SBC Medical Group Holdings Incorporated ($SBC)

Thank you very much for joining the SBC Medical Group Holdings First Quarter Earnings Briefing. Today's session will be led by Yuya Yoshida Director, CFO, COO and AI Evangelist, together with myself, Hikaru Fukui, Head of IR Department, who will start as a moderator. Thank you for being with us. We will begin with the presentation delivered by AI avatar. The content has been reviewed and approved by management in advance. After the presentation, we will move on to the Q&A session. [Operator Instructions]. Now let us begin the presentation.

I am Yoshida, CFO of SBC Medical Group Holdings. Thank you very much for joining our conference call today despite your busy schedules. I will now present our financial results for the first quarter of 2026. First, let me cover the Clinic highlights. Both the number of customers and average revenue per visit increased year-over-year, and total revenue rose accordingly, including same-clinic revenue we will continue to enhance service levels through our multi-brand strategy, which enables us to address diverse customer needs with precision as well as through the development of new services. Next, the consolidated income statement. Total revenues for the first quarter of 2026 were $43 million. While this represents a 9% year-over-year decline. The primary driver was the fee structure revisions that took effect in April of last year, which had a negative impact of $6.2 million on franchising revenue and $2.4 million on Management Services revenue totaling an $8.7 million decrease. In addition, procurement revenue and rental services revenue declined year-over-year. On the other hand, managemen Services revenue was offset by an increase in point revenue. Please also note that net income attributable to SBC Medical Group declined year-over-year, partly because the prior year quarter included a onetime life insurance surrender gain of $8.7 million. As I mentioned, the revenue decline was primarily attributable to the fee structure revision, excluding the fee structure revisions of $8.7 million and further adjusting for the $1.3 million difference in AHH consolidation period, underlying revenue grew +11% year-over-year. Similarly, excluding the fee structure revisions of $8.7 million, underlying EBITDA grew plus 117% year-over-year. While the headline figures show a decline in both revenue and profit, I would like to emphasize that excluding the impact of the fee structure revisions from the prior year, both revenue and EBITDA demonstrated solid underlying growth. That concludes my presentation. Thank you for your attention.

We will now move on to the Q&A session. [Operator Instructions]. So first question is regarding Clinical revenue growth and the competitive environment. Clinical revenue grew significantly year-over-year this quarter, including same-clinic sales. Do you view this as a sign that the competitive environment has started to normalize?

Okay. I will answer the question. Overall, I think, yes, we do feel that the competitive environment of Japanese and global aesthetic market has eased to some extent, compared to where it was previously. And our domestic clinical operations are performing well. We are expanding our customer base while maintaining a consistently high repeat customer ratio, and the average customer ticket -- average revenue per customer has also begun to recover. So our priority is to further strengthen customer trust and capture the underlying growth of the market. So -- and on top of that, we are also seeing a meaningful momentum in non-aesthetic categories such as AGA and dentistry. So we see these adjacent area as promising growth domains. And we intend to invest in scaling them in parallel.

So next question is regarding the fee structure. With a Q1 2026 Q-on-Q plus 9% revenue growth is that impact of 2025 pricing market adjustment now over?

Yes. Basically, I think, yes. We basically view our fiscal year 2025 last year as a transition year that put the company on a healthier footing. So we think reported revenue decline due to restructuring and the fee structure changes. But as you can see now, our profitability improved and the overall earnings space became more normalized. In that sense, yes, you're right. We think the impact of fee structure is kind of now over.

Again about the financial situation. Excluding the impact of the fee structure revision implemented last year, your top line in first quarter is growing. Looking ahead, do you see this positive trend continuing?

Yes. As you pointed out, our Q-on-Q revenue increase is very promising. So, as we explained our clinic operation, underlying clinic operations are performing well. And as the underlying activity accelerate our top line naturally, the accelerate as a function that structural linkage there will, of course, be some kind of variability or seasonal changes. But on the smooth basis, we are confident that in the overall direction from here. So we expect the underlying growth profile of the business to become more visible as the year progresses and the Y-o-Y impact of the last year's fee structure division rolls off.

So next question is regarding the gross margin. Gross margin was lower than expected in first quarter 2026 offset by lower SG&A. What level of gross margin and operating margin do you expect throughout the rest of the 2026, thereafter?

Basically, we are considering our margin will be stable and will be improved over time. As we explained in our last presentation, we are now promoting the AI initiative to deliver two benefits. So one is, top-line growth by improving our customer experiences. And also second one is enabling us to build a learner, more efficient organization. So on the cost side. So there will be some -- so over the medium to long-term, our intention to improve our profitability. So in that sense, over the year, we expect our margin will be stable and improved.

So next question is regarding the cash position. You have a substantial cash position on the balance sheet. How are you thinking about the deployment of the cash going forward?

Yes. Thanks for a very good question. Obviously, as we continuously reiterated this point, growth investment is a top priority. So we will continue to invest with discipline to build a more competitive group of businesses because based on the number of clinics that we are supporting is the kind of KPI for our revenue and profit. So, now we are very fortunate to be seeing a steady inflow of potential very great M&A opportunities because of intense competition in -- especially in the Japanese aesthetic medical market. So at this moment, we cannot disclose anything completely, but I think the benefit from the inorganic M&A opportunities over this year and the next year will be very promising, I think.

Let me get back to clinic situation again. Have you seen any measurable improvement in franchisee profitability retention or unit economics following the fee structure change?

Sorry, can you say that again?

Have you seen any measurable improvement in franchisee profitability or unit economics following the fee structure changes?

Basically, regardless of the fee structure changes, our clinic performance and our clinic's profitability remains very good. And the purpose of the fee structure was to enable our clinic groups to open more new types of clinics. So in that sense, as you can see, number of clinics are growing steadily over this quarter again. So I think the effect of the fee structure -- made a good effect on our clinic level profitability.

Next question is certainly a long question. Talk-bridge is now deployed across all Shonan beauty clinic locations. With an in-house interpretation center cascading toward 800 plus sessions per month. What inbound KPI should investor track? Is it volume conversation from the increased inquiry pipeline, per visit spending, differential [indiscernible] as domestic -- and how is the higher spend in that mix flowing to review visit. The first quarter of the partnership complete, can you provide the general operational update on the progression more importantly what the potential for the bilateral cross-border deployment, bringing OrangeTwist locations into Asia to the SBC's network and deploying SBC's plants or an operating model in the U.S. through OrangeTwist's foot-print and what's the time line for biological expansion?

Okay. So let me put this way. As for the first part of the question regarding the basically inbound customers for SBC Medical Group. Actually, we don't have a concrete number here today. So I think we will include the information and the intelligence of the inbound customers data next time. But from the revenue perspective, the ratio of the inbound tourist revenue is still very relatively small, but the growth rate is very big now. So we see a very great growth opportunities. So we are implementing a variety of measures. For example, we had kind of conference that invite one of our doctor to China and to have a Chinese customer in the Mainland China to explain our expertise in the treatment. That sort of initiatives are working well. And so with that, the number of inbound customers are increasing. And as for the second part of the question regarding our partnership. Yes, especially for the U.S. strategy, yes, as I pointed out, our U.S. strategy is basically centered on building through our collaboration with OrangeTwist rather than pursuing large-scale stand-alone expansion from their end. So yes, as you mentioned, our initiative include a collaboration, variety of collaborations and that consists three parts basically. First is marketing support. We see meaningful room to improve customer acquisition, retention and overall brand execution at OrangeTwist. So part of our focus is helping the brand awareness and acquiring new customers. And the second one is the AI implementation support. We see they had a very, how I can say, potential to improve the cost by utilizing the AI. And the third one is our longevity clinics proof-of-concept. So now we are planning and considering -- implementing longevity treatment in selected location of OrangeTwist med spa. And yes, as I mentioned, our collaboration idea includes the OrangeTwist how can i say, exporting OrangeTwist med spa group to Asia globally. But at this moment, we don't have a concrete time line. So because as I explained, now we are focusing on three cooperation?items now. So in the long term, we think we are considering importing the OrangeTwist brand to Asian countries or even Japan maybe.

Next one is also the global business news. Can you talk about U.S. M&A valuations and whether you see near-term opportunity for strategic transactions?

Yes, I think as you know, compared with the valuation?in the Japanese M&A market. The valuation?in the U.S. is relatively expensive. So for the EBITDA multiple perspective basically over 5x and sometimes over 10x. But basically, we think it's reasonable to acquire the med spa Group potentially, I mean, with EBITDA margins over from the 5x to 8x.

Next one is also international businesses. Overseas remains 1% of clinic revenue with a Phase II and roadmap targeting the U.S. and Southeast Asia for 2027 to 2028, beyond OrangeTwist, which Southeast Asian markets are highly priority? What's a preferred mode of entry, direct to operation, joint venture, franchise, medical tourism partnership, and when should investors expect overseas to become a more meaningful contributor to consolidated revenue?

Thank you for very good question. Actually, we think our kind of partnership with the OrangeTwist could be the model as how to expanding our business into the global, including Southeast Asia. So partnership model could be the one of the prioritized approach to dig into the Southeast Asia because especially aesthetic medical market, it's a very domestic and affected by each culture in the customers preferring. So that's why we need a professional and experts who knows much about the local market. So in that sense, partnership model will be better rather than the large-scale stand-alone expansion. Yes, that's why we are currently concerning. But as you know, depending on the inorganic M&A opportunities. We are very open to, yes, direct [M&A] and helping the direct medical clinics group in South Asia. So it depends yes, on this situation.

Thank you very much. So could you discuss trends in average spend per customer and whether pricing optimization continue to support ARPU and growth?

Yes. As we explained in the last couple of earnings releases, we saw the very intense competition and the Japanese aesthetic medical market. So that's why we are very strategically changed our price of our treatment by treatment basis, but as we explained, we think it hit the bottom and we are now kind of enjoying the -- benefit of survivors. And as our largest aesthetic medical clinic group, we kind of power to control the overall price of the treatment now. So of course, we needed to care about the customer satisfaction. That's our first priority, but we increased the price of some treatment gradually, and then even with that, as you can see, the number of customers increasing. So that's why we are successfully improving our abilities -- revenue per visit and profitability.

So can you elaborate on how the medical branding strategy is evolving and whether the new brands attracting a different demographic or price point segments?

Yes. We are implementing a multi branding strategy. And for example, we opened a new skin clinic that are focusing on more customers with high literacy of aesthetic medical and especially those who want to go to Korea to take the up-to-date treatment. So with that, we introduced up-to-date medical device, including the laser devices. So yes, with the resource effort we are successfully attracting customers with high literacy of the aesthetic medical. Just so the initiatives are currently working, not only the new skin clinic, we acquired medical clinic groups called JUN Clinic, that focuses on more -- not known, how I can say, with low medical aesthetic literacy actually, yes. On the other hand, on the contrary to the new skin clinic. So that's the multi-brand strategy works very well to capture the diverse customer needs, as I explained.

Thank you very much. So this is a profitability questions. As you continue to -- as you continue to roll out AI across the organization? Is it fair to assume that the EBITDA margin is on the upward trajectory come from here?

Yes. Short answer is, yes. Because, yes, due to the nature of aesthetic medical clinics group, our business is basically kind of labor-intensive business model until so far. But we believe AI has meaningful potential to improve our productivity and reduce operating cost over time. So yes, more concretely, our priority is to start with areas where implementation is relatively simple, and the return can be verified quickly. It's a kind of quick win project. For example, we see internal manual research as a short term quick win because actually, we have wide variety of treatment to capture customer needs. So in that sense, we had a lot of internal manuals. But from the counsel or non perspective, it's difficult to find appropriate manual by the hand. So in the sense, we can utilize AI. And more broadly, we have already taken a disciplined approach to hiring at headquarters, including the principle based both on some meter carry hiring. So with that, from the cost reduction prospective, we also believe there is substantial room to streamline operation, through automation and work through redesign over time. So yes, in short answer yes, we can reduce our cost and improve much.

Thank you very much. So next question is regarding -- the cash sorry, share buyback. You established a share repurchase program at the end of last year. Could you share your thinking on how you plan to utilize this program going forward?

Okay. So I think we can completely tell what we're going to do in the near future. But from our point of view, we believe the situation has drastically improved compared to where we were previously, I mean, when we established a share repurchase program, as I explained. And as you can see, our revenue increase, I mean underlying revenue increased and our profitability remains improving. So from our point of view that our priority is to improve our liquidity. So in that sense, share repurchase program by its nature reduces the float. That's where some investors pointed out to us, and we duly, I understand that point. So we do not view it -- I mean, the share purchase?program as a high priority tool at this stage. Instead we plan to continue working on liquidity through expanding analyst coverage, building our institutional investor base and pursuing proactive IR engagement and so on, yes. So we do everything to improve our liquidity and increasing our float. That's what we are considering now.

Thank you very much. So next question is also the capital strategy. Do you envision additional founder share sales in 2026? If so, what size are signing?

Yes actually selling the founders portion is decision should be made by our founder, basically. That's a second base concept. And -- but even with that, yes, as I just explained, increasing our liquidity and the number of floating shares is our top priority. In that sense, we are very open to any idea to contribute to increase our floating shares and our liquidity. Yes, I think that's what we can say now.

Thank you very much. So yes, are there any further questions? If not, we conclude our Q&A session.

Yes. Thanks for joining us and thanks for giving the very good questions. Again, we are very committed to improve our liquidity in the floating shares and improving our profitability. So as you can see, the very big improvement on Q-on-Q basis now. So we look forward to discussing with you again in the near future. Thank you very much.

So this concludes today's briefing. Thank you again, and have a wonderful day. Thank you very much.

Goodbye.