SmileDirectClub, Inc. (SDC) Q1 2022 Earnings Call Transcript

SmileDirectClub, Inc. (SDC)
Q1 2022 Earnings Call
May 10, 2022, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to the SmileDirectClub first quarter 2022 earnings call. [Operator instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Jonathan Fleetwood, director of investor relations.

You may begin.

Jonathan Fleetwood -- Director of Investor Relations

Thank you, operator. Good morning. Before we begin, let me remind you that this conference call includes forward-looking statements. For additional information on SmileDirectClub, please refer to the company's SEC filings including the risk factors described therein.

You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today. I refer you to our Q1 2022 earnings presentation for a description of certain forward-looking statements. We undertake no obligation to update such information, except as required by applicable law.

In this conference call, we will also have a discussion of certain non-GAAP financial measures, including adjusted EBITDA and free cash flow. Information required by Regulation G of the Exchange Act with respect to such non-GAAP financial measures is included in the presentation slides for this call, which can be obtained on our website. We also refer you to this presentation for a reconciliation of certain non-GAAP financial measures to the appropriate GAAP measures. I'm joined on the call today by Chief Executive Officer and Chairman David Katzman, Interim Chief Financial Officer Troy Crawford, and Global Head of FP&A and Investor Relations Jesse Weaver.

Let me now turn the call over to David.

David Katzman -- Chairman and Chief Executive Officer

Thanks, Jonathan, and good morning, everyone. Thank you for joining us today. I want to start by thanking our team members for their tireless focus and commitment to our mission of democratizing access to care, while delivering quarter-over-quarter revenue growth of more than 20% and shipment growth of more than 15%. Q1 financials performed according to plan, and we made considerable progress in strengthening our liquidity position with our $255 million secured debt facility.

While we have sufficient cash on the balance sheet to hit our target of generating positive cash flow by 2024, this facility, which is secured against our accounts receivable cash and certain IP gives us financial flexibility to continue making investments in key strategic growth areas of our business like partner network, going after the higher income consumer, SmileShop expansion and advancing our oral care products. With the launch of our fast-dissolving whitening strips, we successfully ended the quarter with our oral care products available at more than 16,000 retail locations, which is up from 12,900 stores at the end of Q4. We also continued our track record of oral care innovation with the introduction of our patented wireless premium whitening kit. We expect continued success in this category for years to come as our brand, product offering and retail partnership skin momentum.

We are also pleased with the progress we've made on profitably expanding our SmileShops. At the beginning of the pandemic, stay home mandates and social distancing prompted us to reevaluate our SmileShop footprint, focus on kits where possible. Over the past two years, we have continued to reassess our SmileShop approach and ensure our shops are driving incrementality to the business. We've also developed sophisticated models that enable us to better predict the most profitable channel, shops or impression kits for driving incremental demand in a market that may not currently have a shop location.

In Q1, we opened seven net new shops in the U.S., and the early results in this strategy are promising. In the coming quarters, we will continue to monitor progress and update you on further shop and event expansion into the markets we see the most promise, driving incremental demand with scans. We've also made progress in the partner network. During the quarter, we continued to focus on growing SmileDirectClub's awareness and credibility with GPs, while making operational improvements to our model that are paying off and improve practice productivity.

Throughout Q1, we saw improvements in both submissions per practice and increases in total practices in our network. As Troy mentioned during our last call, the focus has been on tightening the model to maximize engagement and productivity through submissions within active practices. Before we scale the sales force to drive further practice growth, practice productivity is an important metric, which ensures we are balancing the growth of our pipeline with our organizational focus on being the best possible partner to our GP network and at the same time, driving the highest possible returns and generating near-term profitable growth. Our commitment to partner network is as strong as ever.

This initiative is expected to be a growth engine for the company that not only provides us with an incremental source of revenue from our core customer demographic through GP submissions of their existing patients, but also creates a critical entry point into our business for the higher household income demographic. As you know, our current core customer has a median household income of $68,000, in many cases, our safe effective T-straining option was the only one that they could afford. We are extremely proud that our award-winning telehealth platform has enabled us to democratize access to care for these 1.7 million customers in counting. With their support, we've been able to expand the category while building this incredible brand with 60% aided awareness, becoming the No.

2 player in clear aligners worldwide, and growing revenue at a compound annual growth rate of approximately 45% since 2017. But as we've mentioned since our Q2 call last year, the core customer is highly sensitive to the impact inflation is having on discretionary spending. In Q1 of this year, the acceleration continued with nondiscretionary inflation increasing for our core demographic to roughly 9% versus 7.8% in Q4. While we have taken steps to mitigate inflation within our business through price increases, we have also been able to support our customers through our vertically integrated financing program by not raising their SmilePay monthly payments.

This strain on our core customers' ability to spend on discretionary high-ticket items has had a meaningful impact on our ability to grow this segment. And it's taken us from a record revenue quarter just one year ago in Q1 of 2021 to where we are today. While we believe strongly in our mission to democratize access to care and in our ability to achieve our long-term growth targets with this demographic, we also believe that the quality of our product, the convenience of our telehealth offering and the awareness of our brand provides the right to win by taking share from traditional wires and brackets as well as other more expensive clear liner therapies. We know traditional orthodontic customers come from higher-income households.

They expect the same level of quality treatment and similarly rely on dental professionals, friends and online reviews to make their decisions about orthodontic care, but they also have different needs and wants from those of our customers today. While we continue to market to the higher income customer by building credibility through our challenger campaign, we recognize that higher income households need more from us than education and awareness of our brand. They need to start their journey with a general practitioner which for our business means they would start their journey in either a SmileShop within a dental practice or through our partner network, which again underscores the importance of our investment and focus on growing our partner network channel. We know that this channel serves a dual purpose in being both an incremental revenue stream for us with our existing customers today as well as an access point for our higher income customers by allowing them to start their journey the way they seem to prefer, which is through a neighborhood GP office supplemented with our convenient telehealth platform and our advanced connected tools.

The research we've done on the higher-income demographic also highlights other areas in our offering that we can modestly adjust in our service model at a higher price point to greatly improve our offerings appeal. These insights also build on the value proposition we can bring to our partner network model for the GP. While we are not ready to share the specific details of this premium offering, the team is working diligently to get a test in market as soon as possible and begin rolling out in late 2022 or early 2023. As you may recall, in early Q1, we announced that in light of the current macro environment, we were reevaluating our international footprint for near-term profitability, rightsizing our operating structure and allocating capital to core growth initiatives that can produce the highest return on investment.

Our team members have demonstrated an incredible amount of grit and dedication as we've navigated this transition together. While I'm pleased with how we've operated during this time as with any transition of this magnitude, there have been challenges. After the transition took place in February, we began to experience some operational challenges within our customer care team that have unfortunately impacted our customer experience and latest Net Promoter Score. The team acted quickly and built a remediation plan to bring us back to our target service levels in the coming weeks.

Our customers are a top priority, and we always aim to deliver a best-in-class experience. In April, we spoke directly to our customers to acknowledge that we were not currently delivering against the high expectations we have set for ourselves and what they have come to expect from SDC. These operational challenges are temporary in nature. We have made significant progress already that will be reflected in our NPS in future quarters.

On close, I just want to reiterate my appreciation to the team. As I mentioned, the transition was a very difficult decision for me and the leadership team. And in spite of the short-term challenges we've been facing operationally, I firmly believe in our direction and focus. This is not a story of retrenchment, but rather a story of highly focused investment in our game-changing platform.

A few days ago, we announced that we won the MedTech Breakthrough Award for Best telehealth platform. MedTech breakthrough is an independent market intelligence organization that recognizes breakthrough people, platforms and products in the health, fitness and medical technology industries today. Nearly 4,000 nominations were considered for the 2022 program, and as the winner of best telehealth platform, we are the only company recognized in the clear aligner space in 2022, and we joined an impressive list of top companies in the larger digital health industry. While we recognize the need to deliver results against our financially strained core customer, this award underscores the importance of our breakthrough innovations.

It also demonstrates the importance of the work we're doing to expand the reach of this amazing brand, and we spent the last seven years growing to the No. 1 largest direct-to-consumer orthodontic brand and No. 2 largest liner brand in the world. In a short period of time, this revolutionary platform has served more than 1.7 million people in a smile they love while saving them over $5 billion collectively over traditional braces.

And now I'll turn the call over to Troy, who will provide more detail on our Q1 financial results and full-year outlook. Troy?

Troy Crawford -- Interim Chief Financial Officer

Thank you, David. I will jump right to our results for the quarter. Please be sure to review our supplemental materials posted to our investor website, which provide additional details on everything I will cover. As David mentioned, revenue for the first quarter was $152 million, which is an increase of 20% sequentially.

This was driven primarily by 76,000 initial aligner shipments at an ASP of $18.90. Our liner shipment count was up over 15% from the fourth quarter. The year-over-year revenue decline of 24% is representative of what we have seen play out in the economy over the last year. We had a record quarter in Q1 '21, driven primarily by the impact of government stimulus on consumer spending, but in Q2, we started to see the effects of the higher inflationary environment that continues to this day.

Despite the year-over-year decline, the sequential increase from Q4 gives us some confidence that we can deliver on our revenue guidance for the full year. Providing some details on the other revenue items. Implicit price concessions were 11% of gross aligner revenue, down from 12% in the fourth quarter. We do expect IPC as a percentage of gross aligner revenue to trend back toward our historical level of 9% as we have seen no significant deterioration in the quality of the portfolio.

The fluctuation in the quarterly IPC percentage is impacted by the overall level of revenue recorded in the period as well as the rebalancing of reserves. As we have mentioned in prior quarters, we maintained separate reserves for IPC cancellation. We analyze and regularly rebalance those reserves based on current information. Reserves and other adjustments, which includes impression kit revenue, refunds and sales tax, came in at 7% of gross aligner revenue compared to 10% in the fourth quarter, primarily due to the lower refund rate and the aforementioned reserve rebalancing.

Financing revenue, which is interest associated with our SmilePay program, came in at approximately $9 million. which is slightly down relative to Q4 due to the lower accounts receivable balance. Other revenue and adjustments, which includes net revenue related to retainers, whitening and other ancillary products came in at about $24 million or over 15% of total first quarter revenue and is up $6 million from Q4. This increase was driven primarily from the rollout of our innovative new retail products, including our whitening strips in Q1.

Now turning to SmilePay. In Q1, the share of initial aligner purchases financed through our SmilePay program came in at approximately 60%. This is in line with historical levels. As David mentioned earlier, the SmilePay program is an important component to drive affordability with our customer base.

Overall, SmilePay has continued to perform well, and our delinquency rates in Q1 were consistent with prior quarters. While admittedly, our core customer has had difficulty with the macro environment, the fact that we keep a credit card on file and have a low monthly payment, gives us the confidence that SmilePay will continue to perform well. While we have recently increased the price of our aligners, we also extended the payment terms from 24 to 26 months in our SmilePay program to help maintain the affordability for our customers. Turning to results on the cost side of the business.

Gross margin for the quarter was 72%, which is more in line with our historical trend compared to the fourth quarter, which included some onetime items, including start-up costs associated with our Smile OS implementation and some higher retail inventory costs. Our gross margin includes a significant portion of fixed costs, and therefore, higher revenue allows us to leverage those costs for a higher overall gross margin percentage. Consistent with Q4, our second-generation automation machines are producing approximately 90% of aligners in line with our internal targets. This streamlining is helping with turnaround time, productivity, reduction in scrap and a more consistent and superior product for our club members.

Marketing and selling expenses came in at $97 million or 64% of net revenue in the quarter, compared to 79% of net revenue in Q4 2021. The sequential decrease as a percent of revenue is primarily attributed to the increase in revenue, but is also the result of a reduction in spend in targeted international markets that we suspended in January as well as increased marketing efficiency. On SmileShops, we had 110 permanent locations as of quarter end and held 130 pop-up events over the course of the quarter for a total of 240 location sites. We had a decrease in shop locations from the fourth quarter, driven primarily by the closure of 38 shops from the international markets where we suspended operations in January.

The pop-up events are an efficient way to meet our demand and enable us to fully leverage our SmileShop and provide flexibility for our customers that are coming to us through aided awareness, referrals and marketing. We continue to evaluate profitable expansion of SmileShops and other scan distribution models where we believe incremental demand exists to cover the additional cost of these locations. Pop-up events have also been critical in supporting our partner network. We now have over 673 partner network locations globally that are active or pending training, increasing our footprint from Q4.

As David previously mentioned, the partner network team has been extremely focused on tightening the model to maximize engagement and productivity within active practices, and we've seen positive momentum on productivity throughout the quarter. As mentioned earlier, our marketing and selling expenses in the quarter as a percentage of revenue declined to 64%, compared to 79% in Q4 and reflects significant improvement due to the exit of specific international markets and our focused analysis regarding any investment in brand building. to support our long-term growth. We did not see the full effect of the international market changes within the quarter as many of the changes were implemented after January.

We did see efficiency improvements in the U.S. and Canada during the quarter, sales and marketing as a percent of revenue was 78% in rest of world markets, compared to 61% in the U.S. and Canada. The focus in Q1 and what will remain the focus is seeking to find efficiency in our spend.

This includes continued efforts to find greater unique reach in our spend on TV, with influencers and through our partner network offices as well as driving the most qualified leads through our site. While iOS 14 changes continue to be a challenge year over year by continuing to optimize our digital channels, we are finding levels of efficiency closer to pre iOS 14 members. It's important to keep in mind that digital marketing is a highly fluid process that requires daily discipline on spend analysis, assessment and reallocation. We're always testing and analyzing new channels and the impact of the channel mix among all channels.

With a targeted focus on efficiency and quality leads, we are continuing to calibrate spend across a diversified platform base in order to optimize continuously through the period to achieve the optimal balance of high funnel leads and bottom of funnel aligner sales. General and administrative expenses were $71 million in Q1 compared to $74 million in Q4 2021. G&A costs were lower in the first quarter by approximately $10 million compared to Q4, when adjusting for incentive compensation differences between the quarters. If you recall, Q4 2021 included a reversal of the four-year bonus accrual of approximately $9 million, compared to a more normalized cost in Q1 2022 of $4 million.

Stock-based compensation cost was also lower in Q1 2022 compared to Q4 2021 by $2 million due to forfeitures of stock awards associated with the cost changes implemented in January. The full effect of the cost actions in the quarterly run rate of G&A expense will be realized in the back half 2022. And excluding stock-based compensation and G&A, we expect to see a continued step-down in G&A between Q1 and Q2 that should continue through the balance of the year. Other expenses include interest expense of $1.6 million of which $1.1 million is related to deferred loan costs associated with the convert we issued in 2021 and $500,000 associated with leases.

Additionally, other expense was approximately $13 million consisting primarily of onetime costs related to our January restructuring actions, including costs associated with severance and retention as well as store and facility closure costs related to our international operations. All the above produces adjusted EBITDA of negative $34 million in the first quarter, which is a $28 million improvement over Q4 2021. Our first quarter net loss was $74 million, compared to Q4 2021 net loss of $95 million. Breaking out adjusted EBITDA regionally, the U.S.

and Canada came in at negative $23 million and Rest of World adjusted EBITDA was negative $11 million. Moving to the balance sheet. We ended the first quarter with $145 million in cash and cash equivalents. Cash from operations for the first quarter was negative $61 million.

Operating cash flow was negatively impacted by the cost savings initiatives we executed in Q1. During the quarter, we spent approximately $20 million on team member related costs such as severance and retention as well as costs associated with the exit of some geographies, including store and facility exit costs. Of the $20 million of cash outflow, approximately $13 million flowed through restructuring costs in the P&L but were added back to adjusted EBITDA for the quarter with the remainder of the cash outflow expensed and restructuring throughout the rest of the year. The total cost of the transition is still expected to be within our guidance of between $20 million and $25 million for the year.

Cash spent on investing for the fourth quarter was $15 million. Free cash flow for the first quarter, defined as cash from operations, less cash from investing, was negative $76 million. We have previously noted that we have access to additional liquidity to invest in our growth initiatives, including any accelerated investments such as partner network, higher income customer penetration and SmileShop expansion. As David mentioned earlier, we successfully increased our liquidity by completing a new $255 million debt facility secured by our SmilePay receivables that has a 42-month maturity and is structured as a delayed draw term loan facility.

At the time of closing at the end of April, we drew down $65 million on the facility, most of which was required as an initial draw under the agreement. As previously mentioned, in January, we took actions to reorganize our company and meaningfully reduce costs. Overall, these targeted cost reductions optimize our operations to refocus our business on achieving near-term profitability while minimizing any impact on revenue. These actions are tracking according to plan with a meaningful impact on our spending realized in the first quarter with full quarterly run rate savings anticipated in the second half of the year.

As noted in our press release, we have reaffirmed our 2022 and long-term guidance as well as assumptions underlying both that we provided on February 28, 2022. Overall, we are pleased to deliver Q1 results in line with our plan. We delivered a significant increase of 15% in aligner orders compared to Q4 and increased revenue across both our aligners and oral care solutions, increased gross margins, recognized efficiency gains with selling and marketing and G&A as a lower percentage of revenue and accessed additional liquidity through our new debt facility. This financial strength provides a solid foundation to help us achieve our 2022 and long-term growth targets and provide the best club member experience.

Thank you to everyone for joining today. With that, I'll turn the call back over to the operator for Q&A.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Chris Cooley with Stephens. Please proceed with your question.

Chris Cooley -- Stephens, Inc. -- Analyst

Good morning, and thank you for taking my the questions. Congratulations on an impressive start to the new year. Just was hoping we could maybe get a little bit more color around your thoughts strategically with the partner network and the new premium offering. It sounds like you definitely are seeing some gains there in terms of not only -- I'm sorry, new customers, but also just better utilization within those existing practices.

Could you just maybe give us some metrics around that and kind of how you see that trending? And then the end result of what you think that can do in terms of Lift, in terms of growth and margin?

David Katzman -- Chairman and Chief Executive Officer

Yes, Chris. I can take that one. So what we're seeing in partner network today is not our premium offering. That's something that we introduced this quarter.

We mentioned it in our deck and in our prepared remarks. So this comes from a lot of research that we've done over the last couple of quarters where we're seeing that the higher income consumer, one of the needs to play is that they do want a local neighborhood GP or ortho to start their journey and to use that network neighborhood network if they choose to, but also have the flexibility of using our telehealth platform. So what we've been doing with the partner network today is more of the GP's patient base who wants to use SmileDirectClub to straight and we now have that offering inside the partner network. This new premium offering, which is a complete new service that we're going to be rolling out the end of '22, it's not in the market today.

It comes at a higher price point. There's more service associated with it. There's more in it for the GP, which is exciting. And when we started out the partner network, that was not -- it was not by design to appeal to the higher-income consumer.

It just so happens that the two initiatives, both of them were independent initiatives are higher-income consumer, strategy as well as the partner network now have come together in the circles cross, which is very exciting for us. So what we're seeing today when we talk about we're getting more productivity per practice. That's in the core partner network with the GP patients. Every month, we're seeing submissions, which is the productivity of those practices go up.

And that's what we've been working on very hard to get it to a certain level where it's profitable, it's consistent and then we're going to really start to pour gas on and roll it out. We're still in a state right now where we are opening more practices. And because of this, what we call SDC plus, it's the term for our new premium offering. We are going to have to open up more offices.

Many of those will be our SmileShops inside the partner network. We've already got about a quarter of them, of our 110 shops or inside partner network requires that we have at least two operatories and space to operate inside the dental practice. But it's been a good model. It's a good model for our core customers coming in.

There's some comfort in being inside a dental practice, but it also really helps with the partner network patients coming over and getting scanned and utilizing our services. So eventually, we'll move most of those SmileShops inside the partner network to support the SDC plus. We'll then also expand beyond that and just having the partner network treat and service or higher income consumers as they come through SDC plus.

Operator

Our next question comes from the line of Alex Nowak with Craig-Hallum. Please proceed with your question.

Unknown speaker

Great morning, everyone. This is Conor on for Alex. I guess, first off, we saw the inflationary environment worse in Q1, but it does look like your results are obviously starting to improve here. So -- and just some more color on were you less exposed to those challenges in the first quarter here? Or just some more color there would be helpful?

David Katzman -- Chairman and Chief Executive Officer

Yes. Conor, I can take that one. So yes, definitely pleased with the quarter, a little over $150 million, up 20% revenue. First of all, Q1 is a better quarter than Q4 seasonally.

There is the new year, new you effect that takes shape every Q1. But beyond that, we have not seen inflation subside, if anything, it's at a higher level than it's been. I just think we're getting used to operating in this environment. Some of the things -- some of the newer marketing channels that we were forced to start spending money in because of iOS 14.

We're starting to get our sea legs. We're becoming more efficient in those channels as we learn more. We really weren't doing money on TikTok and Snapchat at the levels that we are today, podcast, direct mail, all channels are being exposed to our marketing spend, and we're getting more proficient in each of those channels and spending less in Facebook, which wasn't performing. The other one that we don't talk a lot about is conversion improvement.

So there's conversion improvement within each channel, kit and scan. We're always tweaking. We have a better and better philosophy. Everything from kit return rates are up, acceptance rates are up.

So for the same dollars of marketing spend, there's a real problem that you have to go through if you get a kit, a successful kit back to order your aligners. And so after five, six years, There has been improvement in really focus on improving that funnel conversion. We're making strides there. So we saw in Q1 some good improvement in conversion.

The other conversion improvement is taking someone from a kit into a scan funnel the experience in the shops ultimately have a better conversion than some doing it themselves at home with a kit. And so we've seen an uptick in that as well coming out of COVID, we're starting to see more of our customers starting the shops, which has a better conversion, and we're going to continue to push that channel. As we mentioned, we opened up seven new shops in the quarter. We're opening more shops in Q2 as we see incrementality.

They have to be incremental. And when we say incremental, let me define that for you. So it's not only do we get more case starts because someone in that DMA, if we didn't have a shop in there, would not have started with us because they don't want to do a kid at home. That's one incrementality.

The other incrementality is can you convert a large percentage of the people who were doing kits in that market to a -- to the shop, so you have a higher conversion. So if you have the same thousand people who started with kits in a certain DMA now shop there, let's say, half of them now convert over to the shop with the higher conversion, it covers the cost of that shop and then is profitable incrementally. So it's not one thing. It's really a game of inches.

And all of these things performed to plan in Q1, and I think that's why we hit our numbers.

Troy Crawford -- Interim Chief Financial Officer

And just to build on that -- just to build on Conor a little bit. We did expect the seasonal uptick in our guidance for Q1. And we still expect that as we look at the rest of the year at about 45% to 50% of our sales guidance range will be in the front half with about 50% to 55% in the back half based on the $600 million to $650 million full year sales outlook with the lower end of that range being impacted by continued difficulty in the macroeconomic environment with the high end of that, we get a little bit of an improvement from an inflationary standpoint through the rest of the year. So I just wanted to give you that additional color.

Unknown speaker

Perfect. That's super helpful. And then, I guess, second, just if I could squeeze another one in. update, just a quick update on the competitive environment.

We're seeing a little bit more marketing from Candid and those alike. What are you seeing? And how do you intend to kind of defend against those with potentially bigger budgets now?

David Katzman -- Chairman and Chief Executive Officer

We're not really seeing that. I'm surprised you to say that Candid really has dropped out of the DTC space. They're not going direct. You can't buy the product from them other than through their own network of GPs or those -- so I don't see the marketing spend increasing at all.

Quite, I mean, as far as the numbers -- they're on a conference call right now, same time with us, so we'll have to see how they're reporting in. But nothing has changed from a competitive standpoint that we see out in the marketplace. I don't see any real increased spend from any of our competitors. I think -- like I said, I think the $152 million that we achieved this quarter was just a lot of work in this inflationary environment, understanding our marketing spend, the channels we're in, all the conversion curves, the levers that we have -- we're a very data-driven metric company.

And it's a game of moving these levers, 1%, 2% conversion is to be very meaningful in this business when you have the kind of visitor traffic that we have and demand that we have coming into the website.

Unknown speaker

Perfect. Appreciate the color.

Operator

Our next question comes from the line of Jon Block with Stifel. Please proceed with your question.

Tom Stephan -- Stifel Financial Corp. -- Analyst

Great. Hey, guys. This is Tom Stephan on for Jon. Thanks for the questions.

If I can start with price, Troy, maybe with you, can you just talk about cadence of how the recent price increase flows through the P&L? Will it be fully reflected maybe starting in 2H. And then, David, is there any thought around additional price increases this year, just given the inflationary environment and then your ability to execute on this effectively through the longer monthly terms?

Troy Crawford -- Interim Chief Financial Officer

So just to address the price increase. So in the U.S., we'll have that rolled out during Q2. So by the time we get to the end of Q2, it will be fully baked in for Q3, and then we're rolling it out internationally after that. So yes, back half of the year is when we'll start to see the full effect of the price increase.

David Katzman -- Chairman and Chief Executive Officer

Yes. And just to add on that. So it does take a while to have this flow through our system from website to CRM, paid media, all of that has to be adjusted. So we started with the U.S.

being the biggest market. We've got U.K., Canada coming next, but it's going to take through Q3 to get all the six countries up to the 4% to 5% price increase. Now we are looking at -- we don't anticipate another price increase on the aligners. We are looking at retainers now.

Our retainers are $99. It's a good annuity. It's more so some people have a subscription, but we have a flow, a good flow of retainer business coming in every 6 months. We expect our customer store to retain it.

That has not gone up since started business seven years ago. So we anticipate we will take a price increase on retainers. We're just trying to figure out exactly how much that is, which will be helpful. Every little bit helps.

And then this new premium offering we're talking about. Now that's both the retainer price increase premium offering for SDC plus, which really isn't going to even come out until almost the end of the year. None of that is built into the model. So those are added if we retain a price increase additive to the model.

Tom Stephan -- Stifel Financial Corp. -- Analyst

Got it. That's helpful. And then just my second question, as it relates to the SmileShop expansion and the profitability there, you talk about just what you're doing differently now relative to pre-COVID. It sounds like more shops inside offices is helping? And then importantly, what is the sustainability as we think about sort of per store profitability?

Troy Crawford -- Interim Chief Financial Officer

Yes. So we're much more strategic and much more surgical about our Shop footprint. When we were growing like crazy in 2018 and '19, our first shop opened in 2016 in the summer. We got up to over 300 shops in the U.S.

with our partnership with Walgreens and Walmart, CVS, anyone who would take a shop, we put a shop in.

David Katzman -- Chairman and Chief Executive Officer

In COVID, we started seeing it before COVID with the shutdown of all the shops really allowed us to take a real long hard look at the incrementality of these shops. There is expense associated with them, the labor, the monthly rent, etc. So even if they're profitable within a four-wall, that's not the way to look at it because that's how we were looking at it, and most of them, if not all of them, were profitable within a four-wall. But what you have to say is, could I have gotten that business otherwise with an impression kit, even at a lower conversion -- so if you factor in the lower conversion of a kit in that market with the higher conversion of the shop and all the costs associated with the shop, is it incrementally profitable.

So we have a team that's headed by Jesse, who's on this call from our FP&A team along with analytics. And they are -- they look at every data point imaginable against match markets, and we're still test and learning. So we open up those seven markets, in Q1, both seven shops and new markets. Some are new markets, some are incremental shops within existing markets.

And then we wait six, eight weeks to see to make sure that our hypothesis is accurate that this was incremental. It's pretty easy to measure once they open, obviously. And then we're going to the next round in the next round. So Well, I don't anticipate we're going to get back to 300 shops because when we look at the numbers, we were just oversaturated.

They were cannibalistic to each other, but we will have more than 110 shops that we have today that -- and that does help with the conversion like we're talking about as well as new case starts.

Troy Crawford -- Interim Chief Financial Officer

David, if I could just build on that a little bit. couple of things have changed since the time pre-COVID when the company had well over 300 shops, as you pointed out, One, we do have the ability to look back at those shops and look at where we are today, and we have a good test control data set. I mean when you have fully saturated in the United States. It's hard to kind of tease out that incrementality and now we can do that today so that we can crawl-walk-run into what I would say is the optimized number of shops.

And then the other thing, too, is the company has evolved in terms of its go-to-market for those, what we call internally and distribution models. So we don't have just a single thread of all shops stand-alone. Today, we've got an operating model that has a different cost structure for a shop at stand-alone or a shop in dental practice or what we call a guide that could go work in a dental practice for one to two days a week or even a pop-up. And with these different operating models, we can then marry what we estimate to be the increment the opportunity in that market with the appropriate can distribution model, and that really allows us to really focus on capturing what David said, that incrementality as the highest contribution margin.

And we're still early stages, and we're learning. And I think what we'll find is there's more opportunities probably than we can see today. But as we get out in the market and test it, we have a lot of flexibility because these are short-term leases and pop-up events are obviously very temporary to evolve it to continue to tweak the model, as David pointed out and sort of our process innovation culture. So it's a really exciting thing, and we'll talk more about it, I'm sure, in the coming quarters.

Operator

Our next question comes from the line of Matt Miksic with Credit Suisse. Please proceed with your question.

Matt Miksic -- Credit Suisse -- Analyst

Hi. Thanks so much for taking the question, and congrats on a good start to the year. You're -- so a couple of questions just maybe on cadence from here. So first on cash flows, given the restructuring and financing announced during Q1, as you mentioned in your prepared remarks, your partial impact of some of those efforts during the quarter.

Can you talk a little bit about the cadence of operating cash use as we get into Q2 and Q3? And then maybe any sequential improvements on that front as you stabilize the top line? And then I've got a follow-up question as well.

Troy Crawford -- Interim Chief Financial Officer

Sure. I'll take that. So just related to the overall free cash flow was negative $76 million for the quarter. It was impacted by the restructuring events that we executed in Q1.

If you just look at what we've talked about before is kind of the way to think about free cash flow, EBITDA minus the capex. So EBITDA was minus $34 million. Capex was $15 million, and then we had a restructuring event which cost us about $20 million from a cash flow perspective. But the majority of that was spent in exit costs related to some of our international facilities as well as severance and retention costs related to the changes that were made.

So about $20 million of that overall $76 million was I would say, one time. Now not all of that ran through the financial statements, the P&L in Q1, only about $13 million of that was in -- within the P&L, which we broke out on a restructuring line item. So we'll have some expenses for the rest of the year as we amortize those off about $8 million through the rest of the year. We're still within our guidance range that we gave originally of $20 million to $25 million impact from restructuring.

But as we go into Q2 and the rest of the year, as you remember, the changes that we made in Q1, about $120 million in savings that we identified, we'll start to see the impact of that from a full quarter perspective in Q2 and then certainly in the back half of the year. So we do expect free cash flow to get better as we go throughout the year without the onetime impact as well as the changes that we've made from a savings aspect, which I think really goes to define the flexibility that we have in the model and some of the things that Jesse talked about, the changes that we're making from an efficiency and analysis standpoint. But we expect to see better margins, higher ASP coming from the price changes, better marketing efficiency. And as we exited some of those international markets, we'll see marketing costs come down.

And then G&A as well with the changes we made related to personnel to rightsize the business should be all positive impacts to free cash flow throughout the rest of the year.

Matt Miksic -- Credit Suisse -- Analyst

That's great. And the capex element of that, is that still just kind of steady consistent with 15 in Q1? Or does that -- is there a trajectory to that number as well?

Troy Crawford -- Interim Chief Financial Officer

The original guidance we gave was $60 million to $70 million for capex this year. We're sticking to that guidance right now. We've got some investments that we think we can make that are going to be very important for the business, but we're going to fit those into that guidance range.

Matt Miksic -- Credit Suisse -- Analyst

Great. And then you mentioned just, I think, in the last question that you're embarking on a number of different sort of fine-tuning exercises and sort of marketing and customer acquisition and profitability, which is great. Wondering should we expect -- should investors expect that to be sort of start to take shape or see the clear benefits of some of those in Q2? Or does that take a couple of quarters by the end of the year, when do you think you'll have a really sharp view of how these new programs are affecting growth trends?

David Katzman -- Chairman and Chief Executive Officer

Yes. Two things in that question. One was the incrementality or the process improvements that we make, we saw the benefits of that in Q1. So those are the things I talked about, kit conversion, shop incrementality, marketing efficiency, all those little inches, we're always working on it, and we started to see some of that in Q1, you'll continue to see -- that's in our model that is in our model.

The new initiatives as far as partner network in SDC plus, now almost doing one initiative because they feed off each other. That is something that as we roll that out, and that's going to be probably late 2022 into '23. It's a big initiative as far as getting these partner networks stood up so that we can roll out with a national campaign targeted at the higher income consumer with this premium offering. We're working diligently on it.

But as that comes out, we'll start to report on the KPIs of that and some more metrics and you'll start -- you'll see that in our 2023 numbers as we give guidance for that.

Matt Miksic -- Credit Suisse -- Analyst

That's great.

Operator

Our next question comes from the line of Robbie Marcus with J.P. Morgan. Please proceed with your question.

Lili Lozada -- J.P. Morgan -- Analyst

Hi. This is actually Lili on for Robbie today. Thanks for taking the question. With all these macro challenges, is there any color you can share on how SmilePay dynamics have shifted over the last few quarters? And what are you doing to mitigate any sort of financial risk on that side as inflation continues to worsen?

Troy Crawford -- Interim Chief Financial Officer

Yes. I'll take that. So we haven't really seen any degradation, I would say, in our overall portfolio related to SmilePay despite the macroeconomic situation. I think one of the things that helps us certainly is to have a credit card on file with the customer, which kind of allows for easy payments.

We did raise prices, but we're kind of offsetting the impact of that for the customer by extending the payment terms out to 26 months versus 24. So it keeps their payment low at $89. So we're somewhat offsetting the impact of that price increase for the consumer. But overall, I think we watch the SmilePay performance very closely.

There are some ups and downs between quarters, I would say, and even among individual performance month-to-month. But overall, I'd say we're still considering the performance of that consistent with prior years where we haven't seen any major impacts from an economic standpoint from that consumer.

Lili Lozada -- J.P. Morgan -- Analyst

OK. That's helpful. Just a quick follow-up. You've mentioned that these headwinds are really affecting your core demographic.

So how have some of the noncore markets you've moved into recently like teams and the Challenger campaign been trending recently?

David Katzman -- Chairman and Chief Executive Officer

Yes. So I'll take that one. There really wasn't a direct team initiative. I will tell you that SDC Plus going after the higher income consumer by using our partner network local GP office as a way to start.

This also resonated very, very high with the parent of teams. So that was a good outcome for us. So I think SDC Plus kind of rolled up, not only goes after the higher income consumer, but also goes after that team market that we really under-index too. We've never really gone after that market.

So that initiative will take shape. And yes, I mean, as far as other initiatives and things that we're doing, it's really more back half of the year. And I don't know, Troy or Jesse, if you want to add any color on any of that?

Troy Crawford -- Interim Chief Financial Officer

I would just say, yes, it's -- for the most part, our results are driven by our core consumer right now, and that's the way we built our model. So to the extent we make additional investments and make inroads into that higher income consumer, that's all opportunity for us. So while we've been focused on it and trying to grow partner network and some of these other initiatives, I think really all of that is in front of us, I would say, for the most part.

Operator

And our next question comes from the line of Michael Ryskin with Bank of America. Please proceed with your question.

Michael Ryskin -- Bank of America Merrill Lynch -- Analyst

Hey. Thanks for taking the question. I've got a couple, but also sort of the big picture one, and it's a little bit of a follow-on on the last point. If we -- if we sort of take a step back and look at the big picture, at the time of the IPO, the focus was really heavily on.

There are two targets that were sort of guiding your methodology of the business, and it was one, the lower price point; and two, was for patients or customers who specifically did not want to go to the dentist or didn't have access to the dentists. And if you fast forward today, obviously, a lot has changed in the world, but you're increasingly emphasizing or focusing on the doctor-directed channel or the dentist channel. And now you've got the premium offering SDC Plus, and it seems like you're continually shifting more and more back into that the other part of the market where the No. 1 player align is.

So it's still -- I recognize it's still a small part of the business and the former category still captures the majority of the opportunity. But any thoughts longer term on that shift, any learnings we can take from that on the size of the Truly DTC platform and the at-home platform and the market opportunity there? And how you stack up in a market where you could be going more head-to-head with the established players in the Doctor-Directed channel?

David Katzman -- Chairman and Chief Executive Officer

Yes, Michael. I think the way to look at it is we have this pure telehealth platform, which up until this inflationary headwind was doing really well. We just -- we talked about Q1 of '21. It was a record quarter for us, $199 million EBITDA positive that was all of our core demographic $68,000 a year customer.

That customer has been a workhorse for us, and we will continue to grow the business with that customer. We're not abandoning that customer. We just feel we have the right to win, as I stated in my remarks that we have the platform, we have Gen 2 manufacturing, which is a really great product. It's really improved as far as comfort, fit in our Smile OS, which is our software platform, which we have a great team of engineers, putting out new releases every quarter.

We're doing more cases, better outcomes. So we feel that the time is right to go after that higher income consumer, we have the platform. What was missing was they didn't want to totally do a pure telehealth play. Our research came back they love the telehealth aspects of it, the convenience that, that offers, but not at the expense of not having someone in their neighborhood that they can go to, if they need to or at least to start the journey.

So we're -- these initiatives are for growth. And it really was a pivot away from international, which was going to be a growth driver for us as we talked about -- it was the right thing to do to shut that down. Most of these countries that were not performing or had long-term prospects. It was a cash strain.

There was a lot of regulatory hurdles in a lot of these countries that we had to overcome. And so pivoting back to something that has a much better ROI. We can get this SDC Plus up by the end of the year, less costly than opening up international countries and start to really compete for that higher income consumer, which our research is showing that this model and platform is very appealing to them to have the best of both for us, the telehealth and the physical location, which also then gets us into more teen cases, which we're underserving as well. So I would look at it as not so much of a shift to more of an additive incremental segment that we were not getting.

We were not getting that higher-income consumer. We were way under indexing to them. And there's no reason -- it's 20 million-plus case starts around the world. And we were adding a new category for people who can afford it, which is typically when you disrupt the category, that's what you go after.

It's pricing convenience. Price scheme number one by far, which we came out with -- these were consumers who came to us who put out a $4,000 to $5,000 for each Street. It's now timing the evolution of the product and the platform to now go after that higher income consumer, and that's exactly what we're doing.

Michael Ryskin -- Bank of America Merrill Lynch -- Analyst

OK. I appreciate that. And a quick follow-up. On the NPS hit you called out an order, just want to ask on that, given you've been hyper-focused on NPS metric on prior updates, how do you think that comes back accounting-wise? Do you have any concerns from detrimental impact on the business? And can you clarify in a little bit more detail you got operational disruption as a result of the announcement you need in January, what exactly was it that you think led to that pretty steep drop-off?

David Katzman -- Chairman and Chief Executive Officer

Yes. Good question. And this 1 hurts internally because our DNA is all about the customer. Everyone in the organization is extremely customer focused.

We did not want this to happen, and I'll take the blame for that. Basically, what happened was when we did our modeling from Project Horizon, which is our restructuring that we executed in January, we looked at this very carefully at our service levels and what was needed. And one of the cost savings was to take out -- we were 24/7 in all of our teams and categories within our contact center. Our dental team, our customer care team, our retention, our servicing SmilePay, all of that was 24/7.

When we felt like when we realized we didn't have to do that, there can be some cost savings by eliminating midnight and some of these night shifts. That needed IT support, help that support. And so we were going to move some of those people into the other two shifts. We have three shifts, three eight-hour shifts.

But what happened was a big chunk of our labor force for that contact center is in Costa Rica just hindsight is 2020. And what happened was when we offered them -- we thought they'd be happy about moving out of a midnight shift into a day shift and many of them had two jobs. Sorry. I can't do it.

and we were kind of caught short staffed. So we still have to shut down those night shifts to save on the IT and help desk and other support and now we're backfilling. We have a really good detailed plan to get back to our normal service levels, which we're proud of and are important in this business by mid-June. So 30 days from now, every week, we're seeing improvement because we are having hiring classes and we are doing things not only just hiring, but also improved productivity within each of the team members, getting more productivity out of each of them.

So our NPS, which was at 55% last quarter or Q3 of 2021, went down to 37% as low as it's been in a long time, very upsetting to leadership in the company. But you're going to see that bounce back. It's all hands on deck. It's not going to take long and we'll get back to the right service levels and NPS scores.

Operator

[Operator instructions] Our next question comes from the line of Laura Champine with Loop Capital Markets. Please proceed with your question.

Laura Champine -- Loop Capital Markets -- Analyst

Thanks for taking my question this morning. You've laid out sort of short-term targets in your presentation and still have long-term targets. Do we get to see those long-term targets for performance kick in, in 2023 in your current view? And when do we get to EBITDA positive, just knowing all that you know today?

Troy Crawford -- Interim Chief Financial Officer

I can take that. So as far as EBITDA positive goes, we're sticking with our original guidance, which is 2023 EBITDA positive and then cash flow positive in '24/'25. I would say as we start to get through some of these initial investments and understanding what SDC Plus and some of these other initiatives mean. I think we'll certainly take a look at our long-term guidance and make sure that it's representative of what we see from a marketplace perspective.

But I'd say overall right now, sticking with the shorter-term guidance, the $600 million to $650 million, $600 million relates to a continued worsening of the environment with the $650 million a little bit of an improvement. -- as we make investments in the business, we'll take a look at that shorter-term guidance after the first half of the year, and kind of potentially rework that based on what we've seen. But I would say we're not ready to change long-term guidance yet until we get a little more perspective on how these investments are going to play out and win overall.

Laura Champine -- Loop Capital Markets -- Analyst

Got it. And then just a follow on the credit facility that you just reported about. When do you think you'll see peak borrowings on that facility?

Troy Crawford -- Interim Chief Financial Officer

Well, I say it's all based on operating results. I think what it does is gives us a lot of flexibility going forward and the ability to -- if we want to extend some of the investments we want to make, we have the ability to do that. So initially, we took $65 million with the initial draw we took on the facility. Really, that was just to start it off.

But overall, not necessarily projecting that we need additional capital, but it will all depend certainly on how this year plays out and then toward the back half of this year, the investments that we want to make and how we see those play out as well. I think the key thing for us is that we wanted to make sure we had additional liquidity on the balance sheet if we wanted to make those additional investments to drive growth. I mean one of the things we looked at hard as a part of Project Horizon, as David mentioned earlier, was really trying to focus on those investments that have the best return and the shortest term to higher profitability. So this really gave us the ability to potentially weather any storms in the future as well as make those investments in the business that we need to continue to drive growth.

David Katzman -- Chairman and Chief Executive Officer

Yes. I would say just to add to that, Troy. So with the ending cash balance roughly $145 million plus to $255 million. You're looking at $400 million of available liquidity.

It's not needed for the model. So this is added liquidity. You take cash when you can take it. And if we want to start accelerating, we see really good results in the partner network, and we want to really accelerate growth there with a near-term payback ROI, then we have those funds to do there.

Now also, if things really get bad and worse. So from a cash perspective, you should look at this company based on our models, what kind of cash burn we're talking about for 2022, EBITDA positive in '23, We have plenty of liquidity, not like whether storm but also to fast forward and invest more heavily in things that are working. So we feel we're in a really good position. We're really excited about working with HPS.

This is a group that we had worked with in the past off of our SmilePay, AR balance, and we are with them again, good folks to work.

Operator

[Operator signoff]

Duration: 61 minutes

Call participants:

Jonathan Fleetwood -- Director of Investor Relations

David Katzman -- Chairman and Chief Executive Officer

Troy Crawford -- Interim Chief Financial Officer

Chris Cooley -- Stephens, Inc. -- Analyst

Unknown speaker

Tom Stephan -- Stifel Financial Corp. -- Analyst

Matt Miksic -- Credit Suisse -- Analyst

Lili Lozada -- J.P. Morgan -- Analyst

Michael Ryskin -- Bank of America Merrill Lynch -- Analyst

Laura Champine -- Loop Capital Markets -- Analyst

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