AirSculpt Technologies, Inc. (NASDAQ:AIRS) Q4 2022 Earnings Call Transcript

AirSculpt Technologies, Inc. (NASDAQ:AIRS) Q4 2022 Earnings Call Transcript March 10, 2023

Operator: Good morning, and welcome to AirSculpt Technologies Fourth Quarter 2022 Earnings Conference Call. Currently, all participants are in a listen-only mode. As a reminder, today’s call is being recorded and we have allocated one-hour for prepared remarks and Q&A. At this time, I’d like to turn the conference over to Dennis Dean, Chief Financial Officer at AirSculpt Technologies. Thank you. You may begin.

Dennis Dean: Good morning, everyone, and thanks for joining us to discuss AirSculpt Technologies results for the fourth quarter. Joining me on the call today is the company’s Founder and Executive Chairman, Dr. Aaron Rollins and Chief Executive Officer, Todd Magazine. Before we begin, I would like to remind you that this conference call may include forward-looking statements. These statements may include our future expectations regarding financial results and guidance, market opportunities and our growth. Risks and uncertainties that may impact these statements and could cause actual results to differ materially from currently projected results are described in this morning’s press release and the reports we will file with the SEC, all of which can be found on our website at investors.elitebodysculpture.com.

We undertake no obligation to revise or update any forward-looking statements or information except as required by law. During our call today, we will also reference certain non-GAAP financial measures. We use non-GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business. A reconciliation of these measures can be found in our earnings release as filed this morning and in our most recent 10-K when filed, which will also be available on our website. With that, I’ll turn the call over to Dr. Rollins. Aaron?

Aaron Rollins: Good morning, and thank you for joining us on the call today. During the fourth quarter, we experienced a healthy bounce back, compared to the third quarter in our revenues and procedure volume led by strong contributions from our de novo centers. Our most recent cohort of new centers, which includes Boston, Toronto and Philadelphia, is off to a good start and we are very excited for the upcoming launch of our flagship London location. We continue to be incredibly pleased with the patient enthusiasm around all of our offerings, including AirSculpt Plus and AirSculpt Smooth, and we look forward to introducing additional innovative solutions that meet the needs of our patients. Our team accomplished a lot in 2022.

The company’s case volumes increased 18%. Revenue increased 27% and we generated cash from operations of nearly $25 million. We refinanced our debt, which will generate considerable interest cost savings. We added four new centers and aggressively built our de novo pipeline, positioning us for five openings this year. We started our international efforts with our Toronto opening as well. I am also excited to share that we grew our earned media share of voice from less than 1% in early 2022 to 30% in recent months. This incredible performance was driven by the PR we generated through our influencer partnerships and as a model we will be accelerating in the coming year. We will share more details on this exciting area of opportunity as we progress throughout the year.

At the beginning of the year, we were very excited to announce the appointment of Todd Magazine as our Chief Executive Officer. Todd has over 30-years of experience in brand building and retail operations, including over a decade as CEO of Blink Fitness, a national fitness chain created by the executives at Equinox, the luxury leader in the fitness industry. Todd helps scale Blink from four locations when he joined well over 100 during his tenure. He brings strong leadership qualities to our team and he is an excellent addition as AirSculpt moves to its next phase of scaling growth both domestically and internationally. As previously announced, I have transitioned to Executive Chairman of the Board of Directors. And my focus and attention will be to work with Todd and the leadership team on vision strategy, clinical excellence and technological innovation.

I plan on remaining active in discussions with the financial community as well. With that, let me introduce Todd to discuss more about why he joined AirSculpt and his near-term focus.

Todd Magazine: Thank you, Aaron, and thank you to everyone on the call for joining us today. I look forward to talking with many of you in the coming weeks and months. Let me start my comments by sharing why I decided to join AirSculpt. Well I did know the company, I quickly learned through lots of due diligence, that it was an incredible opportunity. First, I learned that it’s a revolutionary procedure that transforms people’s appearance virtually overnight, which to me was mind boggling given my time in the fitness industry and seeing the incredibly high failure rate of people, who spent years trying to change their appearance. Second, I discovered that AirSculpt is truly in a category of one. No company or technology can do what AirSculpt can do, which enables us to recruit some of the very best plastic surgeons in the world.

Third, I learned that our unit economics are very strong with de novo locations that get to profitability within their first year and provide a significant return on invested capital. And finally, I learned that the tailwinds in the broadly defined aesthetics category are very strong with a tremendous runway of opportunity. Despite all of this, I also learned that our brand awareness is still not where it needs to be and our footprint is just scratching the surface of all the opportunities that exist domestically and internationally. As you would expect, my focus over the coming months is to help the team deliver on our top and bottom-line goals. However, I will also be focused on three critical strategic areas. First, we will strengthen the organization by bringing in additional talent and improving our processes.

Second, we will focus on revenue growth, which includes ramping up our de novo expansion program. And third, we will right size our cost structure and strengthen our capabilities to support a much bigger and more robust fleet of centers. I joined this company, because I saw an opportunity to make AirSculpt the undisputed leader in the global body contouring space. Now that I am part of the team, I’m even more confident that this objective is well within our reach. I look forward to leveraging my experiences of building brands, and scaling businesses to help Dr. Rollins and the talented team at AirSculpt grow stakeholder value. In a minute, Dennis will walk you through our fourth quarter results, as well as our guidance for 2023, but before I turn things over to him, I’d like to share a few high-level comments.

Our fourth quarter revenue was in line with our guidance and a significant improvement versus our prior quarter and our fourth quarter last year. This performance demonstrates that the softness we experienced in Q3 was an anomaly, particularly given the fact that we have seen our momentum from Q4 carry into Q1 of this year. In fact, I’m happy to report that we are on track to meet our first quarter revenue expectations. Turning to Q4 profitability, we were impacted by the investments we made in 2022 to bolster our infrastructure. Objectively, the company got a bit ahead of its keys on these investments and did not make the proper adjustments fast enough to impact our end of year financials. As I stated previously, rightsizing our cost structure will be a top priority of mine.

We will share more details on this area as we progress throughout the year. Looking forward, we are committed to delivering very strong year-over-year growth on both the top and bottom line with margin expansion in the back half of the year driven by our cost management initiative. Let me now turn the call over to Dennis to walk you through our financials and our outlook for the year. Dennis?

Dennis Dean: Thank you, Todd. Our revenue for the quarter was $40.7 million, an 8.4% increase over the prior year quarter. Our growth was led by approximately 16% increase in case volumes, which was primarily due to the addition of four de novo centers versus the prior year base. As of December 31, 2022, we operated 22 centers versus 18 at the end of 2021. Our average revenue per case for the quarter was $12,200, a 6% decrease over the prior year’s quarter driven by both procedure mix and some promotional activities, but we’re still within our target range of $12,000 to $13,000. Thus far in the first quarter of 2023, we are seeing an average revenue per case at the midpoint of our projected $12,000 to $13,000 range. Our cost of service as a percentage of revenue was 38.7% versus 34.8% in the same period last year.

The increase is primarily related to the addition of clinical staff to support our growth, which Todd spoke of in his remarks, and our customer acquisition costs for the quarter was approximately $2,300. For the quarter, our adjusted EBITDA was $9 million and our adjusted EBITDA margin was 22.1%, which was a decline versus the prior year quarter and lower than our expectations, primarily due to our revenue per case being on the lower end of our projected range and a lack of progress related to rightsizing some of our infrastructure costs. Our liquidity position continues to be very strong, our cash position as of December 31, 2022 was $9.6 million and our $5 million revolver remains undrawn. Our gross outstanding debt was $85 million and our leverage ratio at the end of the quarter is calculated under our credit agreement was 1.75 times.

Cash flow from operations for the quarter was $6.6 million, which represents an adjusted EBITDA conversion ratio of 73%. For the full-year 2022, our conversion ratio was 56%. We invested $2.2 million primarily related to opening new centers and when he had a use of cash from financing activities of approximately $2.4 million primarily due to tax related payments related to certain vesting of equity-based compensation. In our earnings release this morning, we provided a non-GAAP measure reflecting adjusted earnings per share diluted. For the quarter of $0.07 and $0.37 for the full-year. We provided this measurement as a result of our interactions with shareholders and believe this presentation presents useful information to investors by highlighting the impact to earnings per share of selected items used in calculating our adjusted EBITDA.

We expect another healthy year of free cash flow generation in 2023 with improved adjusted EBITDA conversion ratio due to our focus on margin expansion. We expect our primary uses of cash flow will be to fund growth investments for the business such as adding de novo centers and driving technology innovations. We also expect to continue to strengthen our balance sheet throughout the rest of the year positioning us to consider stock buybacks, debt paydowns and dividends. This morning, we introduced our 2023 revenue guidance range of $187 million to $192 million, representing 11% to 14% increase over 2022. We expect contributions from our de novo centers to drive the magnitude of the year-over-year revenue growth. We expect to open our Austin and Irvine locations later this month and we are on track to open our flagship location in London in May.

Our final two de novos, Raleigh and San Jose are expected to open late in the third quarter, which will give us a total of five new centers added in 2023. Our adjusted EBITDA guidance is $48 million to $50 million, which represents year-over-year growth of 11% to 16% and margins of approximately 26% at the midpoint of both revenue and EBITDA guidance. Underpinning our guidance is the expectation that the second quarter will continue to be our strongest quarter, while we expect the seasonal patterns in the back half of 2023 to be similar to that of the back half of 2022. As we are almost 2.5 months into the first quarter, we are also providing a first quarter revenue outlook of approximately $43 million and adjusted EBITDA outlook of approximately $10 million.

With that, I’d like to turn the call over to the operator for some questions. Operator?

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Q&A Session

Operator: Thank you. Our first question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

Simeon Gutman: Thanks, everyone. Good morning. My first question is on the relationship between case center volume and the new centers or new facilities. At one point, the spread was greater meaning case volumes were running greater than the number of new openings. Now it’s flipped. My question is how should we think about that relationship, granted that new centers are not opening at 100% productivity? But should that be something that these two metrics narrow over time?

Dennis Dean: Hey, thanks for the question, Simeon. So from a de novo outlook, the majority of our case volume increases are still coming from those facilities. One from centers that we’ve opened up in the quarter, but also two from those centers that are €œin our same-store metric€ that are still continuing to ramp up. So we’re seeing the majority of our volume increases from those. But I would point to also Simeon when you look back at the third quarter, our same-store volume was about 7.6% off of the prior year. And in the fourth quarter, we’re actually 1.1% up. So I think it just kind of shows that we had a healthy bounce back, not just in adding the de novos, but also in our existing centers.

Simeon Gutman: And then a quick follow-up. Todd mentioned some expense items just to sharpen up. Can you talk about the expense items? You mentioned there were some promotional initiatives I guess that hurt revenue, I guess, less so margin. Anything else about the economics of this business that can be tightened up as the growth story continues?

Todd Magazine: Hi, Simeon. This is Todd Magazine. How are you doing? Yes, let me just take that real quickly. I mean, really the focus for me and the team is going to be really those areas of our P&L that have really been growing at a faster rate than our revenue growth. So that’s our focus area, as I said in my opening comments, we got a little bit ahead of ourselves in terms of some of those investments. And we’re taking a hard look at those areas that are growing faster than our top line growth. And we’re going to go hard at those and really try to make some progress there, particularly as we exit the year to get some margin expansion. So that’s really our focus right now.

Simeon Gutman: Okay. Thanks. Good luck and see everyone next week.

Dennis Dean: Hey, thanks, Simeon.

Todd Magazine: Thank you.

Aaron Rollins: Thanks.

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

Josh Raskin: Hi, thanks. Good morning. I was wondering, could you just speak a little bit more about that change in rate in the quarter? I’m curious if you have a sense of, sort of, if it exists, sort of, a same-store, same procedure, pricing metric? And then are there any geographic variation or the new centers that are impacting rate? And then lastly, I heard the promotional activities, is that sort of traditional discounting or is that a little bit different? And is that promotional activity new relative to what you’ve seen in the past?