Solesence, Inc. (SLSN) Earnings Call Transcript & Summary

Thanks, operator. And thanks to every one of our investors, business partners, and teammates for being on the call today. During the third quarter, Solésence moved faster on carrying out our Transform and Transcend strategy, and we hit a notable milestone tied to our first and foundational pillar. In Q3, we finished the main investment and implementation stage of our lean management initiatives, and that helped drive the strong financial results we delivered. On today's call, we'll talk about how the beauty and wellness industries keep converging, what that opportunity means for Solésence, and how we uniquely meet consumers' needs and boost our company's growth from this market evolution, both right now and going forward. Before that, we'll give more insight into our strong financial performance in Q3 and our guidance for the remainder of 2026. I'll now hand the call over to Laura.

Thanks, Kevin. For Q3 of 2026, Solésence brought in revenue of $20.2 million — the best third quarter we have ever posted — which is a 38% jump from $14.6 million in the third quarter of 2025. As Kevin noted, we finished the implementation stage of the first pillar of our Transform and Transcend strategy, which brought in lean management principles and produced better operating efficiency. We also benefited from a favorable product mix, thanks to growth among our strategic brand partners. Because of that, we've recorded better direct margins, better gross profit margins, and better free cash flow. Gross margin in the third quarter rose by 1,550 basis points, reaching 39.3%, versus 23.8% in Q3 of 2025, largely on the strength of gains in our overall equipment effectiveness, which we usually call OEE. Across every production line, OEE climbed from 40% at the close of the third quarter of 2025 to 55% at the close of the third quarter of 2026; that gain shows real progress in how we execute operationally and reinforces our guidance that 30% stays the floor for gross profit, with room to go higher as we close out 2026 and head into 2027. Solésence also posted record net income of $3.7 million in the third quarter, against a net loss of $1 million a year earlier. That marks the highest quarterly net income Solésence has ever delivered. As our new operational changes sink deeper into our culture, we anticipate continued margin expansion and greater gross profit as efficiency rises, manufacturing scales up, and operating costs fall as a share of revenue. Here are a few specific examples. Year to date, we sharply improved labor efficiency, with total direct labor costs declining by more than $2 million compared with 2025; we also cut indirect labor costs further by more than $400,000. These signal that performance is getting better; we think that even after these sizable gains, more chances to improve labor efficiency are still there, and they should lift our gross profit margins as we move into 2027. Now to our outlook: starting with shipped and on-hand orders, we expect to reach at least $65 million by year-end. We can say with confidence that we expect 2026 to mark a third straight year of record revenue growth and profit growth for our company. While we now expect full-year EBITDA margins to come in slightly under the double-digit target we communicated earlier, mainly because of weaker performance in the first half, we're encouraged by the substantial improvement in the third quarter. We expect that positive momentum to carry into the fourth quarter, with EBITDA margins staying well above first-half levels. Finally, I want to note that we've completed the restatement of our historical financial statements and filed all the related amendments. We've also put enhanced internal controls in place and are working through the required testing to confirm they operate effectively. We're glad to have finished the restatements, and we're still committed to making our financial reporting processes stronger. Now I'll hand things back over to Kevin.

Thank you, Laura. As we get ready to wrap up the first full year of our Transform and Transcend initiative, I want to spend a moment talking about how the new strategy is going; on earlier calls, we've discussed how this strategy came about out of necessity, as part of a broader evolution of our business. Although Transform and Transcend was only started within the last year, the work of elevating our operations actually began in 2022. From that point on, we've worked hard to evolve the business, deliberately growing our executive leadership and operational management teams, along with our infrastructure, as our manufacturing footprint went from under 80,000 sq ft to roughly 300,000 sq ft. Those decisions didn't just raise our capability and capacity; they also raised our fixed costs, pushing indirect COGS up at a rate similar to or somewhat above our revenue growth. Through Transform and Transcend, we have, figuratively speaking, crossed the chasm, and now those expenses will rise at a pace well below the growth rate of our top line. The improvement shows up clearly, with indirect costs year-to-date lower by a seven-figure amount versus last year. There's still meaningful opportunity to improve labor efficiency, production yields, and product mix, all areas Transform and Transcend will address, and we're pleased with where we stand here and excited about what's ahead. Going forward, we're enthusiastic about the shifts in our industry, which we think will help drive revenue and EBITDA growth for our company over time. More specifically, the boundary between beauty and wellness is blurring as consumers more and more see beauty as an essential piece of a holistic health routine. Because of that, consumers at every income level are increasingly directing their discretionary spend toward health and wellness rather than other categories, which we believe is driving a near-term and sustained expansion of our addressable market; this continuing merge of the two sectors creates a substantial opportunity to grow share of wallet for Solésence, a company whose entire purpose is making products that improve both the health and the look of skin. In effect, our company was created to take part in the very shift that is fueling market growth now and in the future. In a related development, the FDA this year approved bemotrizinol, or BEMT, a UV filter widely used in European and Asian beauty products. As the first new active over-the-counter sunscreen ingredient cleared in the U.S. in more than two decades, this new active has heightened consumer awareness and enthusiasm around UV protection. That enthusiasm is fueling brand-level investment in new daily use SPF products, including facial care, complexion products, and makeup; these categories sit at the very heart of the Solésence innovation engine, and they're where we've been recognized again and again as an industry leader. So because of that, we think BEMT gives Solésence a much bigger opportunity to widen the markets we can reach. Given the distinctive combination of proprietary actives plus SPF-boosting technologies that we own, our company enjoys flexibility no one else has when it comes to designing the innovative compositions and textures of tomorrow. Along those lines, we have already created concept formulas alongside BEMT, and we have shared these novel hybrid formulas selectively with key brand partners, combining BEMT with our Active Stress Defense technology suite as well as our other proprietary skin health technologies. We do not have an official release date, though consumers might start seeing these new hybrid products on the market in 2027. Along with our other innovative technologies, WHSPR, Chromalüm, their sister technologies, Miralüm and Teralüm, and naturally, our patented award-winning zinc oxide technology, Kleair, BEMT gives us more capability to serve the changing needs of beauty consumers while actively improving their overall skin health. With these strong market tailwinds, our growing formulation capabilities, and proactive work to broaden our international reach, we believe we are positioned exceptionally well to deliver sustainable long-term growth as we head into 2027. We believe this will produce increases in our gross margins, ultimately letting us reach greater than 20% EBITDA and drive a higher valuation by capturing the technology company premium we are built to achieve. With that, we will now open the call to questions.

Hey there. Appreciate you taking our questions, and congratulations on the quarter; we're new to this story, but our first question concerns the guidance. Perhaps I didn't catch it properly. Could you say again what the guidance is and how it stacks up against the previous quarter, please, regarding margin and top line? Thanks.

Hi, Sergio. Thanks for the question, and thank you for joining us today. I believe what you were asking about was essentially our guidance for the year. Laura had shared that earlier; the guidance remains the same as what we provided before; on an annual basis, we expect, as we stated, a record performance, the third consecutive record performance, in both revenue and profitability. So that's what we're guiding to at this point. We aren't guiding to an EBITDA greater than or a double-digit EBITDA at this point, but we are guiding to record revenue and profitability.

Okay, that's useful. Looking at this quarter, which looks really strong, why keep the guidance the same? Is that because you figure the next quarter will come in below expectations, or is it simply being conservative?

Sergio, just so I'm clear, what you're asking — it sounds like the question, or at least the one we'll address for you, is why we didn't revise our guidance. We've aimed to stay as consistent and rather conservative as possible with the guidance we give. We'd be glad to discuss the remainder of the year with you on our fourth quarter call. Given how our business works, we really don't want to provide guidance on quarter-over-quarter performance, since we remain a growing business in a market that's changing quickly. Certain reorders and new launches and similar items are occurring at different points in the year than they did previously. That's the situation we're in at the moment.

To say it again, our full-year gross profit guidance still has a 30% floor. That guidance is unchanged. It is the EBITDA guidance that we, we are not guiding toward double-digit growth for this year anymore. We believe it will come in somewhat below that.

Thanks. It's clear that you're at last beginning to find your pace and your gears, and to head in the right direction. I'm aware you've invested a huge amount of effort in the transition into the new manufacturing, in boosting manufacturing efficiency, and in carrying on with the expansion of your product offerings. Could you give us a sense of the number of companies you're working with and how many SKUs exist out there right now?

Hello, Jim. Thanks once more, as ever, for your support. Yes, it has been something of a journey across the last year, and we still have some distance to cover; we'll celebrate for a couple of minutes here, and then we'll get back to work. When it comes to the number of brands, as we've guided, I believe, in the past, we have more than 60 brand partners, give or take. That shifts from year to year. Some of our larger brand partners in particular have kept growing. Yes, we have somewhat more than 60 brand partners. By my last count, we were above 300 SKUs. I don't remember the exact figure in terms of product SKUs, but it's a fairly substantial count of SKUs that are out there at this time.

Yes, once more, I wanted to say congratulations on the progress you've made, and also to note that you're finding ways to capitalize on the BEMT approvals and to see how your products complement that shift in helping people. I truly appreciate all the work you're doing.

Well, thank you, Jim. Yes, we're excited about the changes happening in the market. BEMT is one of those changes, and we certainly feel we're uniquely positioned to capitalize on it with the suite of technologies we have that we can wrap around that sunscreen active to really boost its performance and bring some beautiful textures to the market that consumers are looking for. So, thank you very much.