Good morning, and welcome to AirSculpt Technologies' Third Quarter 2021 Earnings Conference Call. Today's call is being recorded, and we have allocated 1 hour for prepared remarks and Q&A. At this time, I'd like to turn the conference over to Dennis Dean, Chief Financial Officer at AirSculpt Technologies. Thank you. You may begin.

Good morning, everyone, and thanks for joining us to discuss AirSculpt Technologies' Third Quarter 2021 Results. Joining me on the call today is our Founder and Chief Executive Officer, Dr. Aaron Rollins, and Ron Zelhof, our Chief Operating Officer. Before we begin, I would like to remind you that this conference call may include forward-looking statements. These statements may include our future expectations regarding financial results and guidance, market opportunities and our growth. Risks and uncertainties that may impact these statements and could cause actual future results to differ materially from currently projected results are described in this morning's press release and the reports we file with the SEC, all of which can be found on our website at investors.elitebodysculpture.com. We undertake no obligation to revise or update any forward-looking statements or information, except as required by law. During our call today, we will also reference certain non-GAAP financial information, such as adjusted EBITDA and adjusted EBITDA margin. We use non-GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business. A reconciliation of these measures can be found in our earnings release as filed this morning and in our most recent quarterly report when filed, which will also be available on our website. With that, I'll turn the call over to Dr. Aaron Rollins. Aaron?

Thank you, Dennis. Good morning, and thank you all for joining our first earnings call as a public company. Our IPO was a very exciting achievement for us, but it was just one step in a long journey. We had an exceptional quarter. But before we discuss our results, I want to share some remarks about the company for those who aren't as familiar with AirSculpt. We are an experienced fast-growing national provider of body contouring procedures. We operate under the brand, Elite Body Sculpture, and we deliver a premium consumer experience in a luxurious, spa-like atmosphere for a custom body contouring, using our proprietary AirSculpt procedure. Our network of specialty centers focuses on the removal of unwanted fat and simultaneously achieves exceptional skin tightening for our patients. We offer fat transfer procedures, which allow patients to transfer their unwanted fat to other areas of their body. I developed AirSculpt over 10 years ago because I saw a great need to deliver the highest quality results in body contouring and to provide patients a luxurious, first-class experience. Unlike traditional liposuction which uses scraping or shearing techniques, AirSculpt uses a cannula that moves 1,000 times per minute in a back-and-forth corkscrew motion to remove live fat cells one by one, all while simultaneously tightening skin. We do this through a freckle-sized hole instead of using a scalpel incision. Moreover, we perform this procedure while our patients are fully awake and in a minimally invasive fashion. We use no needle, no scalpel and no stitches, and it's all done awake. There's no general anesthesia. Our average patient can resume normal activities the very next day and patients see results immediately. AirSculpt is covered under 2 utility patents, which we directly own. They relate to proprietary processes of performing fat removal and the combination of multiple components to perform proprietary systems that are specifically configured for carrying out AirSculpt procedures. We believe the systems and methodologies claimed in our patents provide impressive results, with less patient trauma relative to other systems and methods of fat removal. We further rely on copyright, trademark and trade secret laws to protect our brands, proprietary technologies, know-how, data and copyrighted content, which includes our library of before and after photographs. We have a gallery of well over 200,000 before and after pictures of satisfied patients, which we believe to be the largest in the world. No matter what type of problem someone may have, our gallery allows them to see patients we have helped with similar body concerns as theirs. While AirSculpt speaks to our innovation in body contouring, it doesn't stop there. In 2020, we began broadcasting AirSculpt TV, which takes you live inside an AirSculpt procedure to see patients having procedures performed. Additionally, we allow the online audience to ask questions of the patients while they are undergoing their procedure. We believe this to be a first of its kind and it again speaks to our innovation in every aspect of the business. We have now grown our footprint to 18 centers in 14 states, as we recently announced our newest centers in Miami Beach, Florida, and Salt Lake City, Utah. This expansion demonstrates our ability to execute on our de novo strategy of opening 3 to 4 centers each year and speaks to the demand in the U.S. for our dramatic body contouring services only available with AirSculpt. We also believe there is a great opportunity in the future to expand our network of centers internationally. We would like to emphasize that we feel that AirSculpt provides the absolute best results in body contouring. Not only are our results incredibly dramatic compared to competitors, but the experience is far less invasive and the skin tightening is incredible. All of these factors lead us to believe that we provide the best body contouring that currently exists, period. Our industry-leading results should not be overlooked. We strongly encourage you to compare our results to any other technology or methodology. Moreover, we sell these results to our patients, not to physicians or to hospitals. We sell our services to patients that want the absolute best in body contouring at what we believe is a very fair price. Finally, before we begin to discuss our results for the quarter, I wanted to provide a quick update regarding COVID. By now, I'm sure everyone is aware of the new Omicron variant. To date, we have not experienced any negative impacts in our centers. While we cannot speculate on how this new variant might impact our country or how certain government bodies might respond, what we can say is we continue to monitor the situation and will follow appropriate measures to address it, just as we have to previous variant outbreaks, such as the Delta variant.

Thank you, Dr. Rollins, and good morning, everyone. I'm going to focus my remarks today on providing a few highlights for the third quarter and then share with you some color on our business model and our attractive unit economics. We had an exceptional quarter, and we continue to be encouraged by our strong top line revenue of $34.7 million, a growth of 94.3% over the prior year quarter. Our growth continues to be driven by strong volumes and revenue per case expansion. Our total case volume increased 60.4% over the prior year quarter, of which 29.9% was from the same centers, and our revenue per case for the quarter was $12,632, a 21.1% increase over the prior year quarter. We continue to be encouraged by our rate increases, which is the result of patients desiring to have more areas performed at one time as well as continued demand for our services. Our third quarter adjusted EBITDA increased to $12.1 million, reflecting a 127% growth over the prior year quarter, and our adjusted EBITDA margins have expanded to 35% compared to 29.9% in the prior year quarter. Our advertising costs, which include our digital, social and traditional advertising, was $4.3 million for the quarter, which is approximately 12.3% of our revenue. When combined with our marketing and sales personnel costs, our total customer acquisition cost for the quarter was approximately $6 million or approximately $2,100 per customer. We expect our marketing costs as a percentage of revenue to move up and down from quarter to quarter related to timing of investments, and we make compared to the related revenue expansion, which we achieved from these investments. I'm now going to comment a bit regarding our business model for those that may not be as familiar with our business. Our centers have an extremely attractive unit economic profile. As Dr. Rollins mentioned, we now have 18 centers across the United States. We have a modest upfront investment in our centers, which typically is less than $1 million, which includes construction and equipment. Historically, our centers become cash flow positive in approximately 3 months and generate a 100% return on invested capital in approximately 1 year. We are 100% private pay, with 0 reimbursement risk. And for patients that request it, we assist them with securing third-party financing. At no recourse to us, patient financing allows us to schedule procedures more quickly, and approximately 44% of our patients utilized a financing option during the quarter. We anticipate opening 3 to 4 centers each year, and now that Miami and Salt Lake City have opened, that brings our total for 2021 to 4 de novos. We will also be increasing the number of procedure rooms at certain locations. All our legacy centers were built as single procedure room centers, and due to capacity constraints, we are converting those to multiple procedure room centers. So far, we have converted 3 centers and have plans to convert the remaining 4 during 2022. Adding the procedure rooms will not only give us additional capacity, but also allow us to increase the speed and efficiency of treating our patients.

Thanks, Ron. Since this is our first earnings call as a public company, I want to provide a framework of our key performance metrics and how we evaluate the business. The key metrics we will report outside of the core financial statement metrics are cases, revenue per case, number of centers and number of procedure rooms, and we'll report these both total and on a same-center basis. Now I'll go into our financial performance for the third quarter and then provide some comments regarding our full year estimates. Revenue for the quarter increased $16.8 million to $34.7 million, a 94% increase from the prior year quarter, and our cases increased 60% to 2,743. The increase is a result of adding 3 new de novo centers, which expanded our footprint from 13 centers to 16 centers, and our number of procedure rooms from 21 to 27 as of September 30, 2021. Our revenue per case was $12,632, a 21% increase from the prior year quarter. We also had favorable revenue metrics on a same-center basis. Same-center revenue increased 56% over the prior year quarter, primarily driven by case growth of approximately 30%. Much of our same-store growth can be attributed to the addition of virtual consultations and an increase in our social media and marketing capabilities, such as AirSculpt TV, to drive further brand awareness and to attract more patients into our existing centers. We continue to see increases in our revenue per case, which we attribute to patients becoming more informed and having more areas treated at one time. There are several variables that determine our pricing. Primarily, it's based on the amount of time a patient is in the procedure room, which can vary due to a number of areas being treated, the volume of fat being removed and also fat transfers. For the quarter, fat transfers continue to make up greater than 20% of our procedures performed. From an earnings perspective, our adjusted EBITDA for the quarter increased $6.8 million to $12.1 million, an increase of 127% over the prior year quarter. The increase is due to the additional de novo centers we added and our same-center revenue increases, and adjusted EBITDA margin expansion to 35% for the quarter as compared to approximately 30% from the prior year quarter. Our margin expansion was primarily related to cost of services due to our ability to leverage certain fixed costs, such as rent in our facilities as well as improved efficiencies with our clinical staff. Moving on to liquidity and cash flow items. We have a very strong balance sheet. Our cash position was $20.7 million, and we have a $5 million revolver that is undrawn and has no outstanding letters of credit as of September 30, 2021. Our long-term debt was approximately $83 million, and our leverage ratio at the end of the quarter as calculated under our credit agreement was 1.69x. Operating cash flow for the quarter was $8.5 million. An attractive aspect of our business model is that we are 100% self-pay. We have no reimbursement risk. We receive all of our payments upfront, so we have no accounts receivable to collect. Additionally, our surgeons are contracted and receive payment only after a surgery has performed, which allows us to manage our operating cash flow very effectively. From an investment standpoint, we invested $1.6 million during the quarter primarily related to opening our de novo centers in Salt Lake City and Miami Beach, Florida. As you know, we completed our IPO on October 28, and it closed on November 2. We received net proceeds of $13.5 million after deducting underwriter fees and related offering expenses. Additionally, we incurred approximately $12.6 million of other expenses related to the IPO, which included terminating our sponsor management agreement, advisory fees, debt amendment fees and IPO-related bonuses. Now I'll provide some information on expectations for the upcoming quarter. As we think about revenue, we expect to achieve approximately $35 million in revenue for the fourth quarter, which will be a 53% increase over the prior year quarter, and we expect approximately $10 million in adjusted EBITDA, which would equate to an adjusted EBITDA margin of 28.5%. Our adjusted EBITDA guidance reflects an increase in our corporate G&A related to additional legal, accounting, insurance, investor relations and other costs that we will incur as a public company. We also anticipate an increase in marketing-related costs related to our new center openings as we continue to increase our brand awareness and drive additional volume into our centers. While these costs will impact our margins in the near term, we expect margins to return to the mid-30s as a percent in the midterm. As a result of our IPO, we reorganized into a C corporation and will be estimating taxes accordingly, and expect our effective income tax rate to be approximately 25%. Additionally, our stock-based compensation will increase related to our IPO equity grants issued as part of the creation of our 2021 stock incentive plan. These initial IPO-related grants have a 3-year vesting period and are expected to impact net income significantly over the next 3 years. As Dr. Rollins and Ron discussed in their comments, we have a very strong business model. From the results our patients received from AirSculpt to the financial results we demonstrated during the quarter, we expect to continue to capitalize on the strength of our technology and operations as well as our attractive business model, which is fueled by favorable trends in the aesthetics space. We are currently in the process of evaluating our full 2022 expectations, which will include investments in opening 3 to 4 new centers, expanding our remaining single procedure room facilities and focusing on innovations to our existing technology, as well as expanding our marketing efforts for greater brand awareness.

Our first question comes from Simeon Gutman with Morgan Stanley.

My first question is on underlying case volume growth. We're tracking it on a sequential basis. And it looks like it's steady at a very strong rate throughout this year. Curious why it shouldn't accelerate as the marketing takes hold and as well as center growth starts to ramp up. And I know you're not speaking to next year yet, but underlying like that assumption directionally, shouldn't we see some acceleration in it?

Yes, it's a great question. One of the things I would point your attention to when you look at it from a sequential standpoint is we tend to see a little bit of seasonality in the second quarter. The second quarter tends to be our strongest quarter. And so when you're comparing second quarter to third, third tends to be our lighter quarter. So you're getting a little bit of noise there as it relates to the seasonality aspect of it. Some of that seasonality rolls over into the first part of the fourth quarter and then will begin to ramp back up at year-end and then going into the first part of the next year. So I think what you're seeing there a little bit is the seasonality aspect of it.

And maybe as a follow-up, can you speak to the penetration rate of add-on services? I know we talked about ticket being influenced by it, but will you provide that? Or maybe you did and I apologize if you have. But what was the penetration and how does it compare to prior quarters?

If you consider fat transfers, we're still at just over 20% of our volume in that area. However, it's important to highlight that our primary focus is on fat removal, as fat transfers require fat removal. We're genuinely excited about the percentage of our business that involves fat transfers, but our main business remains fat removal. We're noticing that more patients are opting to address multiple areas in a single visit, which we attribute to effective patient education. Our sales team excels at informing patients about their options. Additionally, we launched AirSculpt TV last year, which has been instrumental in educating our patients about possibilities, leading them to seek treatment for more areas of their body in one visit.

Our next question comes from the line of Whit Mayo with SVB Leerink.

Ron, in your prepared remarks, you mentioned that 3 to 4 centers will be adding new procedure rooms. Can you confirm that? I’m not sure if I have the numbers right. I’d appreciate any details on the timing of those openings. While adding this new capacity, can you still continue to operate? Will you need to reduce capacity to introduce additional capacity? Additionally, are any of these relocations that we should take into account?

Sure. Great question. Yes, our four legacy centers are all going to be underway. Actually, two of them will involve relocations, so there will be no disruption to business. We will be able to seamlessly transition to our new location as we did in Sacramento. The other center will be staged to avoid any disruptions as well. We are confident in our ability to execute not only the addition of multiple procedure rooms to our existing legacy centers but also in our plan to add three to four new centers next year.

Yes, any help on the timing for when you would expect those new procedure rooms to come online?

Sure. It's difficult to give a precise timeline as it varies based on our construction progress and certificate of occupancy. However, we will have a clearer estimate for you later regarding the fourth location and when it will be operational.

Okay. My other question, maybe for Ron or Dr. Rollins. I'd be curious just to hear a little bit more about just the social media and marketing strategy, just how your internal team is organized, how you guys prioritize and target local national campaigns, how AirSculpt-ing sort of works behind the scenes. It might be helpful to hear a little bit more about just the engine that you guys have from a marketing and advertising and social media standpoint.

Sure. It's Aaron Rollins. Over the past few years, we've seen a significant improvement in how we allocate our marketing dollars, making us much more efficient and boosting our return on investment. We believe there's still more potential for growth. One of our key strategies includes enhancing our engagement on social media, and we're also planning to increase our involvement with celebrities and influencers. I'm eager about this approach because of its proven effectiveness in the past, which has greatly contributed to our business. I believe we have only begun to tap into our total addressable market. Right now, raising awareness is crucial, as many people, even those familiar with plastic surgery, are often surprised by what we can achieve and the results we deliver. Our plan is to continue our current efforts while integrating more awareness marketing, which will involve public relations and various advertising methods.

Our next question comes from Peter Keith with Piper Sandler.

This is Coreen on for Peter, and congrats on the good quarter. So can you first touch a bit on your pricing strategy here moving forward? With average procedure revenue seemingly increasing double digits, is that a good run rate going forward? And what are the drivers of that? Is that solely just people adding on more parts of their body? Or are you also going to be taking pricing with that?

Thank you very much. It's Aaron Rollins. I'll discuss that with you. First, I want to highlight our initiative for improved price transparency. We've noticed that the primary question people ask us after seeing our results is about pricing. Therefore, we are working hard to efficiently provide them with ballpark figures, which is significant. For now, we intend to keep our prices steady as we believe they are fair. While we could increase our prices, there’s nothing preventing us from doing that, and we are not experiencing any downward pressure on price. What we are noticing, and I expect this trend to continue, likely due to our success on social media, particularly with AirSculpt TV, is that individuals who initially consider treating just one area—like their chin, arms, or waist—are opting to treat more areas. This is a strong trend that I foresee persisting. People are seeing others undergo multiple procedures live, which lessens their fears. They think, "Since someone can do it live and not miss work, I can tackle all these areas at once." This represents a significant shift over the last few years. Regarding other economic factors, we believe that minor changes in inflation or interest rates would not impact our volumes given the patients we focus on. Therefore, our price point is very fair and competitive with other body contouring options, and I hope that is recognized.

Coreen, as we look ahead to next year, your question about our future plans is important. It will indeed be part of our strategy for 2022, which we are currently developing. As Dr. Rollins mentioned, we have successfully encouraged people to explore more options. While we do not anticipate 25% growth in revenue per case, we are actively focused on educating our current patients about the services we provide.

Great. That's incredibly helpful. And then just one more on our end. With the new facilities you're adding next year, is there any color you can provide on the cadence of that and when we should start to see those facilities coming online throughout next year?

So go ahead, Ron. No, it's okay. I'll take it. Sorry, we're in different locations this morning. Yes, we're obviously in the process of building out our plans for 2022. What we can say is we feel that we have a high level of confidence to be able to achieve the overall plan of getting 3 to 4 centers opened next year. But the timing of it will be part of our overall plan for next year. We will provide that information in late February or early March of next year.

Our next question comes from the line of Parker Snure with Raymond James.

So when you look at the new center ramps, how much EBITDA contribution do you get maybe in the first quarter, kind of second quarter? And then kind of looking out, like kind of lay out the ramp-up in the new facilities and how they contribute to the bottom line there.

Sure. So as we look at our facilities coming online, our business model gives us really a very attractive return here. And it typically takes us about 3 to 4 months to get to a profitability point. So the first 3 to 4 months from an EBITDA perspective, we're at a point of right at breakeven. And due to our unit economics, we usually achieve a full return of invested capital in approximately 12 months. I think Ron said in his comments that it easily costs us somewhere in the neighborhood of $1 million to open up a new center. So in the first year, we easily achieve, again, 100% return on that $1 million once it's been open for 12 months. And it usually takes us about 24 months to get a center fully ramped.

Okay. And then can you give us just a sense of the kind of difference between what the price point would be for just a simple fat reduction and then maybe a fat transfer? If they're just getting something pulled out of their legs, what is that price point versus getting it transferred into another part of the body?

I could speak to that. This is Aaron Rollins. So in terms of pricing, it all depends on how many areas you want done and how much fat there is to be removed, and that really means operating room time. The longer you're in a procedure room, the more it costs. I'd say about the average add-on cost for a fat transfer is about $6,000 right now. So you could get a fat transfer with 1 area, 2 areas, 4 areas. So that's why the other part of your question is hard to answer.

Yes. And then one last one. Have you guys had any plans to start measuring some of the health outcomes of post procedure as far as lipid profile and other things like that?

Yes, thank you for the question. We are indeed interested in conducting that study and are currently working on the design. I am very excited about it and I look forward to seeing the results related to hemoglobin A1c, triglycerides, and the overall lipid profile, likely three months after the study, but we are still finalizing the design. I am very enthusiastic about this effort.

Our next question comes from the line of Josh Raskin with Nephron Research.

I have a quick follow-up on pricing. The revenue per case for same-store sales is up 20%. I've heard a lot about the procedure mix and the number of procedures, but I’m curious about any geographic differences. For instance, are there higher rates per procedure in areas like Miami or Salt Lake that could influence this? It seems there’s no immediate need for price increases, but regarding labor, are you experiencing any pressures there? Are there any plans to raise prices to keep up with costs if those pressures are present?

Yes. In terms of pricing based on location, we don't see much variation across our centers. While some markets may have different trends in fat transfer procedures, our main focus remains on fat removal. The prices we charge are quite similar across locations; for example, the rates in Beverly Hills are comparable to those in Charlotte, North Carolina. Therefore, we don't experience significant differences in pricing across our markets. Ron, would you like to address the labor situation from a clinical perspective? Or perhaps Dr. Rollins, you can share insights regarding the physicians as well.

In terms of hiring our surgeons, I believe we are performing exceptionally well. We are continuing to expand our physician recruiting department and have increased our capacity for physician training, which is going very well. We have also successfully hired nurses. Although there is a nursing shortage, I am pleased to say that nurses enjoy working for AirSculpt Technologies because they benefit from a better schedule and a more friendly environment. Our patients are not sick, and we offer competitive pay. Overall, our hiring efforts are progressing very well.

Great. And then the second question I had was just around COVID and since you guys went public. Maybe you could just remind us how procedures are impacted by previous COVID waves. I heard your commentary that there's been no impact to date. On this latest wave, I know it's super early. And I am curious if you're ever subject to any of these regulatory rules around elective procedures or the lack of an inpatient stay or no real capacity issues sort of makes that not particularly impactful for you.

I can address some of the questions. Regarding our experience during COVID, while a few clinics did close due to state regulations, we were minimally affected because there are no inpatient stays involved, and we adhered to those regulations. Although we had to shut down for nearly three months, our volume increased significantly once we reopened. There were no specific state regulations that negatively impacted us, as we operate under local guidelines and do not use an operating room. Dennis, do you want to add anything?

Yes, we are still dealing with the Delta variant, which has been around for several months. Fortunately, we haven't faced any significant challenges related to it. Dr. Rollins mentioned the nationwide shutdown that occurred for a couple of months in 2020, which required us to pause operations. Recently, a regulation in New York mainly affects hospitals, indicating that elective procedures that could occupy beds might be denied. However, since our facilities are located in a high-end retail area, they don't fall under the healthcare environment. Apart from the initial nationwide shutdown, we haven't had to close or reduce our services in any other markets due to COVID.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Dr. Rollins for final remarks.

Thank you. I'd love to thank everybody for joining our first earnings call. We're really excited about the coming quarter and happy to announce last quarter's results. I look forward to speaking to everyone in the future. Thanks again.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.