Good day, and welcome to The Beauty Health Company Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Norberto Aja, Investor Relations. Please go ahead.

Thank you, operator, and good afternoon. Thank you for joining The Beauty Health Company's 2025 Second Quarter Conference Call. Our earnings press release was issued this afternoon and is available on our Investor Relations site at beautyhealth.com. Joining me on the call today is BeautyHealth's Chief Executive Officer, Marla Beck; along with our Chief Financial Officer, Michael Monahan. Before we begin, please note that, today's discussion includes forward-looking statements, including guidance and underlying assumptions, which are subject to risks and uncertainties. Actual results may differ materially. For a further discussion of risks related to our business, please refer to our SEC filings. We may also reference non-GAAP measures with reconciliations available in our 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, everyone. Q2 marked another strong quarter, demonstrating the momentum of our transformation strategy and disciplined execution. We exceeded both revenue and adjusted EBITDA guidance for the third consecutive quarter, driven by our consumables revenue, margin expansion and operational improvements. During the quarter, we successfully launched the HydraFillic with Pep9 booster, which has quickly become our top-performing HydraFacial branded booster. We expanded to over 35,000 active devices globally. We saw significant gross margin improvement, GAAP at 62.8% and adjusted at 65.9%. We completed our transition to a distributor model in China, and we restructured our debt. These achievements fueled $78.2 million in revenue and $13.9 million in adjusted EBITDA, both above expectations. Our consumables business, now over 70% of revenue remains strong, demonstrating the impact of our razor-razor blade model. A favorable mix, judicious cost control and inventory optimization continue to enhance profitability. We reduced operating expenses by nearly 18%, lowered inventory and closed the quarter with $212 million in cash following a strategic debt restructuring. While we've made significant progress on adjusted EBITDA and cash flow, device sales remain pressured due to macroeconomic headwinds. That said, we're confident in the long-term opportunity and in our ability to improve performance through strategic execution and innovation. Over the past year, we've taken several steps to drive equipment sales growth in the future. These include a strengthened sales organization with new leadership at every level, including a new Chief Revenue Officer to install a data-driven approach to pipeline management and execution, an upgraded CRM to better leverage field and lead data to target new providers and improved alignment between sales and marketing around shared initiatives to expand our global presence and footprint. Our strategy continues to center on 3 pillars: commercial execution and operational rigor, innovation acceleration and…

Thank you, Marla. Good afternoon, everyone. I'm pleased to report we once again exceeded our initial expectations this quarter, driven by the hard work and disciplined execution of our global teams. The business is undergoing meaningful change to drive value, and our teams are delivering. While there is still work to be done to grow equipment device sales, we are successfully controlling our costs to drive increased adjusted EBITDA and cash flow. As a result of our favorable performance in the first half of 2025, we are increasing the low end of our net sales full year guidance range to $285 million to $300 million and increasing both the top and bottom end of our adjusted EBITDA guidance range to $27 million to $35 million. For Q3, we expect net sales between $65 million and $70 million and adjusted EBITDA between $2 million and $4 million. This guidance reflects the seasonally slower third quarter in our industry, along with strategic R&D investments we are making behind device and consumables innovation, including back bar and skin care. Revenue for Q2 came in at $78.2 million. GAAP gross margin was 62.8% and operating loss was negative $2.7 million. Adjusted gross margin was 65.9% and adjusted EBITDA was $13.9 million. Our global footprint continues to expand, which adds to the recurring consumables revenue stream. In the second quarter, we sold 957 total units worldwide at an average selling price of approximately $23,362. As of June 30, 2025, total active machines in the field increased to 35,193 units versus 33,504 units at the end of Q2 2024. Consumable sales for the quarter totaled $55.8 million, up 0.8% year-over-year, driven by growth in the Americas and EMEA, offset by declines in APAC, primarily driven by the transition in China from a direct business to a…

We delivered a strong second quarter marked by disciplined cost management, expanding profitability and solid execution. With With that, we'll open the line for questions. Operator?

[Operator Instructions] The first question comes from the line of Allen Gong with JPMorgan.

Congrats on the good quarter. I guess, when I look at your guide, you're raising the bottom end after maintaining after a good first quarter, you've had another good quarter. But when I look at your third quarter guide, it looks fairly cautious, right? Like I guess there's some seasonality in there. But given the momentum you have, given easy comps, what are you seeing in July and August? And how does that factor into your confidence in the guide?

Allen, thanks for the question. I'm going to have Mike answer that.

Let me address the second half kind of the guide more specifically because it's really driven and includes the third quarter. It's driven by 3 factors. The first is we're projecting revenue, the year-over-year trends to be down similar to what we saw in the first half. And it's mainly driven by the switch to China along with the current trends we're seeing. And we're expecting to see more ASP pressure in the back half of the year, and that's really putting some overall pressure on revenue and pressuring in the near term the gross margin. The second piece, it does relate to gross margin. It's projected to be down in the second half versus the first half due to overall ASP primarily because we're selling more Elite and Syndeo factory refurbished devices, because they're more accessible and providers are taking advantage of that price point. Additionally, we're still projecting most of the tariff impact that I mentioned of $4.5 million to impact the back half of the year in both the third and fourth quarter. We're hopeful that, that can be -- that ends up being conservative, but we've been managing through that and still are leaving that in the guide. And then the third piece is we're making some meaningful R&D investments in the back half of the year. And approximately, it's $4 million to $5 million, and that's mainly to support launches late in 2025 and in '26 around both consumables and devices.

Got it. And then I guess a follow-up just on the installed base. So, you added net, you had -- or I guess, growth, you were able to place a good number of systems in the quarter. Obviously, that's what helped drive the total system sales upside. But your installed base grew significantly less, implying that a lot of those systems that you sold were upgrades or replacements or churn, I suppose. So, what drove that relative to the trends that we've been seeing in other quarters?

Yes. So, we had device sales continue to be pressured because of the macro environment that we've seen in interest rates. Churn was a little bit higher in the second quarter than we've seen in the past. And that's been the last kind of couple of quarters. It's not occurring in any one channel over another. It's spread across both kind of medical and nonmedical. But we're in the process now of developing an action plan, and we're reaching out to those providers with the expectation to kind of reverse some of those trends in the back half of the year.

Next question comes from the line of Jon Block with Stifel.

This is Joe Federico on for Jon. I guess, I'll just maybe try to get a little more detail on the EBITDA dynamics in the guidance in the back half of the year. And I think, Mike, you've just touched on it, but you've done roughly $21 million year-to-date. And then at the midpoint of the updated guide and implies $10 million in the back half. Is that step down just the combination of the tariff headwinds that you just outlined and the increased R&D spend? And any more color other than that would be great.

It's the combination of both of those and the assumption around product mix, specifically how we're continuing to project increased sales around factory refurbished Syndeos and Elite that's pressuring gross margin as we move through that product and clear it out of our inventory.

Okay. Got it. That's helpful. And then maybe just one more on EBITDA. That the gross -- I mean, gross profit on a dollar basis was essentially right in line with our estimate for the quarter, but EBITDA obviously came in well ahead of us, a very solid quarter. And I think you outlined some of the areas of OpEx that may have accounted for the difference, I think, mainly sales and marketing. But is there any additional specific actions you're taking that you can highlight? And what's kind of the run rate that we can expect there going forward?

Yes. If you look at sales and marketing was a big piece of the driver of OpEx savings. G&A was also lower, and that's just -- if I speak about G&A for a minute, we've had initiatives over the last 1.5 years where we're really trying to control G&A costs. Additionally, we've had some bad debt recovery that's been -- that's helped as we collect on some of our past due accounts that we previously had to reserve for. So, we reversed some of that out in G&A. Sales and marketing, in particular, is the largest driver, as you mentioned. And a lot of that is our sales and marketing team is really focused on making sure that they get an ROI for the spend that they're deploying. And so, we've been cautious around deploying that spend to make sure that it's really driving new leads, helping with lead conversion and expanding the overall HydraFacial brand to the end consumer to drive traffic. And so that's what's driving it. When you think about the future costs, I would expect it to stay the sales and marketing line in terms of dollars, very similar to what we did in the second quarter. So, second quarter GAAP number was low $23 million. I would expect for the rest of the year, we tend to be around that same range, $23 million, $24 million of spend for the back half of the quarter, and the percentages moves around based on the seasonality of the revenue.

Next question comes from the line of Oliver Chen with TD Securities.

Marla and Michael, as we look forward with delivery systems, what do you think it takes to grow positively there? Will the compares ease enough and the changes in Asia also ease such that you can get positive consistent growth? Or any thoughts around that? Also, as we think longer term about consumables, what are your thoughts on the long-term growth rates here? And then the regions, you spoke about the regions at length. I think there's quite different things happening in Americas versus Europe. If you could comment on the consumers and the macros there and how that's interplaying with your numbers, that would be helpful, too.

Oliver, thank you for the questions. I'll start and then I'll have Mike add in. In terms of device sales and device execution, we're acutely focused on driving device sales. And our team has a very ambitious customer engagement program that's being implemented across the globe with regards to leads and pipeline management to really accelerate device sales. So, we think -- while we're disappointed in the numbers, we think we have a good plan to get to where we want to be. In terms of consumable sales, we're excited about where we are and excited about the future. They were slightly positive year-on-year. But when you take out China, consumable sales increased 5.3%. And in terms of the non-APAC markets, our signature treatments were stable, but we're seeing incredible booster adoption. In fact, our global booster revenue grew double digits this year. So, we feel very strongly about our consumable sales future. And with the addition of additional launches, backbar and skincare, that is really an area where we see growth for the company. I'll let Mike take the rest of the question.

I think you covered most with the exception of regional questions. So, on a regional basis, we're seeing similar declines on equipment. So, the themes are, if you look in EMEA versus the Americas, separate and leaving APAC out, we're seeing similar kind of pressure points and percentage pressure year-over-year. On consumables, EMEA did particularly well in growing consumables year-over-year. They grew the consumables business well into the double digits. And so what we're seeing there is strong execution. They're also -- that particular region focuses in on the medical channel, and they're seeing good traction there.

Okay. And Marla, there are prudent changes you're making to the sales organization. What are your thoughts on timing? Or what should we expect in terms of timing of that driving -- helping drive positive growth there? And how do you disaggregate, I guess, what's happening in the backdrop, with the macros, with delivery systems relative to what seems like solid execution are you're on your way?

Yes, it's a good question. I mean the macro still pressures, and it's mainly because of the uncertainty in the market, right, which is just uncertain with where tariffs are going, where the economy is going. So, I think once we get through that, we feel good. Our team is executing well. We have a lot of new leaders on the team. And so, we're really excited. We can't predict exactly when it will turn, but we're excited about the team and the initiatives they are implementing right now and implementing in the back half of the year.

Okay. And Michael, as marketing and demand creation as a percentage of sales or dollar, what's the outlook and framework and timing of how that makes the most sense to optimize against changes and such?

So is your question more specifically on kind of how we think about sales and marketing as a percentage of revenue in the guide?

Yes, both. And I think if there's any other strategy thoughts, too, that's relevant to modeling that and also the changes underway, that could be helpful as well.

Yes. I mean, I think the selling and marketing line, we were a little under 30% of revenue in the second quarter. I would expect that to increase, but the dollar amount to stay relatively stable, but it's increasing because of the seasonally low revenue in the quarter. And then I would expect that to come back down into kind of the 30%, 31% range, give or take, in the fourth quarter. I think one of the important things about what we're seeing in sales and marketing, if you take the sales component, obviously, our sales team, large expense that runs through that is around kind of commissions. So, it's a variable cost that runs through that line. When you look at the marketing spend, that's where our marketing team is very disciplined around deploying money to bring in more leads. They measure the effectiveness of those leads. And as they're effective, we're willing to deploy more money back into that line to drive revenue. And if not, then we end up pulling back on some of the marketing costs until we see an appropriate ROI.

And then strategically, our marketing team is acutely focused on the provider and where the patient or consumer is. And so, I think over the last year, we really shifted into allocating more dollars over to provider marketing relative to consumer marketing. We do think the launch of backbar and skincare will halo overall of our marketing for both provider and consumer.

The last follow-up was innovation sounds exciting as well as R&D. There was previously thinking around exosomes as well as a really good hair product. But what's on your mind, as you mentioned, R&D and investing there?

Yes. I mean I think in terms of R&D, we're investing in consumables innovation and device innovation. You'll hear more about specific categories as we get closer to launching each product, but the categories you're talking about are compelling. We see exosomes as a long-term opportunity. We also see hair and our Keravive treatment as a long-term opportunity for investment.

Next question comes from the line of Bruce Jackson with the Benchmark Company.

Just a follow-up on that last one. You've spoken about the importance of keeping up a new product cadence. When is the next booster or new product expected to launch?

So, we will be launching backbar and a hero skincare SKU in the fourth quarter of this year, and then we'll be following on with a significant expansion in both those categories in 2026. And then, the booster cadence, we think 1 to 2 a year is the right cadence. If you look, I think the company did a lot more previously, but we really need time for -- to get the full benefit of each launch, and we're still picking up penetration from the Hydralock HA launch. which was from last year. And so, we think this strategy of really leaning into launches over a long period of time to get the full adoption makes the most sense.

Okay. That's helpful. And then one follow-up, if I may. Looking at the other income, with the refinancing of the debt, are there going to be any changes to your net interest expense or net income, other income lines going forward?

Yes. So, we restructured our debt where we had $557 million of debt at the end of last quarter. And we pushed out -- we refinanced $250 million from 2026 to 2028. That interest rate is a little bit below 8% so that you're going to see more expense run through interest expense starting this year and into next year based on the $250 million new notes.

Next question comes from the line of Olivia Tong with Raymond James. Please go ahead.

good afternoon. I want to start with the consumables price increase that you talked about. Could you tell us when you did -- when you implemented that? What's been the feedback from your aestheticians and your view on demand elasticity? Does this cover the tariff pressure? Or is there more that needs to be done with productivity or other offsetting measures to offset the headwind?

Thank you, Olivia. We implemented the price increase in July 3. And honestly, we were a little worried about the reaction, but apparently, there were quite a bit of price increases put into the medical aesthetics channel at around the same time that were much higher than ours. So there was -- we really didn't get any feedback on any issues around our price increase. So -- and then, Mike, do you want to talk about the tariff headwinds and how we're thinking about that?

Sure. Yes, Olivia, obviously, the price increase helps, and it's a partial offset to some of those -- to some of the tariffs. But we're still projecting kind of $4 million of expense in the back half of the year. Our hope is that, that ends up being conservative. We've been able to kind of manage through that, but it's largely from purchases from APAC for the consumables piece of our business.

Got it. And then can you talk about what drove the higher churn versus your expectations? And does that continue to contribute in the second half?

Yes, it's a good question. We're looking into the churn. As I said earlier, it's not in any one particular area. So, it cuts across both medical and nonmedical. So, I haven't seen anything in the data that shows anything -- any one specific item. So short answer is we're still reaching -- looking into the specific customers and reaching out. We're pretty optimistic that we can reactivate some of these customers with some very targeted initiatives. So we'll keep you posted on that.

Next question comes from the line of Sydney Wagner with Jefferies.

Just wondering if you can give a little bit more color on the variability of performance between the provider channels or provider types.

Yes. Happy to talk a little bit about that. We saw some nice growth in the nonmedical channel this quarter, especially among single- room STs and med spas. So that was exciting to see given that our good, better, best strategy was really designed to expand the market. And so, I think with our Elite FRC devices and other more accessibly priced devices, the market felt comfortable buying in. So really nice growth in that sector. In terms of the medical and med spa, we continue to feel good about the potential there. And a lot of them are incredibly excited about the HydraFillic booster launches and our more clinically backed booster strategy. And so we had great adoption within that channel.

Next question comes from the line of Susan Anderson with Canaccord.

Alec Legg on for Susan. On the consumables, I think I heard, did you say that consumables was up 6%, excluding Sephora? And then when should we expect that headwind to roll off?

Consumables were up 5.3%, excluding China. That's the big because as we moved from a distributor model or from a direct model to a distributor model, the business in China is going through a transition period. So that's one of the key pieces. I think in the U.S., the 6% was referenced around our U.S. National Accounts. In particular, Sephora, we're no longer in anymore. So when you factor that out, we saw National Account growth in the US grow the 6%.

Got it. And then on the China distributor transition, how should we think about the ASPs across both the equipment and the consumables business? Is the current rate the right way to think about it? Or will there be more pressure in the back half?

We factor that in. So, in our distributor business, it tends to be -- we have different agreements. But think about it on average in terms of it's usually 30%, 40% discount to the product. And then we don't obviously have the OpEx that kind of -- that comes through. And so for the guide this year, the distributor that we partnered with in China is focused on mainly servicing the existing providers that are in China and making sure that transition goes effectively. go smoothly. So, we didn't factor in a significant amount of growth in China this year. We kind of view it as a transition year. As we move into next year, you'll start to see the distributor model and those economics where there's a discount kind of play through where it's lower gross margin, lower gross profit, but very, very minimal OpEx to drive kind of EBITDA.

Next question comes from the line of Navann Ty with BNP.

Sorry if I missed it, but could you discuss the general trends across the med spa, plastic and derm channel in the U.S. this quarter? And are you seeing end consumer weakness in the low end of the market? Or is that still on luxury treatments?

It's a good question. Thank you so much. The specialty facial category is still very strong in medical aesthetics. I think our consumable sales really reflect that consistent consumer demand and our growth in consumables are showing that. I think what we're seeing is with our providers, which include med spa doctor's office and large US chains, they're really driving and utilizing HydraFacial as a traffic driver. Some of our top US national accounts with large footprints are even seeing double-digit growth. And I think what's helping that is our cadence of booster launches, which are driving attention on the part of the providers and the aestheticians and interest on the part of the end consumer into having additional HydraFacial. So just the significant booster revenue growth is showing the value of our higher-end treatments to the consumer. So we feel good about the category we're in. And I think what happens if there's any sort of slowing of patient spend at the more expensive treatment, the med spas use HydraFacial to get the patients and consumers in so they can try to upsell them to other treatments. So -- and the trends we're seeing with treatment stacking and prescribing HydraFacial before other treatments is really compelling.

That's very helpful. And I don't know, if you can discuss the 2026 loyalty program, at least broadly, how will that be structured versus other aesthetics companies' programs?

Yes. I think for us, what we are doing is really simplifying our program and adding more incremental levels to really add more perks and benefits for our base and for our provider base. Currently, 93% of our providers are in our program. And so, we're really leveling up. We're also relaunching it to prepare for skincare and backbar so that we can add additional benefits for buying into those programs. So, for us, it's really about simplifying and then preparing the program, so that we can add additional benefits.

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

Thank you all for joining today, and thank you to the Beauty Health and HydraFacial team for everything you do and your hard work on execution this quarter. Thank you.

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