The Beauty Health Company (SKIN) Q2 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. And welcome to The Beauty Health Company Second Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker, Dawn Francfort. Please go ahead.

Good afternoon, everyone. Thank you for joining The Beauty Health Company’s conference call to discuss the Company’s second 2021 financial results, which we released this afternoon and can be found on our website at investors.beautyhealth.com. With me on the call is Clint Carnell, Chief Executive Officer of The Beauty Health Company; and Liyuan Woo, Chief Financial Officer. Before we get started, I would like to remind you of the Company’s safe harbor language, which I’m sure you’re all familiar with. 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 profit, adjusted gross margin, adjusted net income, adjusted EBITDA and adjusted EBITDA margin. Reconciliations of these non-GAAP measures of the most comparable GAAP measure are included in the earnings release, furnished to the SEC and available on our website. Now, I would like to turn the call over to Clint Carnell, Chief Executive Officer of The Beauty Health Company.

Thank you, Dawn. Good afternoon, everyone. And thank you for joining us today for a discussion of our second quarter results. Before I get started, I’d like to first thank our employees and providers worldwide. Despite the still challenging environment, our employees and providers have shown a level of resilience and passion, enabling us to achieve our record performance. They are at the center of everything we do and a key driver of our success, and we simply could not have achieved any of this without them. Now, turning to a review of our quarter. We are very pleased with our second quarter performance and strong first half of 2021 with both, sales and adjusted EBITDA materially exceeding our own expectations. Our key strategic initiatives continue to gain traction, and we are capitalizing on the favorable self-care trends, which we believe represent a lasting shift in consumer behavior towards health and wellness. Now, subsequent to the quarter end, we have grown our Delivery Systems to over 18,000 units as we accelerate our investments in brand building programs and forge significant progress on strengthening our global connection with our consumers. And while a portion of the outsized growth was related to easier comps from COVID-19 and closures in the prior year, we drove significant growth compared to 2019 levels. We are also pleased to welcome distributors in Germany, Australia, France and Mexico to the HydraFacial family. And we’re thrilled to have them join the team as we see these markets as strategic to growing our business internationally. Turning to financials, adjusted EBITDA was $11.4 million, driven by strong net sales growth of over 370% year-over-year, significant gross margin expansion and disciplined expense management, while we continue to ramp up our strategic investments. We further strengthened our financial position, paying off our debt, and improving our leverage profile, following our business combination in May. We are making significant progress on our vision of deeply connecting our consumers to the Beauty Health community where they live, work and play. We remain firmly on track to achieve our long-term strategic goals as our brand is resonating globally. We’re therefore raising our full-year year top-line 2021 guidance on the back of our strong results, and I’ll discuss those in more detail. For today’s call, I will provide color around our second quarter performance and then discuss the confidence we have in our growth strategies and outlook, given the evolving consumer behavior favoring Beauty Health and our unique business model, driven by our HydraFacial Nation. I will then turn the call to Liyuan, who will discuss both our Q2 results and updated 2021 financial outlook in more detail. Now, as I mentioned, our second quarter results exceeded expectations across the board. Sales strengthened as we moved through the period and meaningfully exceeded pre-pandemic 2019 levels, increasing 57% versus 2019. And on a year-over-year comparison, our second quarter sales grew by over 370%, led by continued strength in our Delivery Systems, which increased 481% and a 290% increase in our Consumables revenue. Our adjusted gross profit increased over 500% from a year ago, generating a 75% adjusted gross margin. And as I previously mentioned, our adjusted EBITDA improved to $11.4 million, which drove an adjusted EBITDA margin improvement of 2,480 basis points compared to the prior year. During the quarter, we continued to build our platform with the objective of establishing a connected community into Beauty Health that benefits everyone, the consumer, the provider, and our Company. We continue to make progress this quarter on our key three growth initiatives, which are comprised of raising consumer awareness; delivering innovation; and expanding our international infrastructure. So, I’d like to touch on those with some specificity. First, with respect to our efforts to drive consumer awareness, we accelerated our investments to build awareness of the HydraFacial brand, leveraging our passionate community in the HydraFacial Nation and expanded our marketing efforts. We continue to build on our HydraFacial CONNECT, our clinical training, professional development and holistic business education program, as we strive to be the world’s largest universities for estheticians. And through our partnership with estheticians, we have created passionate community of loyal and highly influential providers. We’re also beginning to see our business in the retail channel improve as more locations reopen, following the closures related to COVID-19. We continue to make progress on expanding our retail partnerships and extending into the consumers’ awareness of our brand. As markets reopen this quarter, we begin to activate these marketing initiatives, accelerating our investments in brand building programs. We hosted our first inaugural virtual event in Las Vegas on May 1st called EstiPalooza that drove over 1,500 people to register and see the event beside our 150 in-person attendees, properly distanced. GLOWvolution, our U.S. coast-to-coast bus tour kicked off in Miami on June 4th and will continue well into September. During this event, we were able to provide treatments to 250 customers on site over a two-day period. We also hosted two international pop-up events, a Dubai and a London Experience Center. Now, these events are highly effective at activating demand. They drive community engagement with the esthetician and consumer awareness, which turns results into consumer demand. At the same time, we strategically implement promotional offerings in order to activate delivery system sales, effectively expanding our partnership in these select regions. This allows us to build the delivery system capacity in these locations to meet the expanded consumer demand these events create in our local markets. Our strong consumer multiplier effects make these events highly effective, because you have to try it to get it, and approximately two-thirds of consumers who try a HydraFacial for the first time, become repeat customers; and others two-thirds, roughly one-third of the customers will become frequent super users of HydraFacial, going six to eight times per year. And in our most recent event, approximately 85% of people who tried HydraFacial for the very first time have said they plan to do another treatment. Given that once we know people learn about HydraFacial, they become repeat users, we are intently focused on building awareness of the brand and treatment with consumers through these programs. Second, we continue to invest in our innovation initiative in order to create products and technology that seamlessly connects with our HydraFacial community. As we previously mentioned, we are accelerating our R&D investments to make sure we are delivering the right product, the right technology to build upon our connected community. Our upcoming new product launches, which I will discuss in more detail in a moment, remain on-track, and we could not be more thrilled about launching them. We are adding innovation at serums, including our Dr. Murad co-branded serum that launched during the quarter. We are testing our new app that allows us to connect with our consumers and providers directly, where they live, work and play, as we expand our direct-to-consumer connected capabilities. And while our app remains in beta mode, we are highly encouraged by the early response we are seeing from our customers. Third, we continued to build up our international presence this quarter, as we invested in growth and announced the acquisition of four distributors. Global expansion is a top priority for our team with sales increasing over 400% this quarter. We are investing in marketing initiatives globally to grow consumer demand, while scaling our infrastructure and the team to support our rapid expansion. During the quarter, we announced agreements to acquire four global distributors, including our partners in Germany, Australia, France and Mexico for a total purchase price of approximately $35 million in cash and stock. These acquisitions are consistent with our focus on accelerating our growth internationally, which further solidifies our direct presence in key strategic markets. We’re building out our international infrastructure with plans for headquarters in EMEA and APAC, as well as larger teams in the local markets. We are extremely proud of what we have accomplished this quarter, as well as the past year, particularly given the challenging environment. The sustained momentum this quarter of over 370% sales growth is further proof of our powerful consumer brand and platform business we have built in Beauty Health. As we look forward to our third quarter and beyond, we see significant opportunity for our business by leveraging infrastructure and growing our installed base to fund these new investments. As a result of another strong quarter, we are raising our top line guidance for 2021. We now expect sales in the range of $230 million to $240 million. And that’s up from our previous guidance of approximately $200 million. This increased top line guidance is based upon our strong results in the second quarter, as well as the continued momentum in self-care. Coming out of the pandemic, we see the sustainability in health and wellness as a lasting shift in consumer behavior. We see significant opportunity and are accelerating our investments to capitalize on the multi-dimensional growth ahead of us. And now, I’d like to walk you through details of our upcoming investments in our three key strategic growth initiatives that I previously highlighted. First, building and expanding our consumer awareness is an important priority for us. By increasing our consumer awareness through accelerated marketing initiatives, continuing to build out our team and expanding our partnerships, particularly in the retail channel, we will address the significant white space opportunity before us. We will continue to deploy our highly effective events in order to activate consumer demand. Our GLOWvolution coast to coast U.S. bus tour will continue into September. And you may have seen on August 4th, we announced the appointment of Ben Baum to the newly created role of Chief Experience Officer. This position is an important step in further supporting our consumer awareness strategy. We are expanding our presence in the retail channel with our new Nordstrom’s partnership, where we enter in select locations. This partnership will further build upon our focus to expand our presence in the retail channel, as we see significant opportunity to extend the consumer awareness through this channel. Second, we are increasing R&D investments to accelerate the rollout and innovation that will connect our entire HydraFacial community. We’re testing the launch of our connected handheld device in the fourth quarter with a broader rollout expected in 2022. We remain on track to launch a HydraFacial 2.0 connected device in 2022. And we are also continuing to test our app, which will expand our ability to seamlessly connect with our consumer, and early results are highly encouraging. We’re launching innovative products and technologies, driving our longer term focus on building a seamlessly connected and interactive beauty health community. We believe the ability to directly interact with the consumer and engage them through our connected community will be an important driver of our long-term business. Third, we’re celebrating our global footprint as we go direct in key strategic markets and build presence in other markets through new distribution partnerships. We will continue to add incremental resources to our team globally in order to meet the growing consumer demand, as well as expand our infrastructure to support this rapid growth. This includes the announcement on August 4th of Stephan Becker being named our President of EMEA, effective this October. We also hired Indra Pamamull as President of APAC, who joined just yesterday, The Beauty Health family. And we’re continuing to establish new distributor partnerships in certain markets. And we’ll go direct in other markets where we see an important strategic opportunity. Our international presents a compelling opportunity for us, which we expect will exceed our U.S. business in just a couple of years. In conclusion, we are extremely pleased with our second quarter results. The momentum in our business is further proof of the strong foundation we have built as a platform company in the dynamic beauty health category. This is a growth story with significant opportunity. And we are well-positioned to capitalize on multiple opportunities, as we accelerate these investments in our business and build a unique, connected community. And now, I’d like to turn the call over to Liyuan, who will discuss our financial performance in the second quarter, as well as provide you with our updated financial outlook for the year as we continue to deliver profitable growth and reinvest in our unique platform. Liyuan?

Thank you, Clint, and good afternoon, everyone. Before I begin, I’d like to thank our team around the globe for their continued dedication throughout the quarter. Their hard work and commitment of our people drove our impressive growth this quarter. This, along with the stacking and closing four distributor acquisitions in a still challenging environment demonstrates a unique outcome-driven growth mindset of our team and our business model. Just as a reminder, since we finalized the reverse merger on May 4th of this year, The Beauty Health financials reflect mainly HydraFacial historical information. There were a few significant non-cash accounting entries from the valuation of our words and mark-to-market valuation of the 7.5 million earnout shares here related to the four acquisitions, which we will address and adjust out as non-GAAP measures to focus our discussion on our core business performance. I’m going to review our second quarter results, touch on our balance sheet and then provide details on our updated 2021 guidance. And we’ll make select comparisons to our second quarter of 2019 in my prepared remarks, as we believe it is a more meaningful comparison due to the COVID-19-related market closures in 2020. Let me start with our second quarter results. As Clint mentioned, we are very pleased with our record performance this past quarter as we continue to build on our key strategic initiatives with second quarter results exceeding our expectations across all metrics. Since many of you may be new to our company, let me take a minute to talk about our business model. We have a fairly predictable sales cycle, with our seasonally strongest quarters in the second and fourth quarters of the year. Net sales of $66.5 million increased materially from last year’s COVID-impacted sales of $14.1 million and up 57% from $42.3 million in second quarter 2019. The significant increase was largely due to expansion in our Delivery Systems with almost 18,000 active systems globally at the end of the quarter, and acceleration in our Consumables as COVID-19 restrictions lifted and more of our partners reopened. The strength in the U.S. and EMEA businesses continued while the strong growth in the APAC region accelerated in the quarter. Now, I’ll share a few highlights from our three regions. Second quarter sales in the Americas region increased to $42.7 million, compared to $9.5 million a year ago, and grew over 34% from our 2019 level. The strength was driven by continued traction in the U.S., primarily due to higher sales representative productivity on our solid Delivery Systems rollout. It’s important to note that more of our partners began to reopen as vaccines were available and government restrictions were lifted. However, we still had partners in the non-medical channels in select states who did not reopen until late in the quarter. Some U.S. locations continued to operate with reduced capacity to accommodate state and local regulations. We also saw some Consumable orders increase for customers reopening, which contributed to our record second quarter. As Clint mentioned earlier, marketing and training activations, such as EstiPalooza and GLOWvolution also positively contributed to the increase in sales. EstiPalooza celebrated HydraFacial’s birthday on May 1st, and we successfully created our own prime day promotional activity. That sales event was equal to our Black Friday volume. We’re very selective with our promotional events and focus our efforts on digital and physical marketing activation with a trackable outcome. EMEA net sales of $11.4 million, grew from $2.1 million in the prior year and expanded 46% from the second quarter in 2019, driven by strength in United Kingdom, Russia and the Middle East. This result is especially impressive, given the continued COVID-related closures we have experienced in many European markets. Pop-up activations and other marketing events launched by our distributors also positively impacted our results. Turning to APAC. Net sales of $12.4 million, meaningfully increased over 360% for both of the second quarter of 2020 and 2019, primarily driven by growth in China, Japan, Taiwan and Australia. While we continue to be very-focused on our system rollout in China, we have experienced increased sales productivity and continuously expand our presence in the region through both medical and non-medical channels. Our marketing and training programs throughout the APAC market also contributed to the sales increase for both Delivery Systems and Consumables sales. Overall, our growth has been demand-driven across all channels. Consumers are asking for HydraFacial services by name, especially in our more mature markets. Against this backdrop, Beauty Health is well-positioned to continue to take share as our brand awareness expands globally. Moving to profitability. Our adjusted gross margin was 75%, up significantly from last year’s COVID impacted 51% and a 270 basis points sequential improvement from the first quarter of 2021. The bulk of the increase for both comparisons were driven by several sustainable attributes, including fixed cost leverage from higher sales, improved selling price for Delivery Systems, as well as cost savings initiatives. We’ve remain focused on enhancing our margin structure through strategic initiatives, while managing the global supply chain risks. SG&A expenses in the quarter were $70.6 million as compared to $11.6 million for the prior year. As a percentage of sales, selling and marketing decreased by approximately 440 basis points to 39.4% compared to 43.8% in the second quarter of 2020. This decrease was mainly due to sales leverage. The increase of 340 basis points compared to the first quarter of 2021 was due to our strategically planned ramp up in marketing expenses. As we shared during our first quarter 2021 earnings call, we delayed select marketing programs until COVID-19 restrictions were lifted and market reopened in the second quarter. Creating consumer demand is our key investment strategy, and we will continue to focus on optimizing on the investment in sales, marketing and training, as well as strengthening our community engagement. Moving on to R&D, we invested $3 million in the second quarter of 2021 to accelerate our launch of the HydraFacial Nation app, our new home device and our upgraded delivery system. As Clint has shared, innovation is one of the main pillars of our strategic investments. We will continue to invest in innovation in the second half of 2021. Our G&A expenses are $44.4 million, included $30.4 million off transaction costs and $3.5 million of non-cash stock-based compensation expenses. Excluding these items, our G&A expenses were $10.5 million compared to $10 million in Q1 2021. The increase in G&A expenses against the first quarter of 2021 was mainly driven by non-payroll-related public company costs of $0.9 million, which includes D&O insurance and SOX cost. We expect such public company costs will continue totaling approximately $3 million for the second half of 2021. We also have started to invest in technology at international infrastructure and expect such investments will ramp up in the second half of 2021. As a leader in this category, we’re accelerating our investments to capitalize on the long run ahead of us for growth. In addition to GAAP measures, adjusted EBITDA is an important profitability measure that we use to manage our businesses internally. For the quarter, adjusted EBITDA was $11.4 million versus an adjusted EBITDA loss of $1.1 million in 2020. The improvement in our profitability is a result of higher sales and gross margin improvement, partially offset by increased commissions and personnel-related expenses, due to strong sales and increased headcount for growth, as well as increased marketing and scaling spend. Our adjusted net income for the quarter was $7.8 million. Weighted average shares outstanding were approximately $92 million in 2021. As of today, we have approximately $133 million shares outstanding, including the 7.5 million earnout shares issued for the four distributors acquisition closed by July 1st, 2021. Our 15.3 million public warrants and 9.3 private placement warrants are not exercisable nor redeemable until October 2, 2021. Turning to the balance sheet. We ended the quarter with more than $100 million in cash and cash equivalents with no outstanding debt. As a reminder, we repaid all outstanding debt on May 6th as part of our business combination with Vesper Healthcare. Now, I will share more details our outlook for the full year. As Clint mentioned, we expect net sales in the range of $230 million to $240 million, barring any deterioration related to COVID-19 trends, up from our prior guidance of approximately $200 million. As I stated previously, sales in the first quarter have historically been higher than sales in the third quarter. We remain cautiously optimistic while observing more closer, related to Delta variant in both APAC and EMEA regions. We’re leaving our adjusted EBITDA outlook at $25 million, as we intend to prioritize investing the additional sales generated back into the business. So, increased spending on branding and global infrastructure initiatives that will accelerate our share gain in the global beauty health category we created. While we might not see significant returns on these investments immediately in the second half of 2021, we believe investing ahead in our international infrastructure, including people assistance will provide us with speed and readiness for both, growth deployment and potential M&A. We continue to anticipate capital expenditure of up to $15 million in 2021. Our upward net sales guidance revision reflects our highly encouraging performance so far in 2021. Our forecast includes solid results in the first half and strong trends that we have continued into the third quarter. However, given the uncertainty of the environment in which we’re operating, we remain cautious of the potential risks for the further market closures from the new COVID-19 Delta variant and uneven global rollout of the vaccines. As Clint noted, our second half guidance factors in a largely reopened global market, which would be negatively impacted, if closures persisted. Subsequent to quarter-end, we have grown our Delivery Systems installed base to over 18,000. I would like to note that due to factors such as trade-in, trade-out, varying system price points, [ph] and our international distributor model, our total Delivery Systems figures do not directly correlate to sales. In summary, we’re pleased with our strong first half of 2021, we have solid visibility, as we look ahead to the remainder of the year, barring COVID. We have confidence that our strategy will uniquely position Beauty Health for global growth, as we focus on creating long-term shareholder value. With those comments, I’ll turn the call back to the operator to open it up for questions. Operator?

Thank you. [Operator instructions] Our first question comes from the line of Matthew O’Brien with Piper Sandler. Your line is open. Please go ahead. Matthew O’Brien: Good afternoon. Thanks for taking the questions. I guess, Liyuan or Clint, I’m just curious about the comments right at the end there, as far as the guidance for the year, you’re not assuming any real COVID impact in the back half of the year. I know there are some hotspots. But, you’re assuming things are open. The distributors -- those new distributors are kicking in all these investments -- somewhat will be kicking in. So, the back half guidance doesn’t assume much in the way of growth versus the first half of the year. Was there maybe some delays as far as ordering in Q2 that showed up that won’t recur in Q3? Are you just trying to be somewhat conservative as a newer public company?

Thanks, Matt. I appreciate you joining and question. This is Clint. Yes, we want to be thoughtful obviously with the guidance, but I think that 2020 and early 2021 showed us, we have a very durable business, and any challenges related to COVID-19, the current Delta variant appear to be temporary. So, we feel really good about the visibility of the back half of the business -- back half of the year. Matthew O’Brien: So, just more conservative than anything else?

Well, technically speaking on our guidance, we did capture some of the trends into Q3, Matt, and we are assuming Q4 will open up more. That’s how we model the numbers out. Matthew O’Brien: Okay. Thanks for that. And then, Clint, the Delivery Systems number, again, was kind of eye-popping from the release. So, can you talk a little bit about where some of that’s coming from? And then, I think it’s the best quarter you’ve ever had from a Delivery Systems perspective again. I don’t know if there was some pent-up demand from earlier this year that showed up in Q2, which should have been in Q1. But, I would think that’s a leading indicator for the growth of the business going forward. So, if you -- can you just talk about some of the channels where you saw some of that performance, and then what we should think about in terms of how those systems should ramp over the next 6 to 12 months?

Sure. Matt, I think, one is we’re benefiting from macro tailwinds focused on health and wellness, and certainly the zoom boom effect has benefited HydraFacial. I also think, during the lockdowns, we worked very hard to work with our HydraFacial community and particularly the estheticians, med spa owners and physicians that were concerned about their wherewithal. And I think we’re being rewarded for that, as we come back into the marketplace. We continued to increase our spend on consumer awareness. And as more consumers come into those Delivery Systems, we’re getting multiple systems purchases. So, we see leads at an all time high. We see yield rates very strong. And that’s good for the business, when we’re laying down more Delivery Systems than expected. And, we hope to see that trend to continue. Matthew O’Brien: Got it. If I could sneak one more in here. The investments, you’re increasing the guide by about $35 million with EBITDA staying the same site. So, you’ve talked about these investments. Is it primarily for international infrastructure versus some other areas on the investment side that’s ramping up domestically? You called out some of the things. But, if you -- you can maybe bucket where some of those returns could be a little bit sooner than you’ve kind of previously planned versus more of a ‘22 event. That would be helpful. Thanks.

Sure. It’s a great question. So, the three buckets are pretty simple. Consumer awareness, when consumers become aware, like things like the Dubai, the London Experience Center, GLOWvolution, a very high percentage of those consumers are their first time. They’re very sticky and they become a really great lifetime value for us in part of the HydraFacial Nation. So, raising consumer awareness has really been opportunistic for us. Accelerating innovation, we have Project Casa and Syndeo on-track and really excited about those, getting some great early feedback and the app is out in beta. So, we really have accelerated a pretty transformative product development process that we’re real pleased with. And then, yes, finally, you see the growth in the international numbers. And while we’re really, really excited about that, we’ve got to get in front of the infrastructure, the systems, the processes, the personnel; you’ve seen us hire Stephan, Ben and Indra, very senior leaders with significant successful experience, scaling multinational organizations. And so, we feel given the tailwinds we have and the performance of the business, we need to keep our foot on the accelerator and ensure that we have all the infrastructure in place to handle the growth that we are seeing, particularly outside of the U.S. where we have less infrastructure, and while ensuring the same consumer experience, the same provider investment and the same type of NPS scores for the Company and the product.

And Matt, just to add to that point, the bucket, right? So the things that we’ve been constantly talking about, we actually know how to test and learn and react when it comes to marketing activation, or just turning that up around the globe. Now, obviously, it depends on the country and the situation, we can turn that up or down. So we’re planning to turn that up based on the trends we’re seeing. In terms R&D, we’re buying speed, and we’re going to continue to do that. And that’s a bit of incremental investment we’re looking at in that bucket. I think, the biggest investment is truly, to Clint’s point, growing people, process and systems, especially when it comes to international infrastructure. But, there’s other things. We mentioned the fact that we’re implementing ERP system where probably company ready, we’re adding the layers to that as well. So, there’s a little bit of investment on the overall infrastructure. But very much emphasize and kind of pull up in terms of the speed when it comes to international infrastructure.

Thank you. And our next question comes from the line of Steph Wissink with Jefferies. Your line is open. Please go ahead.

Thank you. Good afternoon, everyone. I have a follow-up question on Matt’s prior question. But just wanted to unpack R&D spend a little bit, I think Liyuan you mentioned speed. But just curious a little bit of how we should think about the R&D step up in front of the handheld device in the fourth quarter, and then 2.0, as you plan for 2022?

Yes. So, what we meant by that is obviously as we roll out, there’s the element of using external support and it’s also where the production taking place. So, referred to in that transitional period, sure, we can roll out the product on time, and also, robust, very robust rollout. So, when we talk about really investment in to speed, it’s not only just the R&D function, but also execution that’s specified in that category when it comes to roll out product, if that makes sense.

That’s very helpful. So, just in terms of framing the adjusted EBITDA guidance, would you recommend the biggest step function maybe to prior expectation would be a slightly higher R&D spend versus maybe what we had modeled?

I think to the degree, as we mentioned, the more emphasize, R&D I would say is a smaller bucket and followed by really marketing element. And then, there’s actually more dollar being invested in infrastructure and international scaling.

Okay. That’s really helpful. And then, on marketing, I wanted to just unpack a little bit of what you’re finding as you think about your new device launches. Any change in your go-to-market strategy or the commercial mix of how you plan to market, whether that’s to the consumer or to your professional partners?

Yes. Steph, it’s Clint. As we look, there is couple of things that are becoming -- I would say evolving to as really a B2C2B company. If you think about it, we have a significant provider base out there that’s continuing to accelerate when you see the units out there, raising consumer awareness. But now, when you look at the app, you look at the Wi-Fi connectivity and the relationship we’re building directly with the consumers. We’re building consumer capabilities with our channel partners. That’s really accelerating brand awareness, increasing utilization and making our providers more profitable. So, I think it’s the fact that the Company has really -- really adding. If you look at the three executives, we just added, really good consumer experience, creating brand awareness that creates the activation of HydraFacial. And that experience then becomes one that builds engagement with our company and results in the consumable revenue that’s -- that really is key to our P&L.

Very helpful. Congrats on the good quarter everybody.

Thank you. And our next question comes from the line of Linda Bolton Weiser with D.A. Davidson. Your line is open. Please go ahead.

Yes. Hi. Thank you. I was wondering if you could talk a little bit more about the distributor acquisitions. And what the effect on the income statement is? I would imagine it lifts your sales a little bit, but maybe it increases your SG&A. And then, kind of what you think that will mean longer term as you take these distributors internal?

Yes. Hi, Linda. And thanks for the question. I’ll answer the first part and then hand second part to Liyuan. First, I think it’s unusual, but it’s a way that I think has been successful for us. And we go in and we acquire our existing partners. And we secure those principles, because those local relationships are so important. So, we don’t expect disruption to the business. And we also did these really in a collaborative manner with our distributors. And so, what we’re bringing them, as they grow to the point where they need infrastructure, maybe systems and processes, and they need the ability to do the things we’re doing globally, right? Raise consumer awareness through marketing, and physical events, more sophisticated digital transformation, skill sets, and then the ability to roll out products and in a more disciplined way. So, we are going to be building out infrastructure for these distributors. But, they’ve already grown to a pretty sizable business in these countries. So, just think about it supercharging in these markets, getting close to the consumer, and doing all the things that we do in the domestic markets. So, I think you’ll see us be really interested in being opportunistic on those, but really no disruption to the business. And they’re already well run businesses. So, this is supercharging. And Liyuan, I don’t know -- from a numbers standpoint, there’s a significant discount that we provided to distributors that they then pass along to the end providers. So, we obviously pick that up and feel that it was good for the distributor, and good for us, the valuation, you approach to them.

Yes. So Linda, as we shared previously, when we model out the number, we were already assuming we’re going to take these four distributors on the second half of the year. Obviously, if you think about what the four distributors are, right, Germany, France, Australia and Mexico. So, it depends on the geography and where they are with the trend. Obviously, there’s going to be that top-line transfer to Clint’s points. We’ve shared with you previously, it’s almost up to 50% of transfers, we actually are going to see that pick up, which we modeled in our numbers already, on the top line. But part of the investment is precisely, to Clint’s points, investing into our infrastructure globally, at both EMEA and APAC level, so we can support the further growth to the direct market.

Okay, sounds good. And then, I was just curious if a lot of companies are talking about component shortages, are you experiencing any shortages of any of your components, or any difficulties at all in the supply chain, as you move for the robust demand for your products?

Yes, Linda. We’ve always been top of mind when it comes to the supply chain, right? Like, if you look at our day-to-day business, we’re trying to diversify our vendor base. And we’re trying to really create way of securing these components and make sure we have enough of it to catch up to the demand level or the sales level. Obviously, as we innovate into these new product lines, I think that ship shortage, for example, you experience that everywhere globally, right? So, there’s certain level of that that’s precisely part of the reason we’re being very thoughtful in terms of how do we roll out these new product lines, but very much top of mind for us. And I think we’re here previously, we’ve been working on network optimization, really having a goal of having some of these products closer to our end customer, and actually help from a supply chain point of view as well in the long run.

Yes. And also, Linda, historically, we were owned by private equity, and one of the big parts of our investment thesis was to improve supply chain, improve our demand planning. And I think the team has really done a nice job. If you remember, we moved into new facility at the end of ‘19 and then COVID actually gave us a chance to build the core competencies. So, I think it’s more external challenges that Liyuan and the team are doing a great job of mitigating the risk against. So, I would say it’s just any CEO, CFO that don’t put supply chain on yellow right now, or being too optimistic, but I don’t think there is anything fundamental to our business that is overly concerned. It’s just a challenging, external environment that I think everybody is experiencing.

Okay, great. And then, finally, I’ll just give it a try. But, are you willing to disclose the number of systems that were sold in the quarter or year-to-date?

Yes. So, Linda, I think we talked about this. This is why in the prepared remarks I kind of emphasized the point that we have trade-in, trade-out, we have distributor model that’s a bit different. We’re actually launching new type of delivery system. This is why we want to make sure, directionally we always tell you, right? At the end of the quarter, we’re almost at 18,000, for example, for the quarter and then after it’s over. So, we’ll give you a very much directionally where we are. But at the end of the year, we’ll give you a precise number. But I just want to emphasize, as a proxy, it was shared with everybody. You can do average, call it 20,000 per unit. You can do your modeling that way. But as we move, especially rolling new products out, those profiles could shift and change. So, we just want to be very -- make sure everybody is mindful. We’ll give you the precise number by the end of the year.

Okay. Thank you very much, and congratulations.

And our next question comes from the line of Kyle Rose with Canaccord. Your line is open. Please go ahead.

Great. Thank you for taking the questions. I think, in the prepared remarks, you commented just on the positive pricing trends you’re seeing on the box side. Is that related to the acquisition of the international distributors or is there some -- or is there a different trend in the U.S. that you’d like to call out there?

Yes. I think, not yet on the international side, Kyle. And thanks for your question and for joining us. Not yet because we just did those acquisitions the 1st of July. So, that wouldn’t be reflective. I just think we’re seeing overall strength in the brand. Our sales force has very high retention rates. We’re seeing really strong unit productivity. So, I think when ASPs are going up, typically it’s underlying strength of the brand, it’s demand, and it’s the ability to price competitively in the marketplace. So, I think the early question Linda had, that’s why we’re really trying to be thoughtful about disclosure of units, because we have a lot of trade-in and trade-offs, we have a lot of upgrades and second systems, and then we have next generation products, which are different, but there is no question, we’re seeing strength in ASP, strength in units. And that’s good for the recurring revenue model that we have.

Great. And then, can you maybe just talk a little bit more about the app that you’re working on now and in testing? Maybe how you envision that from a longer term perspective, interacting and maybe connecting the company closer to consumers as well as physicians or estheticians?

Sure, sure. And I’ll give you this directional, Kyle, because we’re still working on our go-to-market strategy and we’re testing and learning, as we always do. We’re working with our channel partners. We’ve got the app out there. And essentially, app is just a tool to help consumers understand what their underlying skin conditions are and what types of services or products they should be using for that. It just is basically a nice guide to take into your medical spa, derma plastic or day spa to talk with that esthetician and give her a starting point for the conversation, and equip you as a consumer better. I think, going forward, what you’ll directionally see from us is, if you buy the home health device that you scan the QR code and it would connect you to the app. And that way we know that you have a home device. That will interact with the 2.0 device where you potentially are sharing your data, so that your esthetician knows what type of skincare regimen you have, what type of products and services you’ve been doing, what you believe your skin condition is. So, what we’re looking to do is really just hug that consumer in their journey for good skin health and give the provider more knowledge, so that when you present yourself in that 30-minute or hour consultation and treatment that we’re just -- we’re giving you better performance from the HydraFacial products that our providers are promoting out there. So, it really is connectivity, no different than what you see in other consumer facing products. We’re just bringing that to an area that historically has been a little technology-vary and that’s consumer healthcare.

Great. And then, just last question for me is, some of the diligence we’ve been talking to physicians and users is that, might like something a little bit more acne focused, or at least to customize, based on the oil levels on specific patients. Wondering, if you could maybe comment on that a little bit and maybe any updates with respect to -- I think you’ve talked historically about one new serum a quarter. Obviously, you talked about the one that you launched in the Q2, just so maybe, forward trends with respect to the serums and boosters you plan to launch? Thank you.

Sure. Thanks, Kyle. Yes. I’ll answer this in two parts and I’ll try to make it simple. And my children will probably shoot me after this call because both of them are on a HydraFacial treatment regimen because they’ve suffered from acne. They’re athletes. They always have oily sebaceous glands and HydraFacial is great for that. Our position as a company has been to not overemphasize the clinical claims, because as you know, acne is a very diverse condition, and there’s lots of different types of acne. And the world is littered with pharmaceutical companies that are actually gone bust trying to cure for acne. So, what we lead is as an n company, we work with our dermatologists, plastic surgeons, all of our estheticians to make HydraFacial part of that treatment regimen. But we will let the provider in conjunction with other treatments or services improve that patient’s outcome. I think it’s safe to say we do have more acne-focused serums we are working on and we’ll look to bring those to market. But I think first and foremost, we really look to under promise and over-deliver with the consumer and the provider. And we believe that medical diagnosis of something like acne and trying to help that consumer with that condition is better served having the professional guidance guide along with the treatment regimen than having the company dictate a claim that isn’t -- maybe we can’t meet all the time.

Great. Thank you for the perspective.

Thank you. And our next question comes from the line of Amit Hazan with Goldman Sachs. Your line is open. Please go ahead.

Hey. Good afternoon, folks. And nice -- congrats on nice quarter. Maybe I’ll just start with coming back to the guide for a second. I just want to make sure we’re all kind of level set in our expectations for 3Q and 4Q. Can you just give an -- especially what’s going on in the U.S. with Delta, any more color as to what you’re seeing so far this quarter? And really, how to think about -- you gave a little bit of kind of general guidelines to think about 3Q versus 1Q, but what else you could add for 3Q and 4Q, for us to consider, to get those numbers tight and where you want to have them? And then, on a prior question -- related on a prior question also, what is the contribution from the distributors that you purchase that are going to direct now? What is that contribution in the increased guide that you gave?

Sure. Thanks for joining and thanks for the question. I’ll answer the first part of that, and then maybe turn it over to Liyuan. Look, we’re looking at Delta, just like we looked at COVID. We have an incredibly durable business. We see these challenges as temporary, and we’re just leading through them. And I don’t think any CEO or management team will tell you this is fun. But, I will tell you, we just see a robust business, we see really strong consumer demand, we see very resilient providers, and we’re very-diversified. If you look at our channels, we’ve got great diversification. We’ve got great global diversification. And it’s a product that’s really desirable when you’ve got the type of macro tailwinds we do. So, I think we’re trying to be thoughtful with the top line guidance. We’re continuing to invest in the business because we believe that we need the infrastructure in place and the raising consumer awareness are things that are increasing shareholder rights, short and longer term. And so, we just see this Delta variant as just an external nuisance. It’s a very serious situation, but in terms of our business, we feel really good about the durability of the business and the temporary nature of any flare ups that we see. And that’s what we’re hearing from our channel partners as well as our distribution partners around the world.

Yes. And I need to add to that, you’re talking about the current trends. Obviously, if you look at by geography, there’s always open and close, right? Even if you look at Q2, I think a lot of European countries went through a lot of the ground, by country opening and closing. If you look at the Delta variant, right now, it’s probably impacting APAC the most, right? Because you saw the news in Japan, you’re seeing some of the trends that’s happening in China. So, some of these current trends we have added into our Q3 numbers. By the same token, if you think about the distributors, based on by country and by region, we kind of figure that out for Q3 and Q4, as well. We are actually speaking the additional accretion on the revenue, it’s not that material in terms of truly changing the trend for Q4.

Okay. And then, I was hoping for just an update on both, Sephora and the progress you’re anticipating there this year, and also the new Nordstrom partnership, it would be great any more detail and color you could give around that?

Sure. I’ll take that. Sephora continues to be just a fantastic partner of The Beauty Health Company. And I think they’re -- I don’t want to speak for them. I think they’re being challenged as a retailer providing services and monitoring the situation just like we are. But I would say that both of us are on our front foot and providing the services where possible. And we’ll continue to work with them to open where they are able to. Nordstrom, to be clear, support is for HydraFacial. And it’s a fantastic treatment, the skin studios. And Nordstrom’s relationship will be the HydraFacial system in their flagship stores. And we said, as a kid who grew up in Seattle that was fun to see that one come full circle, and we’re really excited about it. And we’ll keep everyone posted as we have more than channel partners. I think, just to level set, we see these partnerships with retailers as a really good win-win. One is we help to provide them services and experiences that drive consumers in to buy more products from them. And what we get in return is, it really brings us closer to the consumer, raises awareness around the benefits of HydraFacial. And then, we’re able to drive people back out to our professional channel, med spas, our derms, our plastics our day spas. And so, it’s really a flywheel of influence us getting closer to the consumer, and for them capturing those consumers and keeping them there because the experience that they’re receiving through the HydraFacial treatment. So, you can expect to see more of those from us. And I just want to level set on how we view that relationship beyond just the revenue component.

And Amit, just to add to that point, right? We don’t have a revenue penetration or concentration problem here or a situation here, because if you can think about, we had shared with you previously, even if you look at a Sephora or any of these relationships, they’re all less than 5%. So, we actually have a lot of customers and we’re working with all of them.

Thanks so much.

Thank you. And our last question comes from the line of Bruce Jackson with Benchmark. Your line is open. Please go ahead.

Hi. Good afternoon. Thank you for taking the questions. The gross margins in the quarter were impressive. And I was wondering if was a role of mix and volume in driving the gross margin improvement.

Hey, Bruce. Yes. So, as we mentioned, I think the fact that the leverage on sales plays a pretty significant role, in addition to the fact that we’ve had savings initiative that comes to fruition, especially impacting the first half of the year. So, that was the main factor contributing to that. We continue to work on the accretion. But, obviously, as we mentioned earlier, there’s always a supply chain risk that could negatively impact or offset some of these accretions, if that makes sense.

Yes. And historically, Bruce, we only moved in this building in December of ‘19. It was really designed to give us significant capacity. And then, during COVID, we had a chance to automate our warehouse management system. We reduced the amount of people was required through that. And so, there was a lot of noise as we started to ramp up in early 2021. And so, we’re pleased with the way the facilities working, the automation investments we made, and we’ve got a lean, a better-performing personnel team here at headquarters. So, we’re pleased with it, but there was some noise that we’re pleased to see coming out of the system and we’re normalizing.

Okay. And then, do you think these levels are sustainable going forward?

Well, we’ve raised our guidance twice, and it’s been during a challenging time and as a new public company. So, we want to be thoughtful about the guidance, Bruce. And we want to ensure our investors that we do what we say we’ll do, that we continue to raise consumer awareness, continue to put placements out there of systems and that we build out the infrastructure, so that as this growth continues the way that we would expect it to, that we can still have really high NPS scores with the consumer and the provider. We try not to overcomplicate our business. Our master plan right now, website says, sell a lot of products, continue to invest in our providers. HF CONNECT is quickly becoming the largest university or educator of estheticians. You can see the consumer activations that are happening in Dubai, London, GLOWvolution. And now, we’ve got a next generation technology is going to connect that community. And if we do that, hopefully our consumers trust us as a source for beauty health, for providers if we deliver value and they’re profitable, buy more systems and more serums from us, and we just try not to overcomplicate it and just real pleased to see the way the quarter and the first half of the year has come through for us as a new public company.

Okay, great. Well, congratulations on the quarter. And thank you for taking my question.

Thanks, Bruce. I appreciate it.

Thank you. And that does conclude our question-and-answer session. And I would like to turn the conference back over Clint Carnell for any further remarks. End of Q&A:

Great. Well, thanks everyone. I appreciate you joining us today and thank you for the thoughtful questions from our analyst community. And we look forward to sharing our Q3 results. And please follow us #hydrafacialnation and on Instagram and Facebook. And more importantly, I want to show all of you HydraFacials. And I will talk to you next quarter. Thanks so much.

This concludes today’s conference call. Thank you for your participating. You may now disconnect.