Beauty Health Co (SKIN) 2022 Q3 法說會逐字稿

Ladies and gentlemen, good morning, and welcome to The Beauty Health Company Third Quarter 2022 Earnings Call. (Operator Instructions) Please note this is 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 and we're 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 3 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, 2 key macroeconomic factors have become magnified. First, the U.S. dollar index has reached a 20-year high. When compared to FX rates at the start to 2022, the stronger U.S. 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 modeled 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 3-year plan as discussed during our Investor Day.

Turning to Slide 6. 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 8. Fueled by Syndeo's 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 1 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 to our average selling price when compared to 2021. This is despite having over 6x the number of lower-priced trade-ups when compared to 2021, with credit 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'll 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 9. We continue to see a 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 med spa, 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, key channels to broadening our brand visibility and bringing new consumers into the community. In the hospitality space, we entered our first 1 hotel location in Kuai, 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 of 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 store in the U.S. with recent additions in Canada. In Germany, we launched Douglas's luxury flagship in Dusseldorf, Germany, beauty and lifestyle hub. We also expanded to new locations with existing retail partners such as John Lewis throughout the U.K. and Gallery 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 will be extremely difficult to replicate. We continue to show our commitment to SDs and look forward to welcoming even more talented esthetician to be part of the Hydrafacial nation. Skin care 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 SDs.

In fact, recently, we showed our commitment to our providers in a big way. In a lover letter to Hydrafacial-ists on National Esthetician Day, we hosted a beautiful billboard in Times Square, honoring our esthetician partners on the big screen and generating 1.4 million impressions in just 2 days. On Slide 12, our growing and lower 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 classes, we also have curriculum aesthetic schools to induce 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 Institute and Paul Mitchell schools, 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 installed base.

Moving to Slide 15. Our market investments are creating results. We saw continued momentum with increasing consumer interest in the quarter. Earned media values continues to shatter historical performance with 2022 year-to-date, already surpassing 2021 total EMV. Additionally, our worldwide Google Search has trended meaningfully upward over the last 2 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 our consumers and providers. It created an incredible buzz across social media and early results are encouraging.

The JLo booster are our most successful booster drop yet with presales selling out on the first day and in pressuring 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 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 and further Hydrafacial's leadership as a truly unique platform that personalized skin care solutions. With around 20 boosters to choose from every Hydrafacial treatment is fully customizable for all skin type and needs. You will have seen our latest partnerships announcements in just the last few days with skin care leaders, Dr. Dennis Gross and Glytone. We are also leveraging cutting-edge science to create a novel exosome booster and announced earlier in the third quarter to address signs of aging and inflammation in the skin.

The efficacy of our booster formulas and treatment is gaining industry recognition. Our Hydrafacial by Murad Clarifying Booster launched in the second quarter as been named the Best Pro Facial for acne by Cosmopolitan magazine. No other company offers boosters and 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 experienced 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 a share repurchase program of up to $200 million, of which $100 million was deployed in an accelerated share repurchase program. The buyback decision was taken part of a larger disciplined capital allocation strategy, and we continue to remain a strong cash position to pursue opportunistic M&A.

M&A remains a priority. You'll 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 call 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 9 months of the year. The global macroeconomic environment and dynamic COVID-19 situation in China present challenges that are not unique to Beauty Health. But 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 we 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 macro environment. 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 demand, 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 3 of our regions year-over-year. In Americas, 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 re-openings in China during the quarter and a headwind from FX rates. This demonstrates our team's resourcefulness and resilience in China and to continue operating the business in a very difficult environment. I will touch more on the strategically important market in a moment.

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 lost 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 aesthetics with no signs of slowing demand in their practices.

We will diligently monitor this region, responding as market conditions warrant by exercising our flexibility with strategic investments. Briefly touching on our KPIs on Page 27. We shipped 1,860 delivery systems in the quarter. As expected, we saw less pronounced trade-up levels without additional promotion, consistent to our historical experience. We ended the quarter with an installed 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 a GAAP and adjusted basis, respectively, primarily driven by fixed cost leverage associated with higher volumes and stronger realized delivery system pricing, partially offset by headwinds from global supply chain challenges, inflationary pressures and FX rates. Further, adjusted gross margin benefited from a onetime 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 of Syndeo in the U.S. and Elite internationally. Fixed cost leverage associated with higher volume and stronger realized delivery system pricing, partly offset by the impact of FX rates, supply chain headwinds, sales commissions associated with higher revenue and net increase in the 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 rate, partially offset by a slower-than-expected reopening in China and FX headwinds.

As you know, we employed an intentional strategy of guiding to a fixed dollar amount for 2020 EBITDA to allow for outsized investments 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 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 impact of approximately $8 million to revenue as measured in constant currency, which flow 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 improvement in adjusted EBITDA margin. As a team, we're maniacally focused on our commitment 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 was $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 accrual for estimated bonus expenses, which were originally accrued at 200% of target amount.

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 spend. 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 expense was up $23.8 million primarily reflects increases in professional fees and expenses associated with our continued 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 amount.

We anticipate higher G&A expense in the upcoming quarters given the extensive services related to our SOX testing and the completion of our global ERP implementation by January 1, 2023. Moving down to R&D. The $2.2 million expense is consistent to 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 the build serving as hedge against potential supply chain bottlenecks and anticipation of launching Syndeo internationally the first half of next year.

With our cash balance, we remain well capitalized to execute on our growth initiatives, while keeping strategic M&A opportunities actionable. Our $750 million of 1.25% convertible notes through 2026 remain on the balance sheet. As we shared previously, we've 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 the 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 9 months of the year. Quarter after quarter, this year and throughout its history this business has proven resilience during volatile macroeconomic environment. 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.

We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Oliver Chen from Cowen.

Andrew and Liyuan, great quarter. As we think about your guidance, what's embedded for what you're seeing in 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, just 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 for joining the call. I mean firstly, I'm extremely proud of what the team has achieved. In Q3, we achieved our second highest revenue quarter, increased utilization, record levels of EMV and continued strength in Google Trends. And all this despite as you raise the macroeconomic environment, FX headwinds, the war in Europe and of course, the persistent lockdown in China. And that said, as we look to Q4, to answer your question, we're taking a very measured view. The new news since we spoke at Investor Day is, of course, the macroeconomic environment deteriorated on an accelerated pace with the new news, of course, which was China's decision to adopt an even stricter zero COVID policy when we forecast a gradual reopening. That said, we achieved 44% growth in China last quarter in those -- in APAC last quarter. In those windows of when China reopened, we saw the business bounce back very rapidly, so it gives us a lot of confidence when it does open up.

For Europe, Liyuan and I have just recently turned from an extended trip in EMEA. We were extremely pleased to see the buoyancy of the consumer and demand we met providers across England, the U.K., France and Germany, and again, very, very buoyant consumer and provider. And the U.S., another tremendous quarter, plus 30% strength of the consumer strength -- continued strength of Syndeo, which gives us a lot of confidence. We're seeing absolutely no slowdown. Having said that, we are mindful of the near-term impact of macro pressure. So, we updated our FY '22 EBITDA guidance for Q4 to reflect these related risks. I would say, a measured manner. However, we remain cautiously optimistic to achieve the $50 million. I'm confident certainly to look land in the range we've given. Liyuan, anything to add?

Yes, absolutely. 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 buying speed as we discussed previously. We've seen some of these return investments, especially when you see the improvement on brand awareness that really will benefit us in the long run. And we also had mentioned, we did invest in APAC and EMEA as we turn these distributor purchase from last year into direct and 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 opening, right, that actually fuel that 40% growth in APAC.

Sufficed to say, we've seen it again and again post the first round of pandemic, how strongly APAC bounced back with 200%, 300% growth. So, I think the team is ready, and we have the muscle to put the lever up and down. One thing to really emphasize is on the investment for marketing, we did invest for Q3 heavily in marketing. On one hand, raise consumer awareness on the other hand, double 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 of marketing investments to make sure we finish the year strong.

The next question comes from Korinne Wolfmeyer from Piper Sandler.

Congrats on the quarter, 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 part of Q4. And then has there been any impact on the interest rate environment here?

Thanks for the question. I'll kick off and let Liyuan add. We've seen actually consistent demand across the quarter in all regions, actually. Of course, APAC was, of course, impacted by the opening and closing and opening and closing in China. But across that, we've seen very robust demand, no slowdown. And of course, in the U.S., we continued with the rollout of Syndeo very strongly and prepared for our international launch of Syndeo in overseas markets in the H1 of 2023. Liyuan?

To answer that question you know in this medical device business, it's usually a quarter end heavy. And any given month because of the way we generate our lead usually is 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 are very encouraged as we continue to visit our providers and the sentiment seems to be strong given the type of consumers we service.

The next question is from the line of John Block from Stifel.

Great. First one, just a little detailed. But I think I heard Andrew or Liyuan, you called out FX impact of $8 million on the top line. Is it 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 - $3million 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 sort of a repeat of what we had here in the U.S. in '22? In other words, call it a back-end weighted '23 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 cost 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.

John, good to hear your voice. I'll start with the phasing. I think suffice to say, we have that seasonality we've shared prior. We always have a strong Q4 and then followed by sort of a drop for seasonality for Q1. And then from there, Q2 is a build and then dropped slightly in Q3 usually because of the summer holiday, then finish with a strong Q4 as we shared at the Investor Day. I think from an EBITDA flow-throughs point of view, it very much follows that cadence. And especially, you have to invest earlier in order to see the leads you generate from all the marketing activity to flow through to fill the sales.

So, in that thing you're absolutely right, John, when you think about Q1, obviously, that's going to -- you're going to enjoy less of the leverage point because of the revenue construct. And usually, the EBITDA is lower for Q1. It builds a little bit for Q2. And you have to keep in mind if we're launching Syndeo globally, you're going to see almost a little bit of the repeat of the trade-up dynamic, which is going to impact our gross margin once we launch. And then it's going to come down a bit in the second half of the year, but we usually still invest a bit more for marketing, then we let that flow through. So as a result, you usually see the strongest EBITDA flow-through in the fourth quarter of the year. Back to the constant currency comment. Because of the way we record cheap, a lot of the expenses are burdened on the U.S. side. So, when you think about that true flow-through for our international market, the flow-through is very significant. So obviously, you can almost see it as a 40% plus flat flow-through because of the way we're constructed, if that makes sense.

Yes. So, $3.5 million on the 40% and call it, roughly 3% - 3.5%.

The next question comes from Margarate Boeye.

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 spend. 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 for the questions. 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 which we've just demonstrated this by raising our guidance for the full year as a proof point for the continued strong demand and utilization we're seeing. And of course, as you mentioned with the impressions, it's being fueled by investment we're making in marketing to drive utilization as well as the new booster partnerships, which we have with JLo, the ones we've announced this week from Glytone and Dr. Dennis Growth. So, our long-term plan remains firmly on track. And I think it's important to note, our revised EBITDA guidance does not reflect a demand or profitability problem. Rather guidance reflects just the 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 EBITDA guidance this year. I'll let Liyuan add in more detail.

Thanks, Andrew. 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 the expenses are matching even more for the revenue for all of these international local market 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.

Thank you, the next question comes from Allen Gong from JPMorgan.

I had a quick question on the top line. It's been really great to see that capital momentum as we are going to continue that, I would say, a pace quite a bit stronger than initially contemplated. But when we really think about the underlying consumable 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 with 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?

Allen, 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 the war in European and impact there. So, despite that, and of course, as you rightly pointed out, with the launch of Syndeo, we give away the starter pack to get our providers going. So, despite all of that, utilization still increase. 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. Allen, just to double-click on Andrew's point. As we shared with you, yes, every single new system we sell, including the trade-offs, we have provided 1 quarter worth of consumables. In addition to that, as we sell more second system and multiple systems, we often see those takes even longer time to ramp up because imagine they've already got a machine or 2 at the practice. Now they're adding additional ones. So, we usually see a quarter to 2 quarters lag. This is why as we really laying 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 the proxy based on the true utilization rate. So based on that true utilization rate, we actually did see slight improvement, especially for the market that's not negatively impacted by closure like China or Russia was part of the equation, and now it's not. So, 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 type of consumables. So, the team is on it to continue improve utilization.

Got it. And then a quick follow-up. I wanted a quick -- a bit more on 2023 as well. I mean you provided an 18% to 20% target for adjusted EBITDA next year at the recent Analyst Day. As you've highlighted, macro pressures have got 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, yes, thank you. We remain absolutely committed to the 18% to 20%. For 3 reasons. You will recall, this year, '21 and '22 have been what we've discussed many times over the years are years of elevated investment. As a new public company, we've made all those investments to bring us up to SOX compliance to set up the pre-PR networks, the set of 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. We're double paying. None of those investments will be made repeated next year. So, there's 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 we are, 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 '23.

Thank you. (Operator Instructions) The next question comes from Ashley Helgans from Jefferies.

We're starting to see some signals of a trade down on 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?

Ashley, thanks for your question. I'll start with the -- your question on traffic. I mean, traffic, there's always seasonality in Q3, particularly in EMEA. This is on the compounded by the extreme hot weather and many people taking extending holidays following the COVID lockdown. So, we really sort of build over the quarter in EMEA. Of course, APAC was up and down, mainly linked to China outside of that traffic remained very strong. And in the Americas and particularly in the U.S., in the Americas, we grew 30%, traffic has been and continues to be very robust. I mean, Liyuan and I spent a lot of time visiting providers all over the world and especially in the U.S. recently, and there is no signs of a slow down or impact.

In terms of trade down, we haven't experienced any of that by Hydrafacial, but actually, Ashley, we gain because typically, 60% of our business is in the medical channel, doctors, plastic surgeons, et cetera, by far, we are the lowest cost service in a physician's office. So actually, as we saw in '08, '09, when this company was private, our business actually benefits from trade down for more expensive, more invasive procedures during periods of economic contraction. So we set to gain -- we really are a lifeline for our providers when people can't afford the more expensive services, they want to keep up their skin health, keep up their investment and their confidence. So, they buy a very accessible, affordable price, Hydrafacial. So, we've seem the benefit and I think that explains why we've seen no slowdown in terms of our business.

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

Just wanted to touch on -- you've had Syndeo out, I think, for 6 months on the market, plus or minus. 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 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?

Yes 6 months since the launch of Syndeo, we couldn't be happier with the rollout, of course, as we're expecting to launch in H1 of 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 at Investor Day, I think once we build up a robust set of distribution across the U.S., we'd like to share that. Of course, the very first customers and providers have bought Syndeo were actually the ones who helped us codevelop it. So, there's an inherent bias -- positive bias in the data we collected for those first providers. So that's why we 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, we'll be looking to share more data on that next year.

The next question comes from Bruce Jackson from The Benchmark Company.

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?

Bruce, thanks for the question. Absolutely, I mean clearly, we have a very strong team on the ground in China with offices, of course, in Beijing and Shanghai. So, we're obviously in constant contact with that team and our provider network there. And it's obviously, it's been very interesting for us to follow as we have these periods of closure, followed by extremely rapid bounce back as the market opens. So, look, we are preparing for a H1 2023 launch of Syndeo in China. We have made the investments this year, of course, in the team, the infrastructure, the in-region production, which we talked about at the Investor Day. So, we're ready to ramp up and seize the growth opportunities the market opens, knowing we have a proof point that when it opens, Bruce, we'll really capture that upside.

Bruce, it's Liyuan here. Just to double-click on your comment on the levers. We actually did a lot of test and learn, especially when it comes 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 lock down for extend period of time, we still generated sales. It's precisely because how we approach the lever. Suffice to say, we've been very thoughtful in terms of who to hire, right? Most of the folks we hire ahead 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 are also very agile. So, we know how to turn it up and down if need be. Thanks.

The next question comes from Olivia Tong Cheang from Raymond James.

This is Devin Weinstein on for Olivia Tong. Wanted to ask a little bit about the customer trends that you were seeing. I 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 amount? And then I would also like to hear from your esthetician customers, is there any slowing to the sales cycle or any fallback in demand? And then if not, if conditions were to worse than the macro, what would be your first levers that you would pull to reaccelerate 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 it earlier, Liyuan and I with the team have done a lot of traveling in the last few months, both across Asia over the summer, EMEA in the fall and most recently last week across the U.S. And wherever we go and speaking to providers estheticians, the medical channel, there is no slowdown. The consumer remains very buoyant, investing in their skin health, investing esthetics across a range of categories. In fact, one of the biggest questions or comments we get from providers, there's no slowdown in demand, no increase in cancellation of bookings at all. It's finding enough staff to deliver the demanded services across a range of products, including Hydrafacial. 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 at a starting price of Hydrafacial is an extremely affordable and sticky service. And most of our customers sell packages or subscriptions, so they're locked in for the monthly visits. So that's what reflects the strong demand, which has been flowing into our results. 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 variable on 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.

Devin, just only one point I'm going to double click. I think we 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 location at any given point 3.2 places 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 is a part, both Andrew and I as we visit it kind of validate that point. And we have estheticians come every month at our experience in terms of 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 room for their procedures, which is just another validation of how folks feel about medical aesthetics in general.

The next question comes from Linda Bolton-Weiser from D.A. Davidson.

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?

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 kind 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're heavy enough to fuel the growth. So, as you saw, we invested a lot in inventory for future growth as well. This is why we guided to you're probably not going to see -- you're going to see continued improvement on gross margin, but you're not really going to see that true unlocking starting the end of the year, beginning of next year.

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 5-point master plan with disciplined management, our investment leaders 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.