Earnings Call Transcript - AIRS Q3 2021

Operator, Operator

Good morning, and welcome to AirSculpt Technologies' Third Quarter 2021 Earnings Conference Call. Today's call is being recorded, and we have allocated 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.

Dennis Dean, CFO

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 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, that's filed this morning, and in our most recently filed quarterly report, which will also be available on our website. With that, I'll turn the call over to Dr. Aaron Rollins. Aaron?

Aaron Rollins, CEO

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 our custom body contouring, using our proprietary AirSculpt procedure. Our network of specialty centers focuses on the removal of unwanted fat and simultaneously achieving exceptional skin tightening for our patients. We offer fat transfer procedures that 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 with 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. Our average patient can resume normal activities the very next day, and patients see results immediately. AirSculpt is covered under two 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 brand's 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 going through procedures. 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 are in Miami Beach, Florida, and Salt Lake City, Utah. This expansion demonstrates our ability to execute on our de novo strategy of opening three to four 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's 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 they incredibly dramatic compared to competitors, but the experience is far less invasive, and the skin tightening is incredible. All 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, and 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 net 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 during previous variant outbreaks such as the Delta variant. Now I want to turn the call over to Ron Zelhof, our Chief Operating Officer. Ron?

Ronald Zelhof, COO

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 insights 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 costs for the quarter were approximately $6 million, or approximately $2,100 per customer. We expect our marketing costs as a percentage of revenue to fluctuate from quarter to quarter, related to the timing of investments we make compared to the related revenue expansion we achieve 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 three months and generate 100% return on invested capital in approximately one year. We are 100% private pay with zero 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 the financing option during the quarter. We anticipate opening three to four centers each year and now that Miami and Salt Lake City have opened, that brings our total for 2021 to four 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 three centers and have plans to convert the remaining four during 2022. Adding the procedure rooms will not only give us additional capacity but will also allow us to increase the speed and efficiency of treating our patients. With that, I'll turn it back over to Dennis to provide additional details on our financial results and outlook. Dennis?

Dennis Dean, CFO

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, the number of centers, and the number of procedure rooms. We will 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 three 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 the 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 is 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 continued 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 costs 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 1.69 times. 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 surgery is 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 percentage 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, which 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 over the next three years. As Dr. Rollins and Ron discussed in their comments, we have a very strong business model from the results of our patients received from AirSculpt to the financial results we demonstrated during the quarter. We expect to continue to capitalize on the strengths of our technology and operations, as well as our attractive business model, which is fueled by favorable trends in the aesthetic space. We are currently in the process of evaluating our full 2022 expectations, which will include investments in opening three to four 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. With that, I'd like to turn the call over to the operator for a few questions. Operator?

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Simeon Gutman with Morgan Stanley. Please go ahead with your question.

Simeon Gutman, Analyst

Hey, good morning, everyone, and welcome. 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, 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?

Ronald Zelhof, COO

It's a great question. When examining the data sequentially, we notice a bit of seasonality in the second quarter, which is typically our strongest quarter. When comparing the second quarter to the third, the third quarter usually sees lighter performance. This can create some noise due to seasonal factors. Some of this seasonality also carries over into the early part of the fourth quarter, after which we begin to ramp up again towards year-end and into the start of the next year. What you're observing is largely influenced by these seasonal trends.

Simeon Gutman, Analyst

Can you provide information on the penetration rate of add-on services? We discussed how it affects ticket sales, but I'm looking for specific figures on the penetration rate and how it compares to previous quarters.

Ronald Zelhof, COO

If you're thinking of it from a standpoint of fat transfers, we were still very much in a similar place at just over 20% of our volume in fat transfers. But I would point your attention to that our core business is fat removal. And you can't do a fat transfer without obviously fat removal. And so we're very confident and very excited about our fat transfer percentage of our business, but again, our core business is fat removal. And what we're seeing is more and more patients are getting more and more areas in one visit. And again, we attribute that to really, quite frankly, educating the patient and our sales team does an excellent job of educating what the possibilities are. Also, as you know, as we've shared, we started AirSculpt TV last year, and it really has been a catalyst for us to be able to share with our patients, educate our patients on what the possibilities are. And so they're coming in and having more and more areas of their body addressed in one visit.

Simeon Gutman, Analyst

Thank you. Happy holidays. Good luck. Take care.

Ronald Zelhof, COO

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Whit Mayo with SVB Leerink. Please proceed with your question.

Whit Mayo, Analyst

Hey, thanks. Good morning. Ron, I think in your prepared remarks, you mentioned that I think three to four centers are going to be adding new procedure rooms. Can you confirm that? I can't remember if I got my numbers right here. Just any details on the timing of those openings? And can you continue to operate while adding this new capacity? Do you need to reduce capacity to add additional capacity, and are any of these relocations that we should consider?

Ronald Zelhof, COO

Sure. Great question. Yes, our existing four legacy centers are all going to be underway. Actually, two of them will be relocations, so there will be absolutely no disruption to business. Similar to our experience in Sacramento, we will seamlessly move into our new location. For the other one, we can stage it so there won't be any disruption either. The same applies to the fourth center. We feel very confident in our ability to not only add multiple procedure rooms to our existing legacy centers but also in our plan to add three to four new centers next year.

Whit Mayo, Analyst

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

Ronald Zelhof, COO

Sure, it's hard to say and it varies a bit depending on our progress in construction and obtaining certificates of occupancy. However, we will have a clearer idea for you later regarding the actual timeline for when they are set to open.

Whit Mayo, Analyst

Okay. And my other question may be for Ron or Dr. Rollins. I'd be curious 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 and national campaigns. How AirSculpting 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. Thanks.

Aaron Rollins, CEO

Sure, I'll take that. It's Aaron Rollins. Over the past few years, we've made significant improvements in how we allocate our marketing dollars, becoming much more efficient and achieving higher returns on investment. We believe there are more opportunities to leverage this going forward. In addition to our effective use of social media, we plan to focus more on engaging with celebrities and influencers, which I am very excited about due to its proven effectiveness in our past experiences. It has been a powerful driver for our business. I often say that we have only just begun to tap into our total addressable market, and raising awareness is crucial at this moment. Many individuals interested in plastic surgery are often surprised to realize what we are capable of and the results we achieve. Therefore, we will continue our current strategies while incorporating more awareness marketing, heavily utilizing public relations and other advertising methods as well.

Whit Mayo, Analyst

Okay, thanks a lot.

Operator, Operator

Thank you. Our next question comes from Peter Keith with Piper Sandler. Please go ahead with your question.

Unidentified Analyst, Analyst

Hi, this is Corinne filling in for Peter. Thank you for taking my question, and congratulations on a strong quarter. Could you first discuss your pricing strategy moving forward, especially with average procedure revenue seemingly increasing by double digits? Is this a sustainable run rate, and what are the factors driving this? Is it primarily due to people opting for more procedures, or are you planning to raise prices as well?

Aaron Rollins, CEO

Thank you very much. It's Aaron Rollins. I'll address that with you. First, I want to mention that we've launched an initiative to enhance price transparency. We find that the main question people ask after seeing our results is about pricing. Thus, we're improving how we provide them with ballpark estimates. This is significant. For now, we plan to keep our prices stable. We firmly believe our pricing is fair and could be increased if necessary, as there's currently no downward pressure on prices. What we observe, largely due to our success on social media, particularly with AirSculpt TV, is that individuals who start with one area, like their chin or arms, are opting to have more areas treated. This trend is quite strong and I anticipate it will continue. People are encouraged to see that someone is having multiple areas treated live, which removes their apprehension, allowing them to proceed with multiple treatments without fearing work absences. This marks a significant shift we've witnessed over the past few years. Regarding other economic factors, we don’t expect that modest changes in inflation or interest rates will impact our patient volumes, considering our target demographic. So again, our pricing remains very fair and competitive with other body contouring options, and I hope that message is clear—that we're positioned well in the market.

Unidentified Analyst, Analyst

Great, thank you.

Ronald Zelhof, COO

Corinne, as we look ahead to next year, your question about our approach moving forward is relevant. It's certainly going to be part of our planning for 2022, which we are actively developing. As Dr. Rollins mentioned, we have experienced significant success in encouraging patients to explore more options. While we do not anticipate a growth rate of 25% in either cases or revenue per case, our primary focus remains on educating our existing patients about the services we offer.

Unidentified Analyst, Analyst

Great, thank you. 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?

Ronald Zelhof, COO

So we have multiple speakers.

Aaron Rollins, CEO

Go ahead Ron.

Ronald Zelhof, COO

Sorry, we're in different locations this morning. Yeah, we're obviously, again, like I said, we're in the process of building out our plan 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 three to four centers opened next year. But the cadence of it again will be part of our overall plan for next year.

Unidentified Analyst, Analyst

Thank you.

Ronald Zelhof, COO

And we'll provide that obviously in late February, early March of next year.

Operator, Operator

Thank you. Our next question comes from the line of Parker Snure with Raymond James. Please proceed with your question.

Parker Snure, Analyst

Hey, how's it going everyone? Thanks for taking my question. Regarding the new center ramps, what kind of EBITDA contribution do you anticipate in the first and second quarters, and could you outline how the ramp-up in the new facilities will impact the bottom line?

Dennis Dean, CFO

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 three to four months to get to a profitability point. So the first three to four months from an EBITDA perspective, we're right at breakeven, and due to our economic unit economics, we usually achieve a full return of invested capital in approximately 12 months. I think Ron said in his comments that it costs us somewhere in the neighborhood of $1 million to open up a new center. So in the first year, we achieve again, a 100% return. So in that $1 million range for a new center once it's been open for 12 months. And it usually takes about 24 months to get a center fully ramped.

Parker Snure, Analyst

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?

Aaron Rollins, CEO

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 OR time. The longer you're in the procedure room, the more it costs. I'd say about the average add-on costs for fat transfer is about $6,000 right now. So you could get a fat transfer with one area, two areas, four areas. So that's why the other part of your question is hard to answer.

Parker Snure, Analyst

Yeah. And then one last one, have you guys had any plans to start measuring some of the health outcomes of kind of post-procedure, as far as lipid profiles and other things like that?

Aaron Rollins, CEO

Yes, we are interested in conducting a study on that and are currently working on a study design. I am excited about it and look forward to seeing the results of the hemoglobin A1C, triglycerides, and general lipid profile, likely three months after the procedure. We are still considering the study designs, and I am very enthusiastic about this.

Parker Snure, Analyst

All right, great. Thank you.

Aaron Rollins, CEO

Thanks.

Operator, Operator

Thank you. Our next question comes from the line of Josh Raskin with Nephron Research. Please proceed with your question.

Joshua Raskin, Analyst

Hi, thanks. Good morning. I have a quick follow-up regarding the pricing and the same-store revenue per case, which is up 20%. I understand a lot about the mix of procedures and the volume of procedures, but I'm wondering if there's any regional variation. For instance, are rates per procedure higher in places like Miami or Salt Lake for certain procedures that might be influencing these numbers? It also sounds like there isn't a current need for price increases. On the labor side, are you experiencing any pressures or considerations for price increases to keep up with costs? If so, what kind of pressures are you seeing?

Dennis Dean, CFO

Yeah, when it comes to pricing from a geographic standpoint, Josh, we don't have a significant amount of variability across our centers. Again, maybe certain markets might see a different type of fat transfer procedure that tends to be more prevalent in that market. But again, our core business is fat removal. And we don't have significant variability between our centers. I mean, the rate that we charge generally is very comparable across markets. So we don't have a lot of variability across our markets. And then Ron, do you want to speak to labor and those from the standpoint of clinical or doctor or actually, Dr. Rollins, why don't you speak to that. We can probably even talk about some around the physicians as well.

Ronald Zelhof, COO

In terms of hiring our surgeons, I think we're doing an excellent job. We continue to build out our physician recruiting department, and we've added capacity in terms of physician training, that's working out very well. We've also done a really good job with hiring nurses. Many people have asked us about apparently there's a nursing shortage, but happy to say that nurses really like working for AirSculpt Technologies, because it's a much better schedule, a much better and friendlier environment. People aren't sick and we pay well. So we're doing really well in the hiring end.

Joshua Raskin, Analyst

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 procedure counts were 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 electro procedures or on the real capacity issues, sort of makes that not particularly impactful for you.

Aaron Rollins, CEO

I can address some of the questions regarding our experience during COVID. We encountered very few clinic closures due to state regulations, as there was no inpatient stay, and we adhered to those regulations. Overall, the impact was not significant. We did have to shut down for almost three months, but as shown in our numbers, our volume surged once we reopened. There are no specific state regulations that negatively affect us because we operate under local guidelines rather than as a traditional operating room, and we did not observe much in that area. Dennis, do you have anything to contribute?

Dennis Dean, CFO

We are still dealing with the Delta variant, which has been present for several months. We have not faced any issues related to that variant. Dr. Rollins mentioned the nationwide shutdown that occurred for a couple of months last year in 2020. We had to shut down during that time, but regarding the New York regulation announced last week, which pertains to hospitals that might deny elective procedures that could occupy a bed, it does not affect us since we are not part of the healthcare sector. Our facilities are located in high-end retail areas and are not associated with healthcare. Other than the initial nationwide shutdown, we have not had any other instances or markets where we needed to close or reduce services due to COVID.

Joshua Raskin, Analyst

That's perfect. Thanks.

Operator, Operator

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

Aaron Rollins, CEO

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 with everyone in the future. Thanks again.

Operator, Operator

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