Airsculpt Technologies, Inc. Q1 FY2022 Earnings Call

Good morning and welcome to AirSculpt Technologies' First Quarter 2022 Earnings Conference Call. Currently, all participants are in a listen-only mode. As a reminder, today's call is being recorded, and we have allotted one 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' results for the first quarter. Joining me on the call today is our Founder and Chief Executive Officer, Dr. Aaron Rollins, and our Chief Operating Officer, Ron Zelhof. 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 will 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 measures. 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 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.

Thank you Dennis. Good morning and thank you all for joining us today. First, I want to say that the first quarter saw us reach the highest quarterly volume and revenue that we have ever achieved in the history of our company. For the quarter, we generated $39.5 million in revenue, reflecting outstanding growth of 51% over the prior year quarter. Additionally, going into the second quarter, the demand we are seeing is higher than we have ever experienced. We developed AirSculpt 10 years ago with one center in Beverly Hills; we now have a national network of 19 centers across 15 states, and we continued executing on our growth plans and opened a new location in Las Vegas during the quarter. We remain on target to execute on our de novo strategy of opening four centers this year, which speaks to the demand for our services domestically. As we mentioned on our previous call, we also believe there is a great opportunity to also expand our network of centers internationally, and we anticipate opening a center in Toronto, Canada in the second half of this year. We look forward to continuing the momentum for the rest of 2022 and beyond, and we are excited about the opportunities ahead of us as we continue to expand into new markets and deliver incredible results for our patients and our investors. There's tremendous wind in our sails from favorable trends in the aesthetic space, especially in fat reduction and body contouring. A recent publication by the Aesthetic Society showed that liposuction surgical procedures increased to approximately 500,000 procedures in 2021 and is now the top aesthetic plastic surgical procedure performed today, surpassing breast augmentation. These statistics are further evidence of the opportunity for us to increase our market share due to our superior results and technologies. We remain committed to driving AirSculpt’s brand awareness. We believe most people who want body contouring services and fat removal don't know that we exist. We are focusing our plans to reach this group of customers by expanding our usage of celebrity influencers, earned, owned, and paid media content, as well as continued development of our social and digital media outreach. We believe these efforts to increase our brand awareness along with a heavy demand for aesthetic services will create exceptional value for our business. We have also been very active in building out our team. Due to our rapid pace of growth, we've taken a proactive approach of making investments in various areas of the company to position us for further growth. Over the past six months, we've developed a dedicated physician recruiting department and these efforts are performing exceptionally well. During the quarter, we added seven new surgeons to our network, which brings the number of physicians performing cases at our facilities to over 50. As a result of our increased recruiting efforts, we recently hired a second surgeon trainer, which will allow us to train newly recruited surgeons more effectively as we strive to meet customer demand. During the quarter, we also expanded our clinical capabilities by adding a Chief Clinical Officer to not only support our clinical operations, but also to lead our upcoming health research project. As we introduced on our previous call, we are excited to undertake a health research study on the effects our procedures have on a patient’s metabolic parameters. We are well into the process of designing a study, and we are on target to submit it to the Institutional Review Board for approval later in the second quarter. We expect patient enrollment to begin this fall and we anticipate having results from the study in 2023. Additionally, we have contracted with a national adult stem cell banking company which will allow us to offer our patients the opportunity to bank their stem cells harvested from the fat removed during their AirSculpt procedure. We believe this is one additional way for us to further promote the health and wellness of our patients and we plan to start offering this in the second quarter. I'm sure you all have questions on how the current inflationary environment and increasing interest rates will impact the business. While we can't predict the future, our current demand is stronger than we've ever seen in our history. We also have a very resilient business model, which is a low fixed cost structure coupled with a strong balance sheet to support our business.

Thank you Dr. Rollins and good morning everyone. I'm going to share some information regarding our de novo procedure room expansion project but before I do, I want to say thank you to the AirSculpt team. You performed magnificently every day by bringing first-class results to the patients we treat, especially in the face of challenging times brought on by COVID. Now I'll provide you with a development update. As you know, we opened a center in Las Vegas in March, and up to this point, demand has exceeded our initial expectations. We've now opened three centers over a four-month period, and each of these centers is performing exceptionally well. As previously discussed, it takes approximately four months for a center to become cash flow positive, and while these new centers have a short-term negative impact on our margins, they give us a great platform for margin expansion as we grow revenue over the rest of the year. We expect to open our next center in Boston in June, which will be the first de novo that we have opened with three procedure rooms. Three procedure rooms not only allow us to meet the demand we anticipate in the market but also provides operational efficiencies as utilization increases. Looking to the rest of 2022, we have plans to open two additional facilities later in the second half of this year; one in Philadelphia and another in Toronto, Canada, which will be our first international facility. We are also diligently working on our centers for 2023 and we look forward to sharing more about those markets in the coming months. We have also been busy adding more procedure rooms to some of our existing centers. As mentioned on previous calls, our legacy centers were built with only one procedure room. Due to capacity constraints, we've been converting or, in some cases, relocating those centers to larger facilities. We relocated Sacramento in the fourth quarter of 2021, expanding this facility to three procedure rooms. Having the third room not only gives us increased capacity, but also allows us to operate on patients faster and more efficiently. In March, we added a procedure room to our Chicago facility, and I am pleased to say we relocated our Dallas center on May 2nd and it also was expanded to three procedure rooms. As discussed on previous calls, it typically costs less than $1 million to open a new facility, and so far we have not seen a significant impact from inflation, nor have we encountered disruptions in our supply chain that would delay the opening of new facilities and procedure rooms that are scheduled later this year. We are so excited about the interest and demand we are seeing in existing markets and in our new markets due to our record volumes in revenue, and to further prepare for our growth plans, we've been expanding our team in both clinical capabilities and in our sales and operations to prepare for further growth acceleration. With that, I'll turn it back over to Dennis to provide additional details on our financial results and revised outlook. Dennis?

Thanks Ron. First, I will share some remarks on the first quarter and our liquidity, and then provide some thoughts on our outlook for the remainder of the year. Our revenue increased by $13.4 million to $39.5 million, a 51% increase from the prior year quarter, and our cases increased by 31.1% to 3,156. The increase is primarily a result of adding five de novo centers over the prior year quarter, which expanded our footprint to 19 centers as of March 31, 2022. Additionally, we experienced same-center increases in both volume and revenue per case. Our revenue per case was $12,530, a 15% increase over the prior year quarter. As a reminder, there are several variables that determine our pricing. While it is primarily based on the length of time a patient is in the procedure room, which can vary due to the number of areas being treated, other factors include the volume of fat being removed and whether a procedure involves fat transfers. For the first quarter, fat transfers continued to make up greater than 20% of our procedures performed. Not every patient is a candidate for a fat transfer for a variety of reasons. However, we expect to maintain this percentage as case volumes grow. Same center revenue increased 29% over the prior year quarter driven by strong case growth and an increase in rate. Much of our same-store growth can be attributed to favorable trends in the aesthetic space and to expanding our marketing and selling capabilities, especially AirSculpt TV, to increase brand awareness and to attract more patients into our centers. Our cost of services for the quarter as a percentage of revenue was 37.1% versus 33.6% in the same period last year. As Dr. Rollins and Ron both mentioned, due to our rapid growth, we have been making certain clinical additions to our nursing teams, which started last quarter and continued into the first quarter. These investments further enhance the quality and safety for our patients and better prepare us for future growth in both existing centers and the new centers we are developing. Our margins in the quarter were impacted approximately $400,000 or 100 basis points from these investments which are now mostly complete, and we expect to begin leveraging these investments over time as revenues continue to grow at a strong pace. Additionally, our cost of services were impacted by approximately $150,000 or 50 basis points related to increased staffing costs due to COVID. As Ron mentioned in his remarks, the opening of three de novos in the past four months also impacted our margins by approximately 130 basis points. We expect this impact to be short-lived as demand in these centers has been strong and will give us a platform for revenue growth later this year. Our advertising costs, which include our digital, social, and traditional advertising, were $4.8 million for the quarter, which is approximately 12.2% of our revenue. When combined with our marketing and sales personnel costs, our total customer acquisition costs for the quarter were approximately $2,200 per customer, down sequentially from $2,600 per customer. Based on gross margin per case, which typically averages over $8,000, the return on our customer acquisition cost is nearly four times, which we're extremely proud of. As a reminder, our marketing costs as a percentage of revenue and per-customer rates can fluctuate quarter-to-quarter related to the timing of investments we make compared to the related revenue increases we achieved after making these investments. Our adjusted EBITDA was $9.8 million for the quarter. Just to remind everyone, this was our first full quarter as a public company. Adjusted EBITDA included approximately $2.3 million of public company-related costs, which did not exist in the prior year quarter as we were a private company. Normalizing the prior year to include these public company costs, our adjusted EBITDA growth rate would have been approximately 34%. Additionally, our public company costs are approximately $650,000 more in the first quarter compared to other quarters due to our annual SEC compliance requirements. And finally, our adjusted EBITDA margin for the first quarter was 24.8%, which was also significantly impacted due to public company-related costs. Moving onto liquidity and cash flow items, our cash position as of March 31, 2022, was $27.2 million, and we have a $5 million revolver that is undrawn and has no outstanding letters of credit. 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 1.64 times. Cash flow from operations for the quarter amounted to $7.1 million, which reflects approximately 72% adjusted EBITDA to cash conversion. An attractive aspect of our business model is that we are 100% self-pay with 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 is performed, which allows us to manage our operating cash flow very effectively. We also invested $4.3 million during the quarter, primarily related to opening our center in Las Vegas and our upcoming openings in Boston and Philadelphia and our procedure room expansion projects. Now I will provide some information on our outlook for the remainder of the year. As we think about revenue, we now expect to achieve between $175 million to $179 million for the full year, up from our prior forecast of $172 million to $176 million, representing a 31% to 34% increase over 2021 levels. And we are maintaining our adjusted EBITDA outlook of $58 million to $60 million. From a modeling perspective, we expect to open four centers this year. As you heard, we opened a center in Las Vegas in March, and we expect to open Boston in late June. The remaining two center openings are expected to be late in the second half of the year. Also, as we have previously discussed, there is a slight element of seasonality in the business during the second quarter as patients prepare for the summer months, and our first quarter tends to be a lighter quarter with volumes trending upward in March and through the second quarter. Just to remind everyone, as a result of our IPO, we reorganized into a C-Corp and are now estimating income taxes accordingly. Additionally, our stock-based compensation increased related to IPO equity grants that were issued as part of the creation of our 2021 stock incentive plan. These initial IPO-related grants have a three-year vesting period and are expected to impact net income significantly until they fully vest. Before we take questions, let me say that this truly is a unique company that provides incredible results for our patients. We have an extremely attractive business model that provides an excellent return on invested capital and is being fueled by favorable trends in the aesthetic space, and we look forward to further capitalizing on these tailwinds. With that, I would like to turn the call over to the operator for a few questions.

Thank you. Our first question is from the line of Josh Raskin with Nephron Research. Please go ahead.

Thanks and good morning everyone. I have two questions. First, regarding the $3 million increase in revenue guidance, how much of that is due to Boston ramping up faster? I'm thinking about roughly $750,000 to $800,000 in revenue each month. Also, how much of this increase can be attributed to improved demand? If you could elaborate on what specifically is driving that demand in terms of geography and product mix, I would appreciate it.

Thanks for the question, Josh. I would say it's probably equally weighted if I were looking at it from the standpoint of the increase. We did bring Boston on a little bit earlier. But remember, when we bring those on, they tend to ramp up a little slower intentionally for quality purposes. But the demand is really the main driver as far as us increasing the revenue guidance.

Could I get half and half or more?

I would weight it a little bit more on the demand side.

Okay. And what specifically is driving that, is that more higher cost procedures, it certainly looked like you saw that in pricing, is it more fat transfers, is there specific geographies that are outperforming?

It's really not related to our specific activities, but more about the industry as a whole. We've talked about a recent report highlighting the huge demand for fat reduction and body contouring procedures, which is a major factor in our success. We're very optimistic about this, as demand is the primary driver. Our procedure volume varies from month to month, as we're not a high-volume center, and this can cause fluctuations in our rates based on the types of procedures being performed. However, nothing stands out significantly. Some months we may perform more quick, profitable chin procedures, which might lower our rates slightly, but this doesn't majorly affect our bottom line. We’re satisfied with our business performance. It's worth noting that not all patients are candidates for fat transfers, and in fact, most aren't for various reasons. We're projecting to maintain around a 20% rate as our volume grows, which aligns with our performance in recent quarters.

And then just separately on the new centers, I'm assuming it's a little too early to know anything about Las Vegas, but Miami, Salt Lake, I'm just curious, it sounds like you've seen a little bit of outperformance there. Anything particular there and maybe any lessons you've learned in terms of the newer openings that are going to be helpful in the future?

Hey Josh, it's Ron. How are you? All of our centers are performing slightly actually ahead of expectations, and we're extremely pleased with how they're performing right now.

I think the biggest surprise might be our Miami Beach location. When we opened it, we were somewhat concerned about pricing due to the challenges in the Miami, South Florida market regarding these types of procedures. However, that has turned out to be a positive for us, as the rate there hasn't experienced significant pressure at all. We've actually been very successful in maintaining our rates.

Alright, perfect, thanks.

Thank you. Our next question is from the line of Simeon Gutman. Please go ahead.

Thanks everyone, good morning. I have two questions. First on demand and then second on some costs. So first, on demand. Can you share with us what, I guess, forward bookings look like, I don't know if you'll touch on quarter-to-date, but that's fine but in light of the backdrop, which mostly is stock market changes and geopolitical worries, curious if there's any correlation to how demand is shaping up going forward? That was my first question.

Yes. Thanks, Simeon. You're right. While we don't give any sort of forward-looking specific information, what we would say though is that the first part of the second quarter is really, really going strong. We're very positive as to what we're seeing from volumes and sales and bookings. And so we're extremely, extremely excited about what's ahead of us. Second quarter is looking really good so far.

Okay, great, thanks. And then the second question is on cost and scaling. There were two buckets that, I don't know if it's caught our attention, marketing spend and then surgeons but especially the second trainer. Can you talk about how much of this is planned versus unplanned as the business scales and grows, what portion of this is proactive for example, marketing, where you see an opportunity and you think it would have a good return versus there is a certain level that needs to be spent to support, and then at the same time, more surgeon trainers, this is being scaled for the first time, you guys are doing it, are there areas you finding that the business needs more investment or is this all planned as the number of centers ramp up?

I can start. It's Aaron Rollins. I can start with some answers about our investments in the business. Getting our second surgery trainer, it was wonderful for us, and it was hoped for and planned. There's not many people that can do that and we're really happy to have them. Having two full-time surgical trainers really allows us to scale at a different pace, and it allows us to maintain our quality and our safety in a way that we couldn't before. So we're thrilled about that as a money very, very well spent. We don't plan on hiring a third at this time. Dennis, do you want to fill in some more?

Yes, I would say that as I review our initial outlook, we've actually incurred those costs earlier in the year than we initially anticipated. We made that decision because our revenue and demand have been exceptionally strong. Our goal is to prepare for growth and enhance our expansion, not just in existing locations but also in new facilities. Given the current demand, we believed it was the appropriate time to make these investments sooner.

Another thing is we're happy to see our customer acquisition cost went down to $2,200 per patient for the quarter. And that's a strong return on CAC spend because our gross margin is in excess of $8,000 per patient, which is close to a four times return.

Thanks everyone, good luck.

Thanks Simeon.

Thank you. Our next question is from the line of Korinne Wolfmeyer with Piper Sandler. Please go ahead.

Good morning, and thank you for taking my questions. I'd like to discuss the current macro environment and gather your thoughts. While demand appears to be strong, we've been hearing about a decline in consumer sentiment, both in the U.S. and globally, along with potential cuts in consumer spending. How do you assess the resilience of the broader aesthetics market under these circumstances? Additionally, what are your expectations for the market if we face a downturn?

This is Aaron Rollins. Thanks so much for the question. I've been doing this my whole life, and I've been the CEO of AirSculpt now for over 10 years. And I can say with absolute certainty that I have never seen this level of demand. Our volumes have never been better. Our financing rate is exactly the same, and I see demand actually accelerating. So that's all I can really tell you. So I feel great about the coming quarters here. And these macro conditions have had no effect on our business. I mean, in fact, it's accelerating.

I would add a little bit that we are a luxury brand, and so with that, our customer base tends to be a bit more resilient to some of these macro environment trends that we're seeing. But again, like Dr. Rollins says, from our demand that we're seeing, it's again, I'd say, knock on wood, we're excited about where we're going.

Thank you for the information. I appreciate the insights. I would like to ask about Renuvion. It wasn't mentioned in the prepared remarks, so could you provide any updates on how it's been performing, how many offices now use this technology, and what the demand has been like? Additionally, could you explain the economic aspects of the procedure again, including the add-on costs and your expenses related to introducing it? Any information on this would be appreciated.

I can start. So we're really happy to offer Renuvion. And Ron, how many offices do we have it in to date?

Seven.

We have it in seven and the way we're rolling it out is based on demand. If there's an office where patients are asking for it, which we call AirSculpt Plus, then we immediately get them a machine. There are some offices that do a lot more of it than others, and it's really just based on patient demand for it. The economics are very good. I'm not sure, Dennis, do you want to say what we're allowed to say about that.

We typically see an additional charge of about $2,500 for that. Of course, it varies since each case is unique, but that's the average we observe.

And the good thing is for that $2,500 add-on, that's about 20 minutes more of operating room time. So it's really good. And I'd like to say, because we're a results-focused company, it actually works very well. So I'm very happy with the technology. I think it's extremely safe, and we have every plan to continue to roll it out based on demand from any individual office.

Great, thank you.

Thank you. Our next question is from the line of Whit Mayo with SVB Leerink. Please go ahead.

Hey, thanks, good morning. Dennis, I just wanted to go back to the topic of the increased investments and the timing. I totally appreciate the decision to pull the trigger on these. I don't think it's actually fully within your control when you find the right people, the right talent to join the team. So that decision seems to oftentimes be made for you, not really easy to put that into a budget. And you guys don't give quarterly guidance, and we're getting a few questions here. So if we just kind of take all the puts and takes here of like how the quarter developed with these increased investments, how did it really compare with your internal plan?

Thanks, Whit. Before we discuss investments, I want to highlight that being a public company significantly affects us. I’d like to reiterate that we saw impressive adjusted EBITDA growth year-over-year, despite the costs we incur. This may not have been part of your question, but it’s an important point to acknowledge. As I mentioned earlier, demand has driven us to accelerate these costs. Quality and safety are our top priorities, which has led us to focus on enhancing our nursing standards by hiring more RNs, rather than relying on LPNs, and appointing nurse managers. As we expand our healthcare business, maintaining quality is essential, and we see plenty of growth opportunities ahead. The investments we made this quarter have us positioned well, and we feel we’re at the right level for now, allowing us to leverage this as we progress through the year. We experienced approximately a $400,000 impact this quarter from hiring additional nurses and other clinical resources. As Dr. Rollins mentioned, our investment in surgical trainers is crucial for opening new centers efficiently. Bringing on a second full-time physician trainer reflects our confidence in the volume and opportunities ahead. We did encounter some COVID-related impacts, such as overtime and duplicated staffing, mainly during the first two months of the quarter, but we’re not facing many issues now and hope it stays that way. Historically, we’ve navigated COVID challenges effectively, maintaining revenue by rescheduling cases promptly. This quarter, we also opened three centers within four months—more than ever before—which has affected our margins. It typically takes three to four months for new centers to reach cash flow positivity, impacting our margins by about 130 basis points this quarter. Overall, we feel optimistic about our position and are excited about these current investments as they set us up for future growth.

Yes. No, I think I get it, it seems like you guys kind of come out of this quarter with a little bit more enthusiasm than when you entered the quarter. Can I just ask one other question on the relocations, any way to size disruption that you historically feel when you do a relocation, I think you stagger these pretty efficiently, but just trying to get a sense if there is any expected disruption from a relocation such as Sacramento or whatever?

Sure, hey Whit, it's Ron. I appreciate the question. The answer is no, we don't experience disruption. We handle relocations over a long weekend. For example, in Dallas, which was a major move for us, we start packing on Friday afternoon, and then we complete the move over the weekend. We begin new cases on Monday. This approach ensures there is no disruption at all.

I'd just like to add that I'm very happy to say that we recently used all three procedure rooms in relocated office for the first time at the same time. And that's really big for us.

Okay, thanks guys.

Thank you. Our next question is from the line of John Ransom with Raymond James. Please go ahead.

Hey, good morning. I guess this one is for Dennis. I mean normally, 2Q is your high watermark. Is that going to be even more the case this year if we think about sequential revenues, just given the preopening and maybe the first quarter had some more Omicron effect?

I think sequentially, John, we expect Q2 to see a significant increase, which aligns with our historical trends. I anticipate revenue in the mid-40s range for the next two quarters, with upper 40s expected in the fourth quarter. The fourth quarter will benefit from an additional ramp-up and new centers that we plan to bring online throughout the year. That's how I see the revenue landscape for the remaining quarters.

I know you mentioned the additional audit costs, and I apologize if that's not the correct term, but how should we consider your fixed costs from the first quarter to the second quarter? If you view it as an investment, what kind of increase should we anticipate taking a few factors into account?

Sure. One thing I would make a point is also, if you look at the numbers on a sequential basis, Q4, we were only public for two months, and our public company costs run on average about $650,000 to $700,000 a month. So that's a sequential impact that we bear in the first quarter that we didn't necessarily see in the fourth quarter. Now that's going to run with us. And in the first quarter, we usually see about a $650,000 to $700,000 increase over future quarters because of the annual SEC requirements.

Got you. Was there anything else in the first quarter that maybe you layered in the expense mid-quarter that will be fuller which is kind of?

I think from that standpoint, I would go ahead with it. We have completed the majority, if not all, of our clinical investments, so we feel confident about that. Now we are just preparing for the upcoming growth.

And then last one for me, could you remind us stock comp kind of what your expectations are for the balance of the year, is there any seasonality to it, and what's the full amount you need to invest before it levels off, I know that was part of the pre-IPO discussion, but maybe just level set everybody for that?

Yes, there won't be significant seasonality to that. Most of what we see on the stock compensation line is from the original IPO grant, which is about $7.3 million each quarter. Additionally, for modeling purposes, due to 162M requirements for tax reasons and the deductibility of various executive compensation, we will not benefit from that in terms of income tax. This will certainly affect our effective income tax rate this year.

How are you going to be running at this level and so if you fully absorbed the pre-IPO grant?

Yes, so you will be running for three years. And so we're basically six months into it, so about another two and half years, John.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Dr. Rollins for closing remarks.

Thank you. I'd like to conclude by thanking you all for listening, and I'd like to thank all of our employees and doctors for such excellent work. I couldn't be more excited about our growth and our performance, and I'm looking forward to the future. Thank you all.

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