SkinHealth Systems Inc. (SKIN) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you for joining us. I'm Olivia Tong, Raymond James' Consumer Analyst covering Beauty, Personal Care and Household Products. Thank you all for being part of our consumer conference. Presenting next for us is The Beauty Health Company, which has a very opposed ticker S-K-I-N, SKIN. They're a maker and marketer of HydraFacial, which in 30 minutes, cleanses, extracts and hydrates your face. Three steps, 30 minutes to the best skin of your life. What a great tagline. The business is well balanced between systems, which accounted for 53% of company sales in first half '21 and 47% in consumables, mimicking a razor-razorblade model. First half '21 sales were up 48% versus the 2019 base, $214 million. We're pleased to have with us Clint Carnell, CEO; and CFO, Liyuan Woo. Clint has been with -- the CEO for close to 5 years, and Liyuan is celebrating her first year with the company. Clint and Liyuan are going to provide an overview of the company first, and then we'll finish with Q&A. If you have any questions, please feel free to submit them and we'll ask on your behalf. Thank you, Clint and Liyuan, for joining us, and I'll turn it over to you.

Thanks, Olivia, and thanks to the Raymond James team for having us. Before we get started, we do have a unique event happening. We're right in Long Beach, California, and it just happens that President Biden is flying out in Air Force One about 300 yards from here. So we have choppers and police and they shut down the highway, so you may get a glimpse of that from our windows. My name is Clint Carnell, leading the company, as Olivia mentioned, for the last 5 years. My background, early days with Johnson & Johnson/Chiron, Bausch and Lomb, and really have become known as the consumer healthcare crossover guy. Really excited to share the story, the HydraFacial brand and Beauty Health company. Before that, my awesome CFO next to me, Liyuan Woo.

Hi, everyone. Liyuan Woo. As Olivia mentioned, I actually joined at the end of September of last year, coming from the consumer side, worked for some hypergrowth companies and turnaround companies before I joined Clint.

Great. Our ticker symbol is SKIN, S-K-I-N. We joke that investors got to have skin in the game and have a wonderful-looking skin as they participate with our journey. So we are The Beauty Health Company. Necessary disclosures are up front here, make sure this is clicking forward. Awesome technology. One more click, please. There we are. So a little bit of our background. We covered this, and I want to talk a little bit about what makes The Beauty Health Company kind of special and what we've learned over the last 5 years. When we acquired the company 5 years ago, we were private equity owned. And candidly, it was clearly a medical aesthetics company. It was a B2B. We had a razor-razorblade, very nice CAGR, high growth, high profitability. What's unfolded over the last several years is quite amazing, and there's 3 things that really characterize this company as special. First, if you think about the traditional health care companies, you're all about the cohort analysis. How many doctors? How many can you sell to? Where are you in the Roger's Adoption Curve. And that usually means there's tens of thousands of people you can sell to. In this case, it would be plastics and derms. And candidly, that's what I thought when we acquired the company. What we've done over the last 5 years has turned this upside down. And what we do is we meet the consumer, where they live, work and play, because we've learned that skin health crosses generations, crosses genders and is much more inclusive than I had previously ever imagined. And if you think about it, my daughter and son are 17 and 20, they both spend a lot of time at Sephora, coincidentally, one of our largest accounts. They probably won't be at the day spa for another 10 years, maybe at the med spa for 15 years, maybe the plastic surgeon ever. So why would we exclude them from the wonderful product that we have as opposed to meeting them at Sephora? And that's represented by Sephora being one of our largest accounts. We also have partnerships with Nordstrom's and Ulta, recently announced, as well as Clinique, which all those should be global partnerships, plastic surgeons on the most multiple devices. And Caesars Palace, the casino there and the spa, our single largest customer of 17 HydraFacials. That's one of the things that's really unique as we meet the consumer where they are and we stay with them along the journey. Secondly, you may ask, that could be complicated. How do you support a casino spa, plastic surgeons and the Sephora team? It's real simple. We found that as opposed to worrying about their business model, we train the person that's delivering the experience. And so the aesthetician is the common thread across all of those channels, and we have one sales force that completely takes care of them. We have a robust, what we call Golden Triangle, and that is marketing driving consumer awareness, sales, ensuring that we support those customers and then training centers all over the world to ensure that aesthetician is highly trained because when she delivers a great experience, our NPS score goes to the roof, so it's a really, really important part. And the third and final part, which may sound a little altruistic, is that we're an and company. If you think about HydraFacial, we straddle the beauty and the health care sectors in a way where most consumers are coming in for this type of treatment for the first time, commonly referred to as a gateway product. What that makes us do is we work with all the other companies in the space. What we do is make all of their products better. Skincare is confusion, we make it simple. As Olivia mentioned, 3 steps, 30 minutes, best skin of your life. If you think about it, we're just cleansing the canvas for whatever else that consumer may be interested in and what other provider may be potentially servicing them with. Now, why is that kind of unique? Because it seems intuitive, I'm sure, when I explain it that way. When you look at how the beauty health category, a category that we have claimed to have created, developed, it works a little like this. On the far right, the skin care companies, wonderful companies, the L'Oreals, all the LVMH brands, the Sephoras, Estee Lauders, Revlons, really, really good at consumer marketing, really great at packaging and providing a retail experience. However, there's very little clinical evidence or efficacy that these products work. So sometimes we refer it to as magic or lotions or potions in a bottle. If you look at the left side, skin correction, my Chairman, Brent Saunders, was the former CEO of Allergan, the makers of BOTOX. They created the medical aesthetics category and did a wonderful job at really messaging the consumers, "Hey, these are lifestyle choices. You don't have to look older, you can look younger than you -- as good as you feel on the inside." But it still was packaged kind of like a disease. Aging is something that's happening to you, you need to go to a doctor and get that fixed. And what happens over there is many of these are expensive. A lot of people don't want to get to a physician because it's intimidating. A lot of times it hurts, this isn't worth it. It's kept a lot of the demographic very small. Traditionally, white female, 45 years old, draw bell curve. HydraFacial is unique, in that we're the most approachable thing in skin correction. For a couple of hundred dollars, you feel good. It looks good. We show you the gunky, and it's really approachable for all skin types. And because it doesn't hurt, more men come in. So very approachable to medical aesthetics and often the first gateway in that channel. If you look on the other side, we work. And so our partner, like Sephora, were into the skin studios because for $75 or for a purchase where they provide a complementary, you can have this wonderful express treatment. It looks good, you feel good and we show you the gunky, and it's really magical because it's -- really makes a sticky consumer for our partners there. And our partners are trying to retail-proof or experience-proof their businesses from the Amazons of the world, and this keeps their customers coming in for that HydraFacial experience. So what does the treatment actually do? It's a razor-razorblade model business. Each treatment is approximately $200, and it consists of a system, think about it almost like a Keurig, designed to predictably and flawlessly draw the perfect amount of skin care for you, regardless of the user. And then you have consumables, which, based upon your aesthetician's recommendations and your skin care needs, you can customize both the tips, the loose solutions and the serums. We like to call this democratizing and personalizing skin care. We make it easy: We cleanse, we extract, and we hydrate in 3 steps, that's the 3 most important things you can do. But everybody, all of us on this Zoom call, have different skin care needs, and you recognize that just intuitively as a consumer, so we ensure that your aesthetician or physician can personalize this and put you on the regimen that gives you the best healthy-looking skin. We're really fortunate to be participating in 3 fantastic areas. I think one question that comes up is what did the pandemic do to your business? First, macro tailwinds around general skin health were really strong going into the pandemic. We all got flattened and it startled humanity. Coming out of this, consumers, we believe, are investing in 2 areas: one, saving themselves time; and two, invest in themselves. So whether it's a zoom boom or the [ tech neck ] or all these terms have been thrown around by the media, HydraFacial just sits squarely in the sweet spot. If we're looking at ourselves every day, you noticed all of your flaws, and HydraFacial can immediately help you with that, put you on a skincare regimen, give you clean, healthy skin. Clean healthy skin is beautiful skin, and beautiful skin makes you feel confident. All 3 of these categories are growing because they're all participating in providing those services to consumers, and it's a global phenomenon pre- and post pandemic. So where is the consumer experience, as you hear it everywhere. For goodness sakes, I heard [ Visa ] talking about themselves being a community the other day. We call it the HydraFacial nation. It's something that deeply connects The Beauty Health community in a meaningful way. Our providers, who are our business partners, the consumers seeking out good skin care and our employees. There is growth in disposable income, and people are investing in themselves as opposed to goods and services. Multichannel growth, and we're in the sweet spot of influencers. For whatever reason, when we cleanse, extract and hydrate, the final stage is what we call the gunky. And we actually pull the gunky out, show it to the consumers. It's all the crud we pulled out of you, it's disgusting. But for whatever reason, it's really, really seductive on social media. So you'll see TikTok, Instagram and Facebook posts, and 80% of our postings actually come from our providers and consumers, working on behalf of the HydraFacial nation. It's really quite crazy for a guy like me just trying to keep up with this. It's a really nice product in that it embraces a lot of the current trends with consumers. It's good for people of skin color. It doesn't hurt some more men are coming. And we can actually have grandson, dad and grandpa as well as everyone else in life get a HydraFacial, one treatment. So it's kind of a next-gen beauty play, and we're just very fortunate. The product has been around since '05. We actually created the first microdermabrasion in '01, but overnight success takes roughly 10 years. We feel like we're really early and very fortunate to be here right at this confluence of these consumer behaviors. When you get a HydraFacial, 95% of our consumers get something else, that's the end concept. This inclusivity shows across generations, across -- across gender, and it's just a fabulous product for everyone. And then we're participating in these 3 really high-growth areas: The spa market, the aesthetics market overall and experiential beauty retail. This is the HydraFacial Nation. At our core, we've got a great product. Our providers made good profits from it. The consumers are really happy with the 100% Worth It rating and they tell all their friends. So this is really the flywheel of influence we have in the business that's contributed to this basically 50% CAGR top line, 50% CAGR bottom line, a really nice balanced portfolio and a nice EBITDA margin. So we have a master plan. We have been executing upon this the last 5 years and more excited about the next 5 years as the CEO. And it's really simple and straightforward. I'd like to refer to this as really high on execution, really low on complexity because we've been doing it. Now, we're just supercharged as a public company. So we're going to continue to sell a lot of products. There's a lot of people in this planet with skin. We need more placement systems closer to them so we can deliver beautiful, healthy skin. We're very profitable, so we use that money to invest in our providers. We can do all the fancy marketing and build all of the systems and serums we can. If the aesthetician is not passionate about our brand, isn't well-trained clinically, she's not confident, our NPS goes down. So we need to ensure that the aesthetician is well trained. What she has asked us to do, primarily she, is, "Hey, now that I have all these consumers or these patients, how can you help me stay in contact with them? Can you build a direct relationship and bring more consumers in my practice, because I'm an aesthetician, not a professional marketeer." So we're actually building a relationship directly to the consumer. We like to say that we used to be B2B, and now we're B2C and back to B, because we're investing in 3 areas: build consumer awareness, develop new products, and ensure, we have the global infrastructure to support that enormous growth. The way we're going to do that is by leveraging our technology to connect with that consumer where they live, work and play. And if we do that, skin health is an enormous category, and we believe we can be the company of most influence, not necessarily trying to financially engineer a bigger company. Our NPS score, as we mentioned, is very strong. It's best in class. Most medical device treatments actually have a negative. So here, we mixed in some consumer as well as some medical aesthetic treatments. BOTOX, virtually 100% awareness in the planet, really good NPS score. HydraFacial's actually flips that, so now we just need to raise consumer awareness. We have a next-generation professional device coming in the first half of next year. Super excited about it. The one on the left is today, it's been a workhorse. We have over 18,000 providers. It's incredibly robust, but it's very analog. And I like to say that when the next-generation system shows up next year, it's going to look like a '75 Ford car next to a Tesla. It will be Wi-Fi connected, we'll have RFID, has incredible capabilities to potentially have sharing of data, also booking of treatments, even integrated the supply chains. We're basically just setting a platform no different than what products like Netflix, [ Peloton ], the community little that was built. It really is taking this community, supercharging the relationship and then ensuring the technology is there to support you, like all those other areas that consumers have become used to in their world. It is loved around the world. We're in 87 countries. We're in 15 as direct markets. The business has been a nice global balanced portfolio, channel balanced. No concentration anywhere, but getting close to that consumer and direct markets is a super important success of our company. We're building a competitive moat, and it's very straightforward. We have to have differentiated product offerings. We've told our customer base we'll have new delivery systems every 3 to 4 years, that will have new serums quarterly, and then we'll continue to innovate our business model, like our home device that will be coming in Q4 directly engaged with consumers and drive them back into the professional device. We do consumer engagements. We like to say that we can find you in the virtual world. If you shop at Whole Foods for your food, if you have a Peloton, go to Equinox, like red wine, go to yoga occasionally, do your hair and nails, if you haven't gotten HydraFacial, you just haven't heard about us yet. So we find you out there, we drive you towards one of our activations, like our Dubai Experience Center, London Experience Center, GLOWvolution tour because once you get a HydraFacial, you tend to get stick. 2/3 of consumer stick, and 1/3 of those become super consumers, like 6 to 8 times a year, and then you tell all your friends. And then we drive you back in the virtual marketplace to share about your experience, which brings more consumers in the funnel. Very simple. Our aestheticians are our fearless warriors. They're like part of our employee base, it's incredible. I've got a group downstairs. I gave the opening talk to them, and they're amazing. The more we invest in them, the more they get back to us through their purchases, their loyalty and also their ability to market our brand. And then finally, our customers have to make money. So everything we do ensures that we have a profitable portfolio and the economic cycle works for the consumer, our providers and for the HydraFacial company, so we just got to keep these delivery systems going. Our first, second, third challenge is talent, talent, talent, not anywhere near top of the list is TAM. We are just early innings domestically, I'm not sure we made it out of the locker room when it comes to our international business. I have an experienced executive team. I've been running the company the last 5 years. Really excited to take this company public. I think it allows us to supercharge the brand and to tell our story. And what you see here is a really nice reloading of the executive team with the combination of medical aesthetic background because we are a medical device, consumer, beauty brand background and increasingly technology, because we really are a category creator. I often joke that I need executives who are MMA fighters, super pleased about the addition of these executives as well as the one sitting here on my right, who is an incredible partner as we chart this journey. So there's a couple of strategic investments. If it is not on this list, we're doing it only because we have to for regulatory reasons, continuous, relentless innovation. We have a next-generation device coming next year, Wi-Fi-enabled RFID. You can go out and download our beta app right now at HydraFacial Nation on the app store. It's a skin analyzer, gets you to the community that's out there in beta. And we have a handheld device that we'll be delivering with our partners here in Q4 on a limited basis. All that's designed to do is to deliver clean, healthy skin where you live, work and play, bring you into the community and co-create this company with our users and their consumers because skin is something. Everybody has skin in the game, it's incredibly important, and so we feel like we're in this together with our community. We need to drive consumer demand. Historically, we spent 6% of revenues on marketing. We're doubling that as part of our go-to-market strategy. And we're really, really surgical in our test and learn when we look at CAC to LTV on finding those consumers. We need to expand the global footprint. I believe that our international business will be as large as our domestic in a very short period of time, and it's primarily been a sales and marketing training function. So we've hired some amazing executives, Indra Pamamull for APAC, Stephan Baker for EMEA, and we're establishing headquarters. We're doing network optimization. We're putting supply chain closer. We're doing things to ensure that we can handle that global scale. And then finally, M&A, my Chairman, Brent Saunders, is a prolific deal maker. And whether it was when we merged the SPAC to go public or this past week when we raised $750 million in a convertible note, we feel really, really strong that M&A needs to be on our core capabilities, primarily because we built this amazing community, we have a product that makes everything better, so we want to look to buy the future and drive those products and services back into that HydraFacial Nation to ensure The Beauty Health Company can continue to lead category management. So I'll leave you with this. We are a category creator. We have tremendous loyalty. It's a platform opportunity. There's multiple levers of growth. The economic profile for everybody in the ecosystem works. We have nice IP with a strong trademark, and we've got our management team that's really excited to share the story and to continue to grow this and create shareholder value. With that, Olivia, I think I'll turn it back to you. I made it 1 minute under, and Air Force One took off, and we'll unshare the screen here. So I'll turn it back over to you. Thanks so much.

There you go. There you go. Thank you for all the detail, really appreciate it. Fantastic presentation. Why don't I -- before I start, if anybody has any questions, do feel free to message me via chat or e-mail, whatever works, and we'll be sure to work those in. I'd love to start with just the growth opportunity in front of you because it has been really impressive coming out of the pandemic. And so as you think about further expansion, there seems to be no shortage of initiatives. So how do you prioritize them, whether it's channels, whether it's product, geography? And perhaps can you kind of compare and contrast your expectations on B2B versus B2C?

Sure. That's a great question. I think the first initiative is really global expansion. We entered China 3 years ago, but we are not in whole China, we're only in Shanghai. It's our fastest-growing highest ASP. We're in Japan, but really only in Tokyo. We have not yet entered Korea, one of the top markets in the world. We haven't entered Brazil, one of the top markets in the world. And we just acquired 4 of our distributors and low-hanging fruit to professionalize those businesses. So when you look at the business we acquired 5 years ago, there was no business in Southern Europe, and there's no business in Northern Asia, and that was a real gift. And since then, we really supercharged that international business. So global expansion, incredibly important. As we put more systems out there, raising consumer awareness and going directly to those markets is important because consumers fill those systems up and when they're at capacity, our customers buy another second system or third or fourth. So it's really quite straightforward. Global expansion to the B, raise consumer awareness on the C, and drive them into those new facilities. And we do it all with the same sales force, same pricing, same brand global.

Great. Great. You mentioned acquisitions as something that you're interested in, being acquisitive. Obviously, it did a recent offering with the convertible debt deal. So first thing, how did you decide on this structure? And then more importantly, just talk about your plans for the use of proceeds, your M&A criteria and just your overall view on the state of the M&A environment right now?

Can you take the first -- second [indiscernible]

Yes, absolutely. So Olivia, we know M&A has always been a strong lever for us. And obviously, we'll be actively discussing at our Investors Day. We actually got a lot of feedback from them, right? We put it out there to say there's dry powder out there, it's much easier once we build the dry powder and war chest and to execute our M&A strategy. So the feedback we've got holistically, obviously, dilution is part of the consideration. So convert being so strong as an offering, and it's almost a perfect period for us to enter into the market. So really, that thoughtfulness is what's driven this transaction.

That makes sense.

Yes, we look to our investors, they sort of pointed this that way. You never know until you hit go, but we're really, really pleased with the way last week went. And we picked a lot of new great investors in the equity market and the convert seemed to draft together because I think it allow us to tell our story in yet another venue and attract great, great leadership investors. In terms of M&A, we're not interested in financially engineering the company. We have a high NPS, we have a nice P&L, and we have a wonderful provider base. So I think we'd look for acquisitions that can -- have a high NPS score, like the HydraFacial treatment itself, that can leverage our core capabilities for call point and then be accretive to our P&L. Ultimately, I want to buy the future. So brands that I believe can be commercially successful, but need a lift, that's where our big platform comes into play. Or brands that give us better understanding of consumer behaviors and co-creating to get back into that community, the right products and services for -- for the HydraFacial Nation. Those are really incredibly important. So hopefully, that gives you an idea of the types of assets we'll be looking at.

Absolutely. What's your view on the state of the M&A environment right now and what you're seeing out there?

Well, everybody always hates everybody else's multiples and loves their own, right? So I think it's always funny. It's like selling real estate in Southern California. We feel really, really good about the HydraFacial core asset, our TAM, our growth profile. This is clearly next 18, 24 months, accelerating that story, and we're pleased to see the analysts and the investors pick up on it. We will be thoughtful about what types of assets we pick up because of where the market is right now. But I think what we can add is there's very few things that can supercharge us, and there's a lot of products and services that because of our relationship with aestheticians, the broad user base in the global footprint, we can supercharge. So I would hope that we can do well on the acquisitions market. And then investors will be rewarded in trusting the management's ability to acquire the right value, to execute and to supercharge those products and services that we choose to acquire.

Sounds great. One of the things that we've been asking several companies, a little bit less impactful for you, hopefully, but supply chain and constraints there. Obviously, an issue globally. How is that impacting you? And whether it's in cost inflation, whether it's getting product where it needs to be, can you just talk a little bit about that?

Yes. No, absolutely. We always say it's always going to be a [ yellow ], right? As a management team, supply chain is definitely top of mind. I think there's a couple of things that we did actually quite well. Historically, because it's such a hyper-growth situation, I think we've lived through the pain and suffering from being a growth company, how do we really position supply chain. So the great news is we actually set up a new facility December of 2019. So we're actually manufacturing -- live manufacturing our own product on one side of the equation. So there's a couple of things that were really have been doing. One, diversify our vendor base, especially on the consumables side of the equation. Two, network optimization, to Clint's point, making sure we really run the program and making sure we have factories and locations closer to our customer base. If I just sit back and think about the current state, obviously, with the cost of logistics and things in that nature will definitely impact us as well. But we've always had approach because we're a hyper-growth company, we put less emphasis on [indiscernible] for inventory, working capital management to put much more emphasis to making sure we have ample product for us to sell and to fuel growth.

That's great. That's great. You talked a little bit about doubling your marketing, 6% of sales and doubling it from there. So can you just talk a little bit about your margins, right? They've expanded quite nicely, particularly on the gross margin line, which I assume is helping fund some of that desire for brand support expansion. So could you talk a little bit about the key buckets driving this and your view on the sustainability of that margin expansion?

I'll -- I'm going to take high level and hand it to Liyuan to get specific. One is we've been able to take up price on our delivery systems over a 5-year period by delivering more value and increase in the brand's perception amongst our customers. We've been able to increase utilization as well as take price on our consumables, and that's by investing back in our providers, and those have been well received. So I think we have price opportunities on both of those. We have not been focused on a lot of the improvements on inventory turns, value engineering, low-hanging fruit, network optimization. And yet, we have a really nice balanced gross margin of roughly 75%. So I think we have opportunities, but it has not been the focus because we've just been focused on delivering value, creating more consumer awareness. I think there's opportunities to take out some of the -- some of the costs that as we mature, we can benefit from. If you want to speak of other specifics?

Yes. No, from an EBITDA margin's point of view, Olivia, obviously, being a private equity run business, you've seen, historically, we've been generating 25% EBITDA margin. And to Clint's point, there's a lot of test learned, there's a lot of showcase of ROI in each bucket. So as an example, we're holistically increasing investment in R&D, right, because if you think about the 3 initiatives, number one, innovation. So historically, we spend about 2% with double R&D. And when it comes to marketing, historically 6%, we're doubling that because we can really measure the return on investment there. Last but not least, in terms of international extension, it is about hiring the right people, building in the system. So we're investing heavily for this year and next year just to make sure we have that infrastructure build for future growth. So this is the reason why we actually raised our guidance, but we've been saying we reserve the right to invest back in the business. So right now, we're generating about 14% EBITDA compared to historical 25%.

Got it. Got it. And as you look at expanding within the consumer area, direct-to-consumer area with Sephora, with other retailers, like that, you do start to enter a new competitive set to some extent. So as you think about competing against a more traditional player, particularly within the device area, how is your strategy changing?

Yes. I think we're just so fortunate to have great partners here. I mean, the senior support team's next door, tomorrow, we'll have lunch. So we're working with them on positioning, pricing, supply chain, and we're just really fortunate to have -- I mean, I've been involved in that kind of crossover before and medical device speaks one and the consumers speaks the other. These have been our friends and partners for the last 4 years, and so our go-to-market strategy is thoughtful and that we're working with them. So we're not going to go out there and have to build the full consumer-facing muscle. Nordstrom's and Ulta are both putting in the professional HydraFacial, that's where we can give them some experience. If you think about it, it's a beautiful marriage with these partners because they give us a much larger microphone, seeing us alongside their world-class brands, and we give them an experience that keeps our consumers coming in. So we're both working. It's amazing. These partnerships, you can't tell who's on which team when you come into the room because we're all just focused on delivering a better consumer experience with something that really works. So I think we've got some great partners leading that way for us. But we're also going build this in Q4 in time for the holidays because we recognize we're new to this, so we don't want it to be a blockbuster sellout and then disappoint your back orders or quality of product, any of the things that could go wrong during the launch. So we're really going to slow walk this to ensure we've got it right.

That sounds fantastic. What a great way to end. Clint, Liyuan, thank you so much for your time, really appreciate it. Fascinating to learn more about it. And I hope you have a great day. Thank you all for joining us. Really appreciate it. Take care.

Thanks, Olivia. Appreciate it.

Thank you. Bye, Olivia.

Bye.