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

Good morning, everyone. Thank you for joining us. As part of ICR, I'm Olivia Tong, beauty and HPC analyst for Raymond James. I'm pleased to be chatting today with The Beauty Health Company, ticker SKIN, S-K-I-N and CFO, Liyuan Woo. Liyuan joined Beauty Health in September 2020, and we're very excited to see you today. Thanks, Liyuan, for joining us.

Hi, Olivia.

I think one thing I would highlight is, The Beauty Health Company did put together a presentation. It's on their website. And if you want to have a look at that, that will get you a little bit more familiar with the company.

But maybe can we start broad before we dig in, as you're still relatively new to the public markets. Can you just give a quick overview of SKIN's focus? What exactly is a HydraFacial? And what's the opportunity in front of you from here?

Yes. Absolutely, Olivia. Good morning, everybody. So, Beauty Health is a category creator. And it's really a healthcare and consumer crossover. We're trying to bridge the white space between medical aesthetics and traditional prestige beauty. We are building a connected community to our providers, consumers and partners. HydraFacial. HydraFacial is really our core brand and the creator of hydradermabrasion technology, which is really the device and the service for aestheticians to provide to the customer that starts with cleanse, extract and hydrate the skin with a very clear outcome. Unlike traditional facial or other facial treatment that require more precision from the aestheticians, we -- our treatment really has no pain. It's a 30-minute service, and we -- really, with the technology and the handpiece, get all the stuff out of your skin. Then we'll show you in the gunky canister so you can see it's very effective, and it's also socially very engaging. Because of the fact that there is no pain, it's very popular with men. So we truly service men, women, young, old, different race or gender. We focus on our aestheticians. That's very special for us. They are the trusted advisers for our consumers. We partner with them, we train them. They are incredibly influential and loyal to the community. So our product offering is a winning proposition for everybody, right? Because it's a very attainable price point for our consumers with high satisfaction. And it's very profitable for our providers because there's usually a 3- to 5-month payback for the providers and it's highly profitable. Razor-razorblade model, unit economics for ourselves as well. We are global. We're in 87 countries, growing fast internationally because those markets are relatively nascent. So our TAM is huge and we have multiple avenues to expand within the beauty health category. So given how under penetrated we are, we're truly a -- trying to do a profitable land grab. Organically, we grow through selling more systems, very much focused on that. And building brand awareness is important to us so we can create consumer demand and increase utilization all over the world. So overall, we are thoughtfully expanding the various bundles of product and services to our communities through both innovation and M&A.

That sounds great. And it's a great product, for sure. I think one thing that is important is, you obviously talked to the fiscal '21 outlook yesterday in a press release, announcing at the high end of the range on sales and in line on EBITDA. But you've had several beat and raise quarters so far. So first, do you expect that to continue? And then you also referenced COVID with respect to Q4, but could you potentially bring this up to date to the extent that you can? Obviously, things have gotten a little bit more interesting in terms of the environment. So have you seen any disruptions related to COVID -- the increase in COVID? And if so, how severe compared to a year ago?

Yes. No, absolutely. So Olivia, what's interesting is we've been battling and working under COVID this whole time. And we feel really good about it. We actually, increasingly, feeling very good about predicting our business against this backdrop because overall, if you recall, even last year and the first quarter of last year before a vaccine came out, there's a lot of open and close, and we've been tracking that very closely. And we also raised our guidance multiple times because, as we learn more about how each region behaves, we're able to get closer to how we predict the future. So as a result, as you can see, we actually got really close by the time we're giving guidance in November. Olivia, the other thing I would emphasize is, because we're a growth company, because of the fact that we're growing so fast internationally, we've been very clear about -- we now can truly see and predict quite well when it comes to behaviors in the U.S. and EMEA market. The only one that's a little bit tougher to predict is APAC, and we actually took that into consideration. As you know, especially in Japan or China, given how militant and the way they perceive vaccine and how they shut down the city is very different than what you observe in EMEA and Americas. So -- and then the other thing I would emphasize, if we -- just to look back since the beginning, the [ spec ] went live in May. And when folks were looking at our guidance back in November of 2020 (sic) [ 2021 ], obviously, the world was quite different. So as you can see, our earn projection was actually at $180 million, high $190 million, but we were able to raise it multiple times ending the year at $255 million at -- on the high end. So with that said, for the pandemic, the other thing to keep in mind is, we lived through some of the shift for seasonality as well. We bought the 4 acquisitions back in July, which is Q3. And the way we ship for direct versus acquisitions is a little different. Then we also emphasize a lot in marketing and test and learn. And through that marketing, we can actually react to how we sell the equipment very differently as well. Meaning, Q3 actually emphasize to the market, there's a little bit of pull forward, right, because of the fact that we did a heavy marketing in Q3. And when the pandemic got slightly worse in Q4, we only end up doing 1, that's in New York City. So all of that plays into how we manage the business, how we perceive the pandemic.

Got it. Got it. And then I think one of the concerns that I heard yesterday is just about how the current environment might impact the launch of 2.0, and I want to talk a little bit more about 2.0 later. But is there any risk insofar as worries about spa visitation or anything with respect to the current environment, and how that may or may not impact the launch of 2.0?

Yes. So I'll say, Olivia, we've been planning ahead for launching of the 2.0 all along the first half of 2022, especially for the U.S., right, where we've shared with everybody the launch plan is really first half for the Americas region, especially in the U.S. And then we have regional launch in early second half. That's how we are planning that out. So we've lived through this pandemic. We've seen how the trend work. So the way we were planning all along is we have to have marketing support for new launch, so we're being very thoughtful. Overall, we feel very confident in terms of what 2022 is going to bring. It's really more about thinking through seasonality, thinking through our marketing effort. Just one thing I will truly emphasize again is, we see our business, we manage it based on that golden triangle, which is sales, marketing and training. You need all 3 to work to a very successfully launch and expand in regions. So we're very thoughtful about how we launch and when to launch.

Got it. And then maybe if you could talk a little bit about other risk factors, what you think are the biggest ones right now other than, obviously, the pandemic? But maybe supply chain, for example. If you could talk a little bit about the global constraints and how that could -- how that's affecting your business, any particular part of the business, and how that could potentially transpire in 2022.

Yes. No, absolutely. I think what we always emphasize is our TAM is huge, we're very nascent, we're all about execution. So when we think about risk, when we think about how we manage our business, it's on how quickly can we grow, what kind of people, how fast we can hire the right type of folks with the entrepreneurial mindset of builders, but also understanding we're scaling and growing at the same time. So 1, 2, 3 focus are all head-down execution. When they -- we really think about overall, our business trends and how we launch in 2022, there are a lot to do. So it's really much more about how do we sequence it, how do we bring that to fruition.

Got it. Got it. That makes sense. Perhaps we could pivot over to growth and talk about some of the biggest growth drivers in your model, particularly for those investors who may not be as familiar with your story. Could you just highlight some of your biggest growth initiatives across the different geographies? And maybe some retailers as well?

Yes. So for us, again, I emphasize that golden triangle because we had, the past 5 years, experienced really test and learn a lot, and that's kind of our muscle, right? For us, what's really interesting, number one, it's just push out as many systems as possible because, as you know, Olivia, we're trying to build out a platform. And what's critically important about this product 2.0 is the fact that it truly brings RFID and WiFi capability. And the fact that we've been testing and learning our app, this is the first time we're going to have a true consumption model. And we'll be able to not only provide the consumer level of data to our customers, to the consumer themselves, to help them with different services and maintain this lifestyle, but also we'll have that data to observe and help ourselves drive utilization and help the whole market doing better marketing, right? Because we kind of talk about ourselves as a B2C2B business, in the sense that we are investing a lot in marketing and making sure there's brand awareness and that, in turn, really benefit everybody. So from that vein, I again emphasize the point of golden triangle because of the way we grow, it is a push-and-pull method. Based on the marketing activation, I'm sure you saw -- I'm not sure if you actually stopped by our GLOWvolution, it is that big truck city takeover in New York. We give free services and we do micro-influencer around that. With that event, we usually engage both the consumers and also customer. And with that brand awareness, our funnel keep on growing, our leads keep on growing. And the way from lead to [ commerce ] and close the deal is very fast for us, it's usually 14 days. So then the sales folks can be very focused. And what's really interesting about us is, we don't necessarily have different sales team per different channel. Because the fact that we're really focused on aesthetician, as I said earlier, they're trusted service providers and advisors to the consumer. Our sales force just really very much focused on the aesthetician layer, right? Because in that sense, we don't have to have team for just medical channel or nonmedical channel, retail or hotel. We can be very focused to engage in that conversation. And I think I shared with you previously, too, we're about 60-40 split. So 60% of our business overall, are in the medical channel, and 40% is in the nonmedical channel. And those channels keep on growing. As you can see, on the medical side, you have your traditional plastic derm, a really medical spa is the trend we see tremendously with the growth around the globe. On the nonmedical channel. We've always had business in the hotels and in gyms. But with the retail -- Sephora has been our partner for almost 5 years now. We did a lot of test and learn with that smaller Perk system that's engaging the younger consumer. But we've also start to truly test and learn with players like Ulta, like Nordstrom or [ Jean Louis ] in Europe to really try to provide that experiential services to the retail partners while they go through Amazon [ proof ] of their experiences. So from a growth point of view, I would say, continue to roll out as many systems as possible. We are doing a lot of marketing activation with that golden triangle to drive utilization. And we're so nascent in terms of international market. You can see, based on the trend, the U.S., we grow, call it, 50%-ish, right? And if you look at EMEA, it gives 50% to 60%. And then I'm seeing comparison against 2019 because you kind of have to skip through 2020 due to the pandemic. And 200% to 300% growth when it comes to APAC region. So there's tremendous room to grow. And then last but not least, from an M&A's point of view, the fact that we've raised $900 million, it's truly to be used to build and buy in terms of expanding the bundle to Beauty Health as a platform.

That's great. That's great. Goodness, where do I just want to start with that? Maybe we deal with M&A, and then we'll switch back to some of the marketing and retail efforts that you're making. So obviously, M&A has been a hot topic on investors' minds. You talked about the raise -- the cash raise. Brent has a lot of experience with respect to M&A. So could you talk a little bit about what kind of transaction you're looking for? What we should expect? And then the potential transformational nature of something that you might be looking at?

Yes. No, absolutely. So we did the deal back in December with Brent. And as you know, Brent is our Executive Chair, and he's been very active in terms of setting strategy and really think through, as we build out the platform, what kind of target -- M&A target we're looking at. So suffice to say we've been actually quite busy. There's no shortage of target. And Olivia, we'll be emphasizing the 3 key areas we're focused on. We don't necessarily discriminate. It doesn't have to be transformational or in a string of pearls. It's whatever really truly fit the 3 criteria, right? One, high NPS score, because HydraFacial actually has the highest NPS score, especially compared to all the other procedures. And two, leverage the call point, which are aestheticians, right? So the fact that we have over 19,000 installed base out there already, and as you can -- some of the folks can see from our [ bag ], LTM, September, we rolled out 5,000 systems. So just give you a sense of -- we're keep on expanding so that installed base can either supercharge the target or vice versa for us. So we can have that natural synergy. And then last but not least, accretive. So if you look at our profile, we're very much a top line growth profile. But historically speaking, Olivia, we've always been generating 25% plus EBITDA margin. So we've been purposefully saying, this is a growth situation, land grab, profitable land grab. So as a result, for 2021, 2022, we're very much focused on building that infrastructure, invest every dollar back, drive marketing and really test and learn from that. So the target that we'll be looking at should have the similar type of attractive margin profile. Because even if you look at our gross margin, it's kind of in the mid-70s, if you recall, before the pandemic noise, right? I'm talking about just the gross margin, if you take away depreciation, amortization and all that, how we measure it internally. So we're looking at the target. Ideal target would be similar razor-razorblade with recurring revenue, but more importantly, accretive for both top line and bottom line for us.

Got it. Got it. That makes sense. Can you talk a little bit about maybe, the systems versus the consumables? Obviously, as you mentioned, '21-2022 are very much focused on building the base of the systems. Sort of an if-you-build-it-they-will-come type model, right? And this -- the -- maybe we could talk a little bit about the consumables portion and what you're expecting there in terms of the growth, not just in units, but sort of a unit -- consumables-per-system-type metric?

Yes. No, absolutely. So I would say, Olivia, I will emphasize the fact that we're very under penetrated, right? So if you look at, even in the U.S., we've been existing for a long time. This is over 10 years old. This is not new. Yes, you can see we keep on growing. I think we always joke about, at some point, consumable should be our running system. But the fact that we're rolling out systems so aggressively, and there's no end, our conversion just keep on getting better, right? As a result -- and when we roll out the system, we actually usually sell 1 quarter where we sell the consumable along with that. So you usually see a little bit of a delay until they reorder again. So the way we look at it, during the pandemic, obviously, you can measure what's open and what's close. For example, retail. We talked about Sephora being our biggest customer. But obviously, it's less than 5% penetration. But they haven't been open this whole year, right? We have 500 doors with them, there's less than 100 that's open because of the pandemic. So as a result, we definitely see that slower growth on the consumable side because there's keep on -- even with the EMEA region, you recall, there's keep on have open-close for various countries. So when location shut down, they just shut down. For the ones that open, we continue to see very strong demand. But with that all said, our utilization is still relatively low, right? So what we truly observe is, when our top-tier customers' utilization is very high, that's why we have a lot of multiple system sale, right? Almost over 12% of our customer base have multiple system. Like, Caesars Palace, for example, in Vegas, that 1 casino has 17 systems. Just to give you a sense, when it works, it really works. We also observed, if a location use it 5 or 6 times a day, they buy the second system. So that really give you a sense of, as the market open up from the pandemic, there's a lot of room for us to invest in marketing for that brand awareness because our unaided brand awareness in the U.S. is low single digit. That's how unknown we are. This is precisely why we want to really focus on that marketing, branding effort, making sure everybody knows this should be a lifestyle choice, and you should really be getting HydraFacial once a month. So those are kind of effort we put in, and that's how we're thinking about driving utilization and consumable. And suffice to say, Olivia, we believe, given rolling our systems, building that platform is our number 1, consumable will still just catch up. We're probably going to be seeing this 50-50 for a little while.

Great. Great. I want to -- there's so many questions to ask. Perhaps we switch over to CEO transition and just -- if there's any update there since last quarter? Obviously, the company announced departure of Clint. Could you give an update on the transition? How the search has been going? I think at some point in the past, you had mentioned that there should be an announcement in Q1. So if you could just bring us up to date? I'm assuming you're getting close to an announcement, but we'd love to hear a little bit more there.

Yes. No, absolutely. As we shared earlier, Olivia, Brent has been very active since day 1. And Clint did a fantastic job, right, he built a really strong team. So we've been just working very closely, executing. We haven't changed our strategy or vision at all, so it's purely execution. And the candidate would be, I'm emphasizing, are someone that really can supplement and complement the team, that bring this consumer beauty marketing experience as well as international experience. So with that said, we have the finalists and Brent really wanted to announce and open up the market so we can make sure no stone is left unturned, we have the best candidate. So very happy to report that we're very close that we will certainly announce Q1 and welcome our CEO to join us.

Great, great. Looking forward to it. Maybe one thing that you guys talked about in the past is the at-home device, the Glow & Go. Can you just talk a little bit more about the initiative there? How it complements the in-office experience? And then just, with respect to positioning, how that's going at retail?

Yes. No, absolutely. Because what we're building is a community, and it's a platform. So this whole data connectivity element is so important. So if you think about, for us, the most important things to roll out, the second-generation system, first half of this year. Because we're testing and learning the app. We have to close the loop. Once we launch the system, you can truly start to connect the consumer data with the provider data. By the same token, the consumers would love to have a maintenance tool in between of their visit, right? Because our average customer visit, 3.2 different type of locations, and they also do it 4 times a year. So this way, once you have an at-home device, it will cannibalize our professional services because it won't have the same level of suction, but it will really be providing a lifestyle maintenance tool. So we've been testing and co-creating with our super consumers, right? Because for us, one, we are building a community. We've been an end company, we've be very transparent with our customers. So we want the customer to test that with us. Happy to report. So far, with very limited testing -- by the way, they have to pay for it, right, because we want to have very organic experiences. They love it, and they really believe this is a maintenance tool, and they will still go see their professional services. But from a timing point of view, Olivia, this is our first consumer product. We wanted to do it right, and we want to be very thoughtful. So we will be very much focused on the professional launch and let us take our time because we truly wanted to make sure the function, the form, usability, the right pricing, all of that, work for us.

Got it. Got it. And then, just the second to last question maybe, as we run out of time. Just talking about the investments that you're planning to make in order to support the rollout. Because, obviously, there's been a lot in terms -- the top line-driven story, there's a lot of investment behind it. So can you just talk a little bit about what investments, specifically, what kind of investments you're making?

Yes, absolutely. Double down on marketing, because we talk about how nascent we are from a brand awareness point of view. We've been investing in R&D innovation. But our investment cycle, Olivia, is 3 to 5 years when it comes to heavy-hitting R&D, right? So we just invest in that. Building our infrastructure. Again, we're investing a lot, setting up headquarters, we just rolled out ERP around the globe, hiring folks. So all of the heavy lifting will be done by this year, right? So we're buying speed along the way as well because that's very important to us. And then, obviously, with M&A integration -- so from a fixed cost point of view, most of the investment will be done by the end of this year. Now obviously with marketing, we see such significant return on investment for us. So if it continue, we're going to continue to pump in the dollar. As soon as we see that slow down, we'll slow down as well. We're very much of a quick test and learn orientation.

Great. Great. Great. Well, I guess we're sort of closing in on time. If there's anything -- last things that you want to talk about in terms of things that you're excited about for '22?

Yes. No, we're really excited. We performed really well against the pandemic noise, and we're looking forward to kill it again next year.

Sounds great. Well, Liyuan, thank you very much. Appreciate it. And thank you, everybody, for joining us. Really appreciate it, and have a great day. Take care. Thanks, Liyuan.

Bye, Olivia.