Good afternoon and welcome to The Beauty Health Company's Fourth Quarter and Full Year 2023 Conference Call. Please also note this event is being recorded. And I'd like to turn the floor over to Norberto Aja, Investor Relations. Please go ahead.

Thank you, operator and good afternoon, everyone. Thank you for joining us today to discuss The Beauty Health Company's fourth quarter and full year 2023 financial results which were released earlier this afternoon and can be found on our website at beautyhealth.com. Joining us on the call today are BeautyHealth's Chief Executive Officer, Marla Beck; along with Chief Financial Officer, Mike Monahan. Before we begin, 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. Listeners are cautioned not to place undue reliance on any forward-looking statements. For a further discussion of risks related to our business, please see the company's filings with the SEC. This call will present non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to the most comparable GAAP measures are in the earnings press release furnished to the SEC and available on our website. Following management's prepared remarks, we will open the call for a question-and-answer session. With that, I would now like to turn the call over to BeautyHealth's CEO, Marla Beck. Please go ahead, Marla.

Thank you, Norberto and thank you, everyone, for joining us on the call today. I want to start by thanking our Board of Directors for their trust and support as I formally take on the role of CEO of BeautyHealth. I'm excited about the opportunity and I'm confident about the future of the company. I joined BeautyHealth's Board of Directors in 2022 because I saw a beloved brand in an underpenetrated market, the space where beauty meets aesthetics. I built my career in this space and bring significant experience in sales, operations, and new product development to the role. I founded Bluemercury in 1999 as a specialty beauty retailer, featuring a selection of curated products alongside in-store aesthetic treatments. It is a commonplace format today, but it was novel when we started. We grew Bluemercury to nearly 200 stores with 2 private label skincare brands, a healthy e-commerce business, and strong loyalty penetration before a strategic sale to Macy's in 2015. While my passion for the sector and knowledge of products and formulations served me well, it was operational excellence, financial rigor, and a clear commitment to the consumer that made Bluemercury a success. I can see clearly how to implement these elements for BeautyHealth. Over the last few months, I've spent my time meeting with our providers, getting to know our sales team, testing our products, and gaining a deep understanding of our operational capabilities. During this time, I've come to understand the unique proposition of our brand and products, the engagement of our providers and consumers, and the tremendous opportunity ahead. I also understand the careful work required for BeautyHealth to meet our ambitions and growth potential. The Board, the executive management team and I are fully aligned to deliver against 3 key priorities over the near term. We will drive sales excellence, operational excellence, and financial discipline. Our first priority is sales excellence. The treatment room is the heart of our business, and providers and our sales teams are the face of the brand in many ways. I learned early in my career the importance of staying close to the customer by helping aestheticians optimize their operations in our Bluemercury store during busy periods. Hence, I have asked the BeautyHealth Executive Committee to begin this year by focusing in the treatment rooms with our providers. We fanned out across the globe with our frontline sales team to meet more than 50 providers in the past 50 days. The feedback was insightful and grounding. I will share just a few themes we heard. First, providers know and appreciate that we put them at the forefront. Second, they agreed that despite issues with the early versions of Syndeo, Syndeo 3.0 is a better platform. Third, they recognize and value the unmatched efficacy of our treatment and the power of the HydraFacial brand to bring consumers through their doors. Importantly, the challenges providers experienced with Syndeo 1.0 and 2.0 have not impacted the consumer experience. We routinely hear from providers that HydraFacial is a brand clients ask for by name. This is reflected in steady consumable revenue growth in the Americas and in certain metrics like Google Search trends, which show a 21% uptick in interest globally in 2023 versus 2022. We are fortunate to have an experienced and tenured sales team who have developed deep relationships with our providers. It is incredible to see their connections and eagerness to go above and beyond. Our training and education team is best-in-class, supporting providers in their craft and helping them build profitable revenue streams. Our marketing team is thoughtfully building on a brand loved by both providers and consumers—an incredibly unique aspect of our business in an industry largely driven by non-branded treatment modalities. We will continue to hold ourselves to the high performance standards expected from HydraFacial and always prioritize our providers and consumers. Our second priority is operational excellence. We will tighten our operations, focusing on our strongest growth opportunities and establishing accountability across our supply chain. We are undertaking a total review of our manufacturing and operations footprint and will provide an update on our findings later this year. Much of the recent focus has been on executing the Syndeo program announced last quarter, ensuring all Syndeos globally meet our latest 3.0 standard, and that we protect our valuable provider relationships. The early feedback regarding Syndeo 3.0 is positive. While we still hear some concerns regarding the 3.0 system, the level is consistent with industry standards and we are addressing issues that arise promptly. We will continue to prioritize operational excellence, always with the provider in mind. Finally, our third near-term priority is financial discipline. We will be cost-conscious in everything we do, balancing our cost structure with revenue and opportunity. We will bring increased transparency and consistency to our financial results through improved forecasting. Mike and I are aligned on this point, which is evident in our fourth-quarter results with revenue and adjusted EBITDA in line with guidance. Mike will share these details shortly. These three priorities—sales excellence, operational excellence, and financial discipline—are foundational and necessary to operate from a position of strength and leverage the opportunities ahead. Since joining the Board in June 2022, a few things have become very clear about the significant growth potential which we will see begin to take shape in the second half of 2024 and beyond. We see a compelling opportunity around consumables to drive further penetration—this is a focus of mine. We will have more to report on our plans and progress later this year. We also see a clear opportunity to grow our device installed base by leveraging the specific value we bring to each provider channel—whether in medical practices, med spas, hospitality locations, retail, or with single-room aesthetic providers. We are in the early stages of addressing the opportunity across the majority of markets where we operate. Increasing penetration in existing markets to achieve scale is something we are confident we can execute on. I will emphasize, however, that our focus for now is squarely on implementing a transformation of the company. This entails driving sales excellence globally, keeping our providers at the center of everything we do, investing necessary resources to drive operational excellence, and operating with enhanced financial discipline and a more strategic deployment of our resources. As we continue to build and rebuild the foundation of BeautyHealth, I'm confident we will soon leverage the opportunities ahead to deliver long-term value to our employees, partners, and shareholders. We have a magnificent brand, terrific products, strong partner and customer relationships, healthy underlying market trends, and ample resources. There is no reason why we shouldn't anticipate better times ahead. With that, I will now turn the call over to Mike to share details of our Q4 and full year 2023 performance.

Thank you, Marla. I'll start by commenting on our full year 2023 financial results and fourth quarter performance as well as provide details behind our financial guidance for 2024. Revenue for the full year 2023 came in at $398 million, representing 8.8% year-over-year growth. Revenue was driven by steady consumables growth in the Americas and strong international performance, with nearly 43% of sales coming from APAC and EMEA. Global equipment revenue was relatively flat for the year, up 0.2%, primarily driven by lower provider adoption in the Americas due to Syndeo challenges. Total active machines in the field increased 24% to 31,446 units over the course of the year as we grew our provider base. Consumable sales increased 19.9% year-over-year to $191.4 million, reflecting continued and growing consumer interest in HydraFacial treatments. Consumables represent 48.1% of total revenue. Gross margin for the full year 2023 was 39% versus 68% in the prior year period on a GAAP basis and 62.8% versus 72.6%, respectively, when adjusted for non-cash expenses and selected add-backs. The primary drivers of the decline on a GAAP basis were the Syndeo 3.0 program and higher charges related to discontinued excess and obsolete products. Adjusted EBITDA came in at $24.3 million or 6.1% of revenue versus $46.1 million or 12.6% of revenue in the prior year, representing a 47.2% decline year-over-year. Moving to fourth quarter performance. Fourth quarter 2023 revenue and adjusted EBITDA results were at or above the guidance we provided on our third quarter earnings call. Revenue for the quarter declined by 1.3% year-over-year to $96.8 million. We saw Americas revenue decline 8.5% year-over-year, primarily driven by soft device sales due to customer caution around Syndeo and higher interest rates. As Marla mentioned, we are beginning to see Syndeo concerns subside and expect capital momentum to pick up. For the quarter, APAC revenue grew 17.3% year-over-year to $18.7 million. China accounted for $14.2 million of the region's contribution, showing 71.8% year-over-year growth. This performance was driven by strong delivery system placements, reflecting our success in penetrating the market and the significant potential to grow our presence as well as a partial COVID shutdown during a portion of Q4 2022. EMEA Q4 revenue grew 8.4% year-over-year to $18.8 million, with strength coming from consumables. Moving on to revenue by product type. For the quarter, consumable sales of $52.2 million eclipsed equipment sales, accounting for 53.9% of revenue and a 10% year-over-year increase. On the system side, we saw a 12% decline year-over-year in revenue to $44.6 million, driven by lower system sales in both the Americas and EMEA, partially offset by 66% revenue growth in APAC. During the quarter, we sold 1,551 systems at an average selling price of $28,783, up year-over-year primarily due to a favorable mix shift towards direct markets in APAC and EMEA and a higher percentage of Syndeo systems sold. Of the 1,551 systems, 341 were trade-ups. We delivered consolidated GAAP gross profit of $45.7 million, resulting in a GAAP gross margin of 47.2%. During the fourth quarter, we incurred inventory-related charges of $8.7 million. We did not add back these charges to our adjusted gross margin, as our intention is to minimize our add-backs going forward. In 2024, we are focused on improving our demand planning process and overall inventory management. Adjusting for non-cash charges such as depreciation, amortization, stock-based compensation, and incremental Syndeo program charges, adjusted gross profit was $52.8 million for a 54.6% adjusted gross margin. Selling and marketing expense was $32 million, down approximately 17.9% year-over-year, reflecting a strategic pullback in marketing spend as well as lower compensation and sales commissions. R&D expense was $3 million, up $1.6 million year-over-year. G&A expense was $29 million, up $0.5 million year-over-year, primarily driven by higher severance, bad debt reserve, depreciation, amortization, and software expenses. Altogether, this resulted in a net loss of $9.4 million. Normalizing for non-cash items and certain discrete charges, our adjusted EBITDA was $3.4 million, primarily due to gross margin pressure. This compares to a net income of $6.5 million and adjusted EBITDA of $17.6 million in Q4 2022. Moving to the balance sheet. We ended the quarter with approximately $523 million of cash. As of December 31, we had approximately $70 million remaining on our existing share repurchase authorization. In the fourth quarter, we repurchased 9.9 million shares at an average price of $2.80 per share. In January of 2024, we deployed $57.8 million of cash to purchase $75 million of our debt. We feel comfortable with our current liquidity position and, together with our Board, we'll continue to evaluate capital allocation, including debt management. We will provide investors with updates on our capital allocation in future quarterly calls. Our inventory stood at approximately $91.3 million at the end of December, a decrease compared to $109.7 million in December 2022. We increased our inventory during the fourth quarter as we began to build and deliver replacement Syndeo 3.0 units to our provider base. Additionally, at the end of the fourth quarter, we had approximately 1,300 trade-up elites on our balance sheet at the estimated resale price less our cost to resell. We are planning to sell through this inventory over the next two years and have factored in roughly half of the existing inventory to be sold during 2024. Starting in 2024, we are no longer taking back older equipment to resell and, instead, will offer our providers other incentives to upgrade. Including our sales of new 3.0 machines, we ended our fiscal year 2023 with roughly 9,500 Syndeo systems sold globally and approximately 3,000 systems are left to be upgraded to the 3.0 model. We continue to make progress on this initiative and expect to complete the program during the first half of 2024. Our December year-end accrual for the Syndeo replacement program was $21 million, down from approximately $32 million at the end of September 2023. We have a year-end warranty accrual of approximately $6 million as of December 2023 to cover our total global systems, inclusive of extended Syndeo warranties issued to support our providers during 2023. Next, I want to update you on our business transformation program that we announced in September. As a reminder, our initial target for the program was $20 million in annualized Phase 1 cost savings beginning in March 2024 with an incremental $15 million of annualized Phase 2 cost savings beginning in June 2024. Phase 1 gross cost savings of approximately $15 million were realized in Q4 of 2023 by reducing our workforce by roughly 10%. Planned Phase 2 cost savings were expected to be driven by optimizing manufacturing operations and reducing operating spend. In 2024, we made the decision to reallocate most of these initial and expected cost savings towards necessary investments in systems, processes, and training to implement stronger management of and controls around our supply chain and inventory. We recently identified a material control weakness in our inventory controls and are making the necessary investments to address this issue immediately. We expect many of these investments to be short-term in nature and to position us for meaningful cost savings in future years. Additionally, we will continue to work through other areas where we believe we can drive efficiencies and reduce our overall spend. We believe these actions will result in long-term net savings. I would like to take a moment to discuss the revenue cadence and seasonality of our business. Revenue is typically highest in the second and fourth quarters due to two factors. First, capital purchases are historically the largest in the fourth quarter as providers often have clear visibility into their annual capital spending allowance at that point in the year. Second, the second and fourth quarters usually see the highest consumer demand for HydraFacial treatments in the spring and again in the fall, consistent with aesthetics and beauty trends, and bolstered by our twice-annual consumables promotion periods in May and Black Friday in November. Given the size of our growing business, these two drivers impact revenue cadence. At the same time, the first quarter of each year is a traditionally slower revenue period for the business. We see a large share of sales and marketing spend in the form of major trade shows and events during Q1. These shows and events are important lead generators and training for the year, but the spend versus revenue puts pressure on the quarter's EBITDA. It is important to remember that our business operates on a razor-razorblade model with a roughly even revenue split between capital and consumables today. Our consumables segment represents a growing predictable and high-margin recurring revenue stream. Longer term, as with any razor-razorblade model, we can expect consumables will become a larger portion of our revenue mix, and the seasonality of the business will flatten, resulting in more evenly distributed revenue throughout the year. Keeping in mind the seasonality of our business, I'll move on to guidance for 2024. In the first quarter, we expect net sales to be $77 million to $83 million and an adjusted EBITDA loss of $6 million to $9 million. We expect revenue to decline year-over-year in the first quarter of 2024, primarily driven by soft equipment sales in the Americas as we regain provider confidence in Syndeo 3.0 with a return to growth in the latter half of the year. Additionally, we expect to face a challenging year-over-year comparison for system sales in APAC and EMEA in the first half of 2024 due to our international Syndeo launch in the comparable period of 2023. Adjusted gross margin is expected to be lower in the first half of 2024 compared to the first half of 2023 as we invest in our controls, processes, and overall supply chain. For the full year, we expect to improve slightly year-over-year with supply chain efficiencies later in 2024, partially offset by pricing pressure as we transition away from our trade-up program and bolster our sales efforts with lower average selling prices for our systems. Additionally, in the first half of the year, we plan to continue investing in sales and marketing to generate leads, as is typical in our industry. These expenses are expected to lessen in the latter half of the year. Resulting from the above assumptions, for the full year 2024, we are projecting revenue growth to be flat to up single digits year-over-year but expect to deliver adjusted EBITDA of $40 million or greater as we prioritize growing profitability alongside the foundational priorities Marla discussed. As we stated on our previous earnings call, our goal is to execute with a straightforward structure while meeting the high expectations of our providers, consumers, partners, and shareholders. Our action plan is clear: we'll increase our footprint through new capital equipment sales, plan to grow consumable sales per system, stabilize the business, complete our Syndeo 3.0 replacement program, and drive profitability. I'll now turn the call to the operator for Q&A.

Our first question today comes from Olivia Tong from Raymond James.

Great. I wanted to build on some of the comments that you made about sales growth and cadence, as it suggests sort of low to mid-single-digit growth in Q2 to Q4. So can you talk about the building blocks to get you there? And then secondly, you mentioned in your prepared comments a strategic pullback in marketing spend. You also said that the customer didn't really see any issue, and that was a really important point. So could you talk about the decision to curtail marketing spend? Because I would imagine that given the disruption behind the scenes, if the customer didn't see it, you would want to maintain that marketing spend to ensure they aren't aware of any disruption.

This is Mike. I'll address both questions. So the first part was around the overall guidance. Let me talk a little bit about what's driving that. A few anticipated drivers of pressure in the first half of the year are noteworthy. We expect sysytem sales to grow in the Americas as we complete our Syndeo replacement program. We're already starting to see increased interest as we move past the challenges of the Syndeo launch. The second piece I mentioned in the prepared remarks is that in the international markets, we launched Syndeo in the first half of last year. So as we look to that comparison, it gets easier in the back half of the year. The third cornerstone is around consumable sales per system. Because of some challenges with Syndeo, we saw pressure in the back half of '23. We're actively working with our providers to support them, and we expect to increase those consumable sales per system as we enter the latter half. The second part of your question was around marketing spend. We traditionally spend more on marketing upfront, as we discussed, related to provider trade shows and conferences. These expenses tend to be weighted towards Q1, specifically and a little in Q2, during the year. One thing I would like to highlight is we still have allocated costs in the back half of the year; we are not turning off that spend completely. We are still planning to spend and support our providers, but it's just to a lesser extent than in the first half.

Our next question comes from Oliver Chen from TD Cowen.

On some of our research, we're still seeing some issues with Syndeo 3.0, but it sounded like it's in really good shape. Any color on what gives you confidence and risk factors there? And as you mentioned, supply chain and controls both have opportunity. How would you contrast what needs to be done regarding controls relative to the supply chain? Finally, capital allocation priorities—you mentioned them on the call. I would love a framework for how you're thinking about capital allocation priorities going forward.

I'll start, and then Mike can elaborate. So, I would say with Syndeo 3.0, we're encouraged by what we're seeing. It's better than 1.0 and 2.0. However, we still have work to do to bring quality to the level we want. So there's progress, but we need to continue focusing on enhancements. I will let Mike address the supply chain and capital allocation.

Sure. On overall operations, we are investing in information management systems, and our overall processes and procedures to ensure we’re looking at the right metrics and managing overall inventory controls. The material weakness is around ensuring we have the right people with the right experience and the right processes in place to effectively manage inventory and related obligations. The second part of your question around capital allocation is ongoing; we are spending time with the Board and have a capital allocation committee that meets regularly. I don’t have specific updates to share, but we'll be sure to inform investors as things evolve.

Our next question comes from Allen Gong from JPMorgan.

Congratulations, Marla, on the position. To start off on a higher level, I'd imagine that your previous targets presented at the 2022 Analyst Day are no longer in effect. So when we consider the outlook for the company once we move past this transition period in 2024, how should we approach prioritizing top-line growth versus EBITDA, as it seems like in 2024, you're kind of realigning EBITDA and growth might be suffering a bit as a result. So what should our expectations be moving forward?

We're not in a position to provide long-term guidance today, but we can state that we believe there’s substantial growth potential in the business. We think we can grow profitably; this is a specific focus as we move forward. The levers we expect to address over the long term include opportunities to enhance gross margin. Regarding OpEx, we have discussed some our initial OpEx savings, which we're reinvesting back into the business to ensure effective implementation.

Our next question comes from Susan Anderson from Canaccord Genuity.

Alec Legg is on for Susan. I was wondering if you could talk about the trends of consumable sales by region. It looks like Americas were very strong this quarter, but APAC took a step back. Can you provide details such as usage frequency by machine and some of the add-ons? Additionally, where do you see that add-on business heading in the long term?

Sure. I can talk about consumables growth and then some of the other metrics. Overall, the increase in consumable growth was driven by the Americas and EMEA while APAC faced challenges, as you mentioned. APAC consumables revenue is down 30% year-over-year in the fourth quarter; this was primarily driven by softness in the distributor channel, which we're currently researching. Notably, China consumable sales, primarily sold directly, were down a couple of percentage points year-over-year. We believe there’s substantial opportunity for consumables growth in APAC as we continue to expand our systems base. Some of the things we're investing in include additional boosters and products designed for the APAC market that we plan to launch later this year. The second part of your question was around overall consumables usage. We're still working through specific metrics we want to communicate externally, but one internal key metric is consumable sales per system—we're tracking this and expect to grow it in the future. In Q4, last year, this metric was down year-over-year primarily due to the APAC market, and we're focused on addressing it.

Our next question comes from Jon Block from Stifel.

I'd like to combine two questions into one. First, your worldwide consoles were down roughly 35% year-over-year. Could you elaborate on the overall capital environment and how you believe you performed in terms of market share relative to that decline? Secondly, you noted a disparity between EBITDA and free cash flow; traditionally, we’ve seen a big delta between these metrics. Could you provide insights on that, especially as we're approaching your convertible maturities in 2026?

I will take the first couple of parts and then leave it to Marla. Regarding equipment revenue and sales, I don’t have specific data on how we fared against the market, but some challenges we saw in equipment sales were due to issues with Syndeo overall. With the launch of 3.0 and our outreach to providers, we expect to see improvement over the next couple of quarters. Regarding EBITDA and free cash flow, we mentioned in the guidance that we would reach at least $40 million or above in adjusted EBITDA. Our intention is not to have significant add-backs to achieve adjusted EBITDA. Our CapEx projections for the year will be roughly $15 million to $20 million, and our expectation is to generate close to flat adjusted free cash flow from those metrics. We are mindful of capital structure and the upcoming convertible maturities, and we feel well-positioned for the time being.

Our next question comes from Korinne Wolfmeyer from Piper Sandler.

You alluded earlier to some issues Syndeo 3.0 has been experiencing. We've done our research and want to understand what exactly you're seeing regarding ongoing concerns and what you're doing to address them. Additionally, you mentioned you’re transitioning away from the trade-up program but may offer some pricing actions to upgrade. Can you specify what incentive structures are being implemented in lieu of trade-ups, and what we should expect with that program going forward?

The Syndeo 3.0 issues are not the same challenges we faced in the past. We have some noise issues and concerns about equipment being damaged during shipping. These quality issues need continual improvement but differ from the prior issues with 1.0 and 2.0. This focus is part of a broader review of our manufacturing, fulfillment, and supply chain, which we consider an absolute priority. Mike, do you want to add anything?

Regarding trade-ups, we are restructuring how we address them by offering incentives to trade into Syndeo without taking back the existing device. This effectively becomes an additional device for many of our providers.

Our final question today comes from Ashley Helgans from Jefferies.

To rephrase, some providers have shared concerns regarding the Syndeo 3.0. Can you provide specific details on the concerns being raised by providers? Additionally, there’s been significant growth in China. Can you share your perspective on the market there and how much further growth potential you believe exists?

I can answer that, and Marla can add if needed. The concerns with Syndeo are primarily quality control issues that we're addressing. Our near-term reinvestment back into the business is largely focused on ensuring products coming off the production line meet the necessary quality standards. Some issues we've encountered are around equipment moving during shipping, resulting in noise issues or scratches. Our goal is to ensure providers receive a high-quality product when it arrives. Regarding China, we believe we are still early in our growth there and foresee significant expansion potential as we continue introducing new products and boosters in consumables. Based on our results, we are still successfully deploying equipment and expect this momentum to continue.

Thank you all for joining us today. We're excited; this is the beginning of our time with you and look forward to really doubling down and getting to where we need to be. Thank you.

And ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.