SkinHealth Systems Inc. Q3 FY2022 Earnings Call

Ladies and gentlemen, good morning, and welcome to Beauty Health Company Third Quarter 2022 Earnings Call. All participants will be in listen-only mode. Please note that this event is being recorded. I would now like to turn the conference over to Eduardo Rodriguez, Senior Director of M&A and Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining the Beauty Health Company's conference call to discuss the company's third quarter 2022 financial results, which were released this morning and can be found on our website at beautyhealth.com. Also available on our website is an investor presentation that will be referenced during this call. With me on the call today are Beauty Health's President and Chief Executive Officer, Andrew Stanleick, and Chief Financial Officer, Liyuan Woo. Before we get started, I would like to remind you of the company's Safe Harbor language. Management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. For a further discussion of risks related to our business, see our filings with the SEC. This call will contain non-GAAP financial measures, such as adjusted gross margin and adjusted EBITDA. Reconciliation of these non-GAAP measures to the most comparable GAAP measures are included in the earnings release furnished to the SEC and available on our website. I will now turn the call over to Andrew.

Thank you, Eduardo. Good morning everyone and thank you for joining our 2022 third quarter earnings call. Over the next 30 minutes, I will update you on our successful quarter of top-line growth and the progress we have made across our strategic master plan. Liyuan will then walk you through the financials in more detail before we take your questions. As always, I want to start by recognizing and thanking the exceptional Beauty Health team and community around the world. Our performance reflects their passion and commitment to living our purpose each day, building confidence for our consumers, providers, partners, and employees. As you will see from our results, our community remains loyal and highly engaged around the world craving that confidence-boosting Hydrafacial glow. We continue to execute against the strategy we previously communicated; we are investing to build our infrastructure for scale to drive long-term growth and margin expansion. Together these factors underscore the strength of our resilient business model and I'm confident in our outlook. I'm pleased to report that we once again delivered ahead of top-line expectations, marking this the seventh consecutive quarter of doing so. I am especially proud of our team for delivering these results despite a difficult macroeconomic environment and headwinds such as FX pressures and the unexpected persistence of the zero-COVID policy in China. I will get into that in a little bit more detail later. Even against this complex macro backdrop, we saw positive momentum in both delivery system and consumable sales, producing net sales of $88.8 million, up 30% year-over-year, one of our strongest quarters on record. We also reported quarterly adjusted EBITDA of $16.5 million in the period. We achieved mid double-digit top-line growth in all three of our operating regions. Year-over-year, the Americas region grew 30%, APAC increased 44%, and EMEA was up 21%. Based on our progress, I am pleased to announce we are raising our 2022 net sales guidance to a range of $360 million to $365 million. Since we last spoke, two key macroeconomic factors have become magnified. First, the US Dollar Index has reached a 20-year high. When compared to FX rates from the start of 2022, the stronger US dollar has created an $8 million year-to-date headwind in our foreign direct market. Second, China recently renewed its commitment to a zero-COVID policy. As we have stated previously, we conservatively model a gradual reopening in China to occur in the back half of this year and invested in the local infrastructure to capture the anticipated demand. Unfortunately, an even more conservative scenario is unfolding with market closures and restrictions in China continuing to persist. Despite this, our APAC team delivered 44% net sales growth year-over-year. In the near-term, we remain cautiously optimistic about China's reopening. We are monitoring the situation closely and expect to prudently manage additional investment in the market. Longer term, the market continues to be a focus for our growth strategy. Given these developments, we are taking a measured approach to revise our 2022 adjusted EBITDA outlook to a range of $45 million to $50 million. We have an agile business model and we remain cautiously optimistic in our ability to achieve $50 million in EBITDA, but we believe it is responsible that we update our guidance to a range reflecting these macroeconomic challenges. Once markets normalize, we have strong fundamentals in place to capitalize on the demand and capture profitable growth. Looking ahead, we still expect to drive year-over-year adjusted EBITDA margin improvement and our overall three-year plan as discussed during our Investor Day. Turning to slide six, we continue to make progress against our 5-point master plan. First, our strategy to expand our footprint and increase consumer access to Hydrafacial is working. Moving to slide eight, fueled by the Syndeo U.S. sales momentum and strong global demand, we have sold nearly 6,500 delivery systems year-to-date, already eclipsing 2021's record year with one quarter still to go. I want to take a moment to highlight our pricing initiatives. So far this year, we have realized a 7% increase in our average selling price when compared to 2021. This is despite having over six times the number of lower price trade-ups when compared to 2021, thanks to the launch of Syndeo. As we have stated previously, we remain on track to realize a high single-digit average price increase on delivery systems for the year. On the consumable side, you remember from last quarter's call that we instituted a mid-single-digit price increase in the U.S. in May. We have not seen any deterioration in demand as a result. In fact, utilization has improved year-over-year despite China's closure, and we are pleased with the top-line performance in what is usually a seasonally slower quarter. We expect to take pricing on consumables and systems in Europe in the fourth quarter. Turning to slide nine, we continue to see healthy growth throughout our omnichannel network as we seek to meet consumers where they live, work, and play. A significant portion of consumers get their Hydrafacial at MEDSPA, a channel that continues to show healthy consumer demand and no signs of a slowdown. We also continue to expand our hospitality and retail presence; a key channel for broadening our brand visibility and bringing new consumers into the community. In the hospitality space, we entered our first one hotel location in Kauai, Hawaii. We also expanded to iconic hotels like the Mandarin Oriental in Hong Kong, and The Addition in Miami Beach. During the quarter, Hydrafacial launched in Sephora's first store at the future in Singapore. We plan to expand this important and growing partnership further across Asia. As you know, we are already in every Sephora door in the U.S. with recent additions in Canada. In Germany, we launched in Douglas' luxury flagship in Düsseldorf, Germany's beauty and lifestyle hub. We also expanded to new locations with existing retail partners, such as John Lewis throughout the U.K. and Galeries Lafayette in France. Moving to slide 10, our providers are central to our success and are among our most influential brand ambassadors. Over many years, we have cultivated a unique and growing Hydrafacial community. Our estheticians are the heart of our brand and one of our most powerful assets; this community would be extremely difficult to replicate. We continue to show a commitment to estheticians and look forward to welcoming even more talented estheticians to be part of the Hydrafacial nation. Skincare specialist jobs are among the fastest-growing occupations in the U.S., projected to grow 17% by 2031. This job growth mirrors accelerating consumer skincare demand and further validates our investment in our vibrant community of estheticians. In fact, recently we shared our commitment to our providers in a big way. In a love letter to Hydrafacial on National Esthetician Day, we hosted a beautiful billboard in Times Square, honoring our efficient partners on the big screen and generating 1.4 million impressions in just two days. On slide 12, our growing and loyal community of professional estheticians continues to drive brand awareness, earned media value, and utilization. We are proud to be one of the world's top educators of estheticians, training more than 35,000 globally online and across our 13 experience centers around the world. In addition to evangelizing existing providers through our proprietary HFX training courses, we also have curriculum at esthetics schools to introduce student estheticians to our brand. I'm proud to say that Hydrafacial currently features in the curriculum at more than 80 of the top aesthetic schools in the U.S., including Aveda Institutes and Paul Mitchell School, with plans to significantly expand that footprint around the world. The third pillar of our master plan—we continue to invest in initiatives to drive brand awareness. Our 8% aided brand awareness represents our biggest opportunity for growth. This initiative is critical to unlock and improve utilization as we continue to rapidly expand our install base. Moving to slide 15, our marketing investments are creating results. We saw continued momentum with increasing consumer interest in the quarter. Earned media values continue to shatter historical performance with 2022 year-to-date already surpassing 2021's total EMV. Additionally, our worldwide Google Search has trended meaningfully upward over the last two years. In October, we officially launched the highly anticipated Hydrafacial Booster partnership with JLo Beauty. Together we developed an efficacious booster, which has been incredibly well received by consumers and providers. It created an incredible buzz across social media and early results are encouraging. The JLo Booster was our most successful booster drop yet, with presell selling out on the first day and impressions numbering in the hundreds of millions. The JLo Booster exemplifies our strategy in action. We offer unmatched treatment optionality to providers and consumers, broadening our brand's reach and awareness worldwide, while maintaining our position at the forefront of innovation, skin science, and consumer relevance. In addition to the JLo Beauty Booster this quarter, we expanded our booster strategy in further Hydrafacial's leadership as a truly unique platform of personalized skincare solutions. With around 20 boosters to choose from, every Hydrafacial treatment is fully customizable for all skin types and needs. You will have seen our latest partnership announcements in just the last few days with skincare leaders Dr. Dennis Gross and Glytone. We're also leveraging cutting-edge science to create a novel exosome booster earlier in the third quarter to address signs of aging and inflammation in the skin. The efficacy of our booster forms and treatments is gaining industry recognition. Our Hydrafacial by Murad Clarifying Booster, launched in the second quarter, has been named the Best Pro Facial for Acne by Cosmopolitan Magazine. No other company offers boosters at the level of personalization that Hydrafacial provides. It is a unique differentiator and offers us a clear competitive advantage in the industry. Moving to slide 18, we continue to build excitement for our brand outside of the providers' offices. Following the success in the U.S., we expanded our GLOWvolution tour to APAC and EMEA for the first time in 2022. These differentiated experiential marketing events create excitement and fandom among consumers and providers alike and are strengthening our brand. This quarter alone we took GLOWvolution to 15 cities across the world, reaching millions of new consumers in the process. We are moving towards an immersive approach that leverages pop-ups, our footprint of 13 experience centers globally, and multimedia for an adaptable and agile 360-degree activation format. As appetite for our differentiated operating continues to grow globally, we are expanding our global infrastructure capabilities and leadership to meet increasing demand. You can see some of this progress on slide 20. Last week, we appointed David Aquino as Executive Vice President of Global Operations, leading production, supply chain, quality, distribution, and logistics, and I'm pleased to welcome David to the Beauty Health team. We also continued investing in operational initiatives and infrastructure that we expect to deliver future leverage, including progressing on the expansion of in-region production in China, furthering our value engineering efforts, and building IT infrastructure to fuel future growth. Moving to M&A on slide 21. M&A does not happen in a vacuum and we are committed to creating value for shareholders through disciplined capital allocation, whether that be by M&A or opportunistically buying back our stock. At the end of September, our Board authorized the share repurchase program of up to $200 million, of which $100 million was deployed in an accelerated share repurchase program. The buyback decision was part of a larger disciplined capital allocation strategy, and we continue to maintain a strong cash position to pursue opportunistic M&A. M&A remains a priority. You recall our M&A criteria on slide 22; opportunities that provide a differentiated product or service with a high Net Promoter Score, brands or services that are complementary to our existing platform and community leveraging the esthetician core point, and investments that are financially accretive with a compelling revenue growth and profitability profile. Our M&A philosophy remains unchanged from what we outlined at Investor Day, prioritizing responsible and prudent capital allocation. Finally, before I turn it over to Liyuan, I want to thank again our teams around the world and reiterate how proud I am of what we accomplished in the first nine months of the year. The global macroeconomic environment and dynamic COVID-19 situation in China present challenges that are not unique to Beauty Health. With the bulk of our investments nearly completed, we remain confident in the ability of our team to continue to execute on our master plan. With that, I will now turn the call to Liyuan for a more detailed discussion of our third quarter results.

Thank you, Andrew and thank you everyone for joining the call. I would also like to thank our dedicated teams and partners around the world for delivering this quarter's results. We exceeded top-line expectations for the seventh consecutive quarter and navigated a volatile global environment. The underlying momentum across our business continues to grow and the team is laser-focused on delivering profitable growth despite the complex microenvironments. Today, I will discuss our third quarter results, balance sheet highlights, and our outlook in a bit more detail. Let's start with our net sales results on slide 25. We delivered net sales of $88.8 million, up 30% year-over-year. This was driven by continued strong global demand for delivery systems and consumables. As a reminder, the third quarter tends to be seasonally slower due to summer holidays. And we typically ramp up to our biggest quarter of the year in the fourth quarter. Note that we view our seasonality trends on a normalized basis, which would exclude revenue associated with elevated trade-up demands, such as what we saw in the second quarter this year for the U.S. launch of Syndeo. Turning to our regions on slide 26. We drove double-digit growth across all three of our regions year-over-year. In America, we grew 30% year-over-year, driven by the continued success of Syndeo placements. In APAC, we grew an impressive 44% year-over-year, despite seeing only small reopenings in China during the quarter and a headwind from FX rates. This demonstrates our team's resourcefulness and resilience in China to continue operating the business in a very difficult environment. I will touch more on this strategically important market in moments. Outside of China, we saw continued strength in markets across the APAC region. EMEA grew 21% year-over-year, despite a meaningfully strengthening dollar, which negatively impacted our top line by approximately $3 million and roughly $2 million of loss opportunity in Russia compared to last year's third quarter. Andrew and I had the opportunity to visit EMEA during the quarter and remain optimistic about the region's outlook. From Paris to London to Frankfurt, our providers all mentioned seeing increasing demand for medical esthetics, but no signs of slowing demand in our practices. We will diligently monitor this region, responding as market conditions warrant by exercising our flexibilities with strategic investments. Briefly packing our KPIs on page 27, we shipped 1,860 delivery systems in a quarter. As expected, we saw less pronounced sales levels without additional promotion, consistent with our historical experience. We ended the quarter with an install base of 24,473 delivery systems. Lastly, the average selling price, or ASP, of a delivery system in the quarter increased to $25,947. As Andrew mentioned, we increased pricing across delivery systems and consumables in the U.S. As a reminder, we guided to a high single-digit blended ASP increase for 2022. Moving to slide 28, we reported a GAAP gross margin of 69.3%, or 75.1% on an adjusted basis. These margins increased by 174 basis points and 355 basis points year-over-year on GAAP and adjusted basis respectively, primarily driven by fixed cost leverage associated with higher volume and stronger real-life delivery system pricing, partially offset by headwinds from global supply chain challenges, inflationary pressures, and FX rates. Further adjusted gross margin benefited from a one-time write-off, primarily related to the discontinued Glow & Go pilot program. As we mentioned in September, we're underway with our value engineering efforts, such as localized manufacturing and supply chain optimization, with some savings expected to flow through towards the end of the fourth quarter. Moving to the bottom right, we reported adjusted EBITDA of $16.5 million for the third quarter, which was driven by strong demand assets of Syndeo in the U.S. and Elite internationally. Fixed cost leverage associated with higher volumes and stronger real-life delivery system pricing, partly offset by the impact of FX rates, supply chain headwinds, sales commissions associated with higher revenue and a net increase in personnel-related expenses. This brings our year-to-date EBITDA up to $31.4 million. I will now turn to slide 29 to touch on our updated outlook. As Andrew mentioned, we raised our guidance for net sales to a range of $360 million to $365 million, up from our previous guidance of $340 million to $350 million. The continued momentum in delivery system placements and strong demand from consumers worldwide are the drivers behind the raise, partially offset by a slower than expected reopening in China and FX headwinds. As you know, we employ that intentional strategy of guiding to a fixed dollar amount for 2022 EBITDA to allow for outsized investment into global infrastructure for future growth. Year-to-date, those global expansion investments have totaled $20 million, much of which is fixed, including hiring talent across our 16 direct markets and opening new experience centers in Shanghai, Singapore, London, Paris, and Frankfurt. As you heard from Andrew, our guidance previously anticipated gradual reopening of China throughout the second half of 2022. With China's renewed commitment towards a zero-COVID policy at the party congress in October, we now expect markets in China to remain restricted longer than originally anticipated. Despite this, we remain bullish on the long-term growth opportunity China represents for our business. In addition to China lockdown headwinds, we have absorbed a year-to-date FX impacts of approximately $8 million to revenue as measured in constant currency, which flows through to meaningfully impact EBITDA. As a result of these macroeconomic factors affecting our ability to generate operating leverage, we are revising our EBITDA outlook to a range of $45 million to $50 million for 2022. As Andrew mentioned, while we remain cautiously optimistic in achieving $50 million EBITDA, we believe it is responsible to update our guidance to reflect these macroeconomic challenges. I will emphasize that we continue to execute against these headwinds under our agility-oriented model. Upon completion of elevated investments to build scalable infrastructure, our goal and strategic focus will shift to creating margin expansion. As mentioned in September, we expect operating leverage from our investments to drive year-over-year improvements in adjusted EBITDA margin. As a team, we're maniacally focused on our commitments to achieve profitable growth. I will now turn to slide 30 to walk through our cost details. Breaking down the OpEx items, selling and marketing expenses in the third quarter were $39.8 million compared to $30.5 million in the quarter last year, primarily driven by sales commissions associated with higher revenue, increasing planned marketing programs, and a net increase in personnel-related expenses. The increase in selling and marketing expense was partially offset by a $2.6 million reduction in a call for estimated bonus expenses, which were originally accrued at 200% of target amounts. As a percentage of sales, selling and marketing was 44.8% of net sales, in line with last year's third quarter of 44.7%. As Andrew mentioned earlier, we constantly evaluate our marketing initiatives to maximize the ROI efficiency of our spending. We also continue to invest in our training programs, such as those hosted at our experience centers and our Hydrafacial Connect program. Compared to $19.2 million last year, our third quarter 2022 G&A expenses of $23.8 million primarily reflect increases in professional fees and expenses associated with our continual hiring to build scaled global infrastructure, including stock-based compensation and recruiting fees. The increase in G&A was partially offset by a $2.9 million reduction in the accrual for estimated bonus expenses, which were originally accrued at 200% of target amounts. We anticipate higher G&A spend in the upcoming quarter, given the extensive services related to our stock testing and the completion of our global ERP implementations by January 1, 2023. Moving down to R&D, the $2.2 million expense is consistent with our run rate trend for the past several quarters. I will now move to our balance sheet highlights on page 31. We ended the quarter with roughly $684 million in cash and cash equivalents. As Andrew mentioned, we deployed $100 million in the share buyback during the quarter under an ASR. We also continue to invest in inventory to position ourselves to meet expected demand with a build serving as a hedge against potential supply chain bottlenecks and the anticipation of launching Syndeo internationally in the first half of next year. With our cash balance, we remain well-capitalized to execute our growth initiatives, while keeping strategic M&A opportunities actionable. Our $750 million of 1.25% convertible notes due 2026 remain on the balance sheet. As we shared previously, we raised the capital for M&A among other capital allocation initiatives. Our $50 million revolving credit facility remains undrawn. Finally, our current shares outstanding are approximately 143.2 million. This figure reflects a retirement of approximately 7.7 million shares initially delivered to us in connection with our ASR, representing 80% of the estimated number of total shares to be repurchased under the program. As a reminder, we have Board authorization for an additional $100 million of share repurchases. In closing, I'm proud of what we accomplished in the first nine months of the year. Quarter-after-quarter this year and throughout its history, this business has proven resilient during volatile macroeconomic environments. We continue to remain confident in our ability to execute our strategy to deliver profitable growth. Andrew and I will now gladly take your questions.

Thank you very much. We will now begin the question-and-answer session. The first question comes from Oliver Chen from Cowen. Please go ahead.

Hi, Andrew and Liyuan. Great quarter. As we think about your guidance, what's embedded for what you're seeing in the Americas and Europe? And on the China side, what risk factors are you monitoring? It sounded like you're incrementally cautious given the dynamic situation there. As a quick follow-up, as we model marketing as a percentage of sales, the near-term view on that and longer term, there's a big awareness opportunity, I know you're balancing that relative to spend. Thank you very much.

Good morning, Oliver, and thank you for joining the call. Firstly, I am extremely proud of what the team has accomplished in Q3. We recorded our second highest revenue quarter, increased utilization, achieved record levels of EMV, and maintained strong Google Trends, all despite the macroeconomic challenges, foreign exchange headwinds, the war in Europe, and the ongoing lockdown in China. Looking ahead to Q4, we're taking a very measured approach. Since our last conversation during Investor Day, the macroeconomic environment has deteriorated more quickly, particularly with China's decision to implement an even stricter zero-COVID policy when we had anticipated a gradual reopening. However, we still achieved 44% growth in China last quarter, and during the periods when China reopened, we saw a rapid business recovery. This gives us significant confidence for when it fully opens up. In Europe, Liyuan and I recently returned from an extended trip to EMEA, where we were very pleased to observe strong consumer demand. We met providers across England, the U.K., France, and Germany, and again, the sentiment among both consumers and providers was very positive. In the U.S., we had another impressive quarter with a 30% increase in consumer strength and continued solid performance of Syndeo, which gives us a lot of confidence. We are seeing no signs of a slowdown. That said, we are aware of the near-term effects of macro pressures. Therefore, we have updated our FY 2022 EBITDA guidance for Q4 to account for these related risks carefully. However, we remain cautiously optimistic about reaching $50 million and are confident in the range we provided. Liyuan, do you have anything to add?

Yes, absolutely. Hi, Oliver. So, just to double-click on your point; it's been a balancing act, right? On one hand, we absolutely need to invest in building speed. As we discussed previously, we've seen some of these return on investment, especially when you see the improvement in brand awareness that really will benefit us in the long run. We also had mentioned, we did invest in APAC and EMEA as we transition these distributor purchases from last year into direct, and we continue to really fuel growth for the future. So, I think as a team, we feel very strongly about the future growth. At the same time, though, we're being cautiously optimistic given the conditions in China. You are seeing limited openings, right? that's actually fueling that 40% growth in APAC. Suffice to say, we've seen it again and again, post the first round of the pandemic, how strongly APAC bounced back with 200%, 300% growth. So, I think the team is ready, and we have the muscle to pull the lever up and down. One thing to really emphasize is on the investment for marketing. We did invest heavily in marketing for Q3. On one hand, we raised consumer awareness; on the other hand, we doubled down to make sure we get the leads, so we can fuel growth for the fourth quarter. So, suffice to say for Q4, we will naturally ease off marketing investments to make sure we finish the year strong.

Thank you. Best regards.

Thank you.

Thank you. The next question comes from Korinne Wolfmeyer from Piper Sandler. Please go ahead.

Hey, good morning, Andrew and Liyuan. Congrats on the quarter and thanks for taking the question. I'd just like to ask quickly about the cadence of delivery system sales that you saw throughout the quarter. Is there any color you can provide on maybe was it heavier towards the front end of the quarter, was it heavier towards the back end? How has that been trending here in the early parts of Q4? And then has there been any impact on the interest rate environment here? Thank you.

Good morning, Korinne, and thank you for the question. I'll start off and let Liyuan add to it. We experienced consistent demand throughout the quarter in all regions. APAC faced some challenges due to the openings and closings in China, but overall, we saw very strong demand with no signs of slowdown. In the U.S., we maintained a strong rollout of Syndeo and are preparing for our international launches in overseas markets in the first half of 2023. Liyuan?

Hi Korinne. To answer that question, in this medical device business, it's usually quarter-end heavy for any given month because of the way we generate our leads; it’s usually month-end heavy as well, especially on the medical device side. That's just the way our seasonality and rhythm works. Obviously, we haven't seen a slowdown, as Andrew mentioned, in the U.S. market. We're very encouraged as we continue to visit our providers, and the sentiment seems to be strong, given the type of consumers we service. Thanks.

Thank you. The next question is from the line of Jon Block from Stifel. Please go ahead.

Great. Thanks, guys. Good morning. First one, just a little detail, but I think I heard Andrew or Liyuan, you call out FX impact of $8 million on the top line, is there just an EBITDA number you can give us, I don't know, $2 million, $3 million, it seems like we're getting caught up on $2 million, $3 million in EBITDA. So, just curious if that's all FX-related? And then let me just ask about the phasing of 2023 for EBITDA, because I think it's important to maybe try to clean that up as best as possible. Should we expect a repeat of what we had here in the U.S. in 2022? In other words, call it a back-end weighted 2023 EBITDA number because you're going to launch Syndeo internationally; that usually means a little bit of a gross margin hit, you've got the upfront launch costs associated with that. So, I'm not asking for the guide per se, but maybe just importantly, walk us through the phasing or the cadence based on that international Syndeo launch? Thanks guys.

It's great to hear from you, Jon. I'll begin with the timing. We traditionally experience seasonality, as we've mentioned before. We have a robust fourth quarter, followed by a decline in the first quarter due to seasonality. Then, we usually see growth in the second quarter, a slight dip in the third quarter, often because of summer holidays, and we finish strong in the fourth quarter, as discussed during Investor Day. The EBITDA flow-through aligns closely with this pattern, particularly since early investments are necessary to generate leads from marketing activities that translate into sales. You're correct in noting that in the first quarter, you'll benefit from a leverage point due to revenue contracts. Generally, EBITDA is lower in the first quarter, which also affects the second quarter. Additionally, with our global launch of Syndeo, you can expect a somewhat similar dynamic, which will impact our gross margin once we start. In the latter half of the year, our investments in marketing tend to increase without immediate flow-through. Consequently, the strongest EBITDA flow-through typically occurs in the fourth quarter. Regarding the constant currency point, a significant portion of our expenses is recorded in the U.S., so the actual flow-through for our international market is quite substantial. You could view it as having over 40% flow-through due to our structure, if that is clear.

Yes, so $3.5 million on about 40%, roughly $3 million or $3.5 million?

Thank you, Jon.

Thank you. The next question comes from Margaret Kaczor.

Hey, good morning, everyone. Thanks for taking the questions. I wanted to talk a little bit about kind of the growth that you're seeing in impressions, obviously, incredibly good traction that we're seeing there. And that's partly driven on the marketing front. But as we move into, I guess, 2023 and beyond, can you talk about the leverage that we should expect to see here? What should the FX impact be on the top and the bottom line, rough math based, again on what we see today? And I guess, as we look at the long-term guidance provided at the Analyst Day, has anything changed between now and at that point in time? Thanks, guys.

Good morning, Margaret. Thanks for the question. I mean, first of all, I'll kick off. I'll address your last point first; we remain fully confident in the strength of our underlying business fundamentals, which we presented at the Investor Day. And we've just demonstrated this by raising our guidance for the full year as proof of the continued strong demand and utilization we're seeing. And of course, as you mentioned, with the impressions, it's being fueled by the investments we're making in marketing to drive utilization, as well as the new Booster partnerships, which we have with JLo and the ones we've announced this week from Glytone and Dr. Dennis Gross. So, our long-term plan remains firmly on track. And I think it's important to know our revised EBITDA guidance does not reflect a demand or profitability problem; rather, the guidance reflects just this potential of temporary macro pressures, blunting our operating leverage, and as we said, we remain really cautiously optimistic about our ability to achieve $50 million in EBITDA guidance this year. I'll let Liyuan add any more detail.

Thanks, Andrew. Hi, Margaret. So on the point of currency, we've been exploring hedging programs this year. But as you know, there's a lot of uncertainty in terms of the direction of the currency. So I think the team is laser-focused on how do we come up with a natural hedge, right? Making sure that expenses are matching even more for the revenue for all of these international local markets and continue to explore potential for hedge programs as well. So as a result, given the currency shifts, it's difficult to foresee what is the impact, but we're proactively managing that ahead. Thanks.

Thank you. Next question comes from Allen Gong from JPMorgan. Please go ahead.

Hi, guys, I had a quick question on the top line. It's been really great to see that capital momentum has really continued at, I would say, a pace quite a bit stronger than initially contemplated. But when we really think about the underlying consumer will pull through, I think there is an understanding now that there is a bit of a delay, especially with Syndeo, where you offer a free quarter or so of consumables along with the initial sale, but even stripping out some of the strong Syndeo sales you've had so far this year, it does put the consumables are lagging a little bit behind expectations. You highlighted that you're continuing to see strong demand from the end consumer. So I guess, could you dive a little deeper into why the consumables haven't really caught up as much as would be implied by your installed base?

Good morning, Allen, and thanks for the question. You're absolutely right. I mean, we're extremely proud of Q3; it's actually our second highest revenue quarter. And you're right, we increased utilization, despite China being pretty much locked down and as well as you know, the war in Europe and the impact there. So despite all of that utilization still increased. So I think we're really actually happy with that. And of course, with the investments we're making in marketing, the new booster portfolio which we've launched, that will continue to increase. Liyuan, if you have anything to add.

Thank you. Hi, Allen. Just to double-click Andrew’s point, you know, as we shared with you, yes, every single new system we sell, including the tree tops, we have provided one quarter worth of consumables. In addition to that, as we sell more second system and multiple systems, we often see those take an even longer time to ramp up because imagine they've already got a machine or two as a practice; now they're adding additional ones. So, we usually see a quarter to two quarters lag. This is why, as we, you know, really lay down a lot of systems, it takes time for the consumables to catch up around the globe. I would also say the way we measure, we're actually trying to figure out a proxy based on the true utilization rate. So based on that true utilization rates, we actually did see slight improvement, especially for the markets that are not negatively impacted by closures, like China or Russia was part of the equation. And now it's not. So, you know, with that said, we continue to measure progress. And this is why we're investing in brand awareness because, by definition, that also helps with utilization, in addition to expanding in boosters and other types of consumables. So the team is on it to continue to improve utilization. Thanks.

Got it. And then, you know, a quick follow-up, I want to click a bit more on 2023 as well. You provided an 18% to 20% target for adjusted EBITDA next year at the recent Analysts Day. That, as you've highlighted, macro pressures have gotten worse, currency has continued to get worse as well. And if currency is going to reflect an incremental headwind to this year, then it's only fair to assume that for part of next year, it's likely to reflect the challenge as well. So, when I think about that 18% to 20%, how should we think about that, framed in terms of these ongoing challenges?

Allen, yeah. Thank you. We remain absolutely committed to the 18% to 20%. First off, there are three reasons. You recall this year 2021 and 2022 have been, what we've discussed many times over the years, years of elevated investment. As a new public company, we've made all those investments to bring us up to self-compliance, to set up the three 3PL networks, just to set up in-region manufacturing in China, to set up the teams around the world, the ERP, the systems; many of those investments are one-offs. In fact, we've been paying double for them this year. If you can imagine our 3PL in Europe, we already had an existing partner; we've created a new one, so we've doubled paying none of those investments will be made repeated next year. So, there are a number of one-offs this year, which will give us leverage next year. We're, of course, monitoring the situation in China very closely. But at some stage, it will need to open up, and we'll be ready to capture that growth when it does. In the meantime, we have other levers which we can manage very maniacally in terms of our variable expense. So we remain committed to our 18% to 20% EBITDA guidance for 2023.

Thank you. The next question comes from Ashley Helgans from Jefferies. Please go ahead.

Hi, thanks for taking our questions. We're starting to see some signals of a trade down in some beauty categories. We're just curious if you're seeing any of this for Hydrafacial. And then any details you can provide us on traffic during the quarter trends throughout the quarter and maybe anything quarter to date. Thanks so much.

Good morning, Ashley. Thank you for your question. I'll begin with your inquiry about traffic. Traffic depends on seasonality, and in Q3, particularly in EMEA, this summer has been influenced by extreme heat and many people taking extended holidays following the COVID lockdown. Over the quarter in EMEA, we built momentum, while APAC had fluctuations linked to China. Outside of that, traffic remains very strong in the Americas, especially in the U.S., where we grew traffic by 30%. It has been and continues to be very robust. Liyuan and I have spent considerable time visiting providers around the world, particularly in the U.S. recently, and there are no signs of a slowdown or any negative impacts. Regarding trade-down behavior, we haven't witnessed that with Hydrafacial. In fact, we have gained because 6% of our business is in the medical channel with doctors and plastic surgeons, where we are the lowest-cost service available. Our business typically benefits from a trade-down during times of economic downturn, as seen in 2008 and 2009 when the company was private. We become a lifeline for our providers since people still want to maintain their skin health and investment in their confidence, making Hydrafacial, which is very accessible and affordable, a choice they continue to make. Thus, we have seen the benefits and have not experienced a slowdown in our business.

Wonderful. Thank you so much.

Thank you. The next question comes from Kyle Rose from Canaccord Genuity. Please go ahead.

Great. Thank you for taking the questions. Just wanted to touch on, you've had some data out for, I think for six months on the market. One of the big promises of it is the connected aspect of it and the ability to really drive a flywheel effect from a marketing perspective. Just wanted to see where you're at as far as, you know, harnessing some of that data and being able to leverage your marketing activities, and maybe an expected timeline of when we should see that meaningfully change over time?

Good morning, Kyle, and thank you. Yes, it’s been six months since the launch of Syndeo, and we couldn't be happier with the rollout. Of course, as you know, we're expecting to launch in H1 2023 internationally—so working hard to prepare that. Look, we're learning a lot, Kyle; I think we're gathering a huge amount of data. I think as we talked about at Investor Day, I think once we build up a robust set of distribution across the US, we'd like to share that, of course, the very first customers and providers of block Syndeo. We're actually the ones who have this co-developed it. So there's an inherent bias—positive bias in the data we collected for those service providers. So, that's why we've paused on sharing, but I think we're learning a lot and obviously taking a lot of that learning as we improve the system ahead of the rollout internationally. So, you know, we'll be looking to share more data on that next year.

Thank you. The next question comes from Bruce Jackson from The Benchmark Company. Please go ahead.

Hi. Good morning. And thank you for taking my question. Now, as you monitor the situation in China, can you tell us what factors you're watching? And how that feeds into your decision process as to whether to accelerate launch activities?

Good morning, Bruce. Thank you for your question. We have a very strong team in China, with offices in Beijing and Shanghai, and we maintain constant communication with them and our provider network. It's been interesting to observe the market dynamics with periods of closure followed by rapid rebounds as the market reopens. We're preparing for the H1 2023 launch of Syndeo. This year, we've invested in our team, infrastructure, and in-region production, as discussed at the Investor Day. We feel well-positioned to ramp up and take advantage of growth opportunities as the market opens, especially since we have evidence that we can capture the upside when that happens.

Hey, Bruce, it's Liyuan on here. Just to double-click on your comment on the levers. We actually did a lot of tests and learn, especially when they come to marketing activation. We know how to move it up or down. We've been living through that the whole year last year. This is why you actually do see, as we invest, despite the fact that the country is locked down for an extended period of time, we still generated sales. It's precisely because of how we approached the lever. Suffice to say, we've been very thoughtful in terms of who to hire, right? Most of the folks we hire ahead are our salespeople, marketing people, and training folks because those folks are really important. But you have to pre-prepare them. So they really understand how to win the market as we expand thoughtfully which region within China to go. So, I just want to overemphasize the fact that we made the investment, we have the core team, but we're also very agile, so we know how to turn it up and down if need be. Thanks.

Thank you, and congratulations on the quarter.

Thank you.

Thank you. The next question comes from Olivia Tong from Raymond James. Please go ahead.

Hi. This is Devin Weinstein on for Olivia Tong. Appreciate you taking our questions. Wanted to ask a little bit about the customer trends that you were seeing? Heard you say that you're not seeing any trade-down, but perhaps are there any—are you seeing less frequent visits from end consumers? Are they coming in the same amounts? And then we'd also like to hear from your esthetician customers, are there— is there any slowing to the sales cycle or any fallback in demand? And then if not, if conditions were to worsen than the macro, what would be your first levers that you would pull to re-accelerate demand, whether it be increased marketing spend, or perhaps some kind of promotional activity or anything else that comes to mind?

Devin, thanks very much for your question. As I said earlier, Liyuan and I with the team have spent a lot of traveling in the last few months both across Asia over the summer, during the fall, and most recently, last week across the U.S. And wherever we go and speaking to providers, estheticians in the medical channel, there is no slowdown; the consumer remains very buoyant and investing in their skin health, investing aesthetics across a range of categories. In fact, one of the biggest questions or comments we get from providers is that it’s not there's no slant of slowdown in demand, or increasing cancellation of bookings at all; it's finding enough staff to deliver the demanded services across a range of products, including Hydrafacials. So extremely buoyant. So, absolutely no slowdown there. And of course, as I referred to earlier to another question, Hydrafacial is one of those products, which particularly in the medical channel benefits during these periods of economic contraction or uncertainty because whilst consumers may shy away from high investments in surgery, or fillers, or big laser treatments, they still want to invest in their skin health, their confidence to keep that regimen going. And the only $150 as a starting price for Hydrafacial is an extremely affordable and sticky service, and most of our customers sell packages or subscriptions, so they're locked into those monthly visits. So that's what reflects the strong demand, which has been flowing into our results. In terms of, I mean, we haven't seen any slow demand at all, but in terms of the levers, as Liyuan talked to earlier, we’re extremely wearable in our investment. And it's very easy for us to ramp up or down marketing; we tend to avoid promotions, that's not really a part of our business model. But really doing the on-ground events, the trial, and the brand awareness events, particularly as we launch boosters, such as JLo, or the recent ones from Glytone and Dr. Dennis Gross, they will help drive utilization and consumption.

Hey, Devin, just only one point, I'm going to double-click, I think we've shared with you last quarter as well. If you look at our consumer base, they are higher middle class, right? Because we often say our consumers visit our locations at any given point 3.2 times a year. So they show up in various areas. But more importantly, our super consumers, most of them on average are upper-middle class. This was a part Both Andrew and I, as we visit, it kind of validated that point. And we have applications come every month at our experience center for training, and we're constantly getting that real-time information. By the way, when we went to Europe, almost to our surprise, some of these locations either being in Paris or even in Frankfurt, we see a lot of men in the waiting rooms for their procedures, which is just another validation of how folks feel about medical esthetics in general.

That's all. Great to hear. Appreciate you taking my questions.

Thank you.

Thank you. The next question comes from Linda Bolton Weiser from D.A. Davidson. Please go ahead.

Hi, yes. Thank you. I was wondering if you could update us on the reengineering of the Syndeo system? And what's the progress so far on that? And what does that mean for margins in 2023?

Hi, Linda. So on the value engineering, this is a system that we're getting ready to launch globally. So it's a constant effort as we tweak on the different kinds of components that we use to enhance. And we're learning a lot, given the region production that's ongoing in China as well, that would really benefit us. But suffice to say, we have order and continue to order raw components just to make sure we have enough for future growth. This is why we guide it to, you're probably not going to see continued improvement on gross margin, but you're not really going to see that true unlocking starting at the end of the year, beginning of next year. Thanks.

Thank you. This concludes our question-and-answer session. I would like to turn the conference back to Andrew Stanleick for closing remarks.

Thank you, everyone for your questions. And to close, I will say, we are proud of our results. We remain confident in our strategy to deliver profitable long-term growth. We see strong demand around the world, and we'll continue to build our business according to our five-point Master Plan with disciplined management, our investment levers to achieve our commitments. I want to say a big thank you to our dedicated team and our passionate community of consumers and providers who are the heart of our business. Thank you everyone for joining today's call.

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