Nu Skin Enterprises, Inc.

Good day, and thank you for standing by. Welcome to the Nu Skin third quarter earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask questions during the session, you need to press star 11 on your telephone. You will then hear an automated message advising you your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand your conference over to your first speaker today, Scott Pond, VP of Investor Relations. Scott, you have the floor.

Thanks, Stacey, and good afternoon, everyone. Today on the call with me are Ryan Napierski, President and CEO, Connie Tain, Chief Global Growth Officer, and Mark Lawrence, CFO. On today's call, comments will be made that include some forward-looking statements. These statements involve risks and uncertainties and actual results may differ materially from those discussed or anticipated. Please refer to today's earnings release and our SEC filings for a complete discussion of these risks. Also during the call, certain financial numbers may be discussed that differ from comparable numbers obtained in our financial statements. We believe these non-GAAP financial numbers assist in comparing period to period results in a more consistent manner. please refer to our investor website for any required reconciliation of non-GAAP numbers. And with that, I'll turn the call over to Ryan.

Thanks, Scott. Good afternoon, everybody, and thanks for joining us on the call today. It's been an interesting year to date, to say the least, as we initiated a global strategic transformation at Investor Day earlier in the year, just prior to the economic turmoil that we're now facing. The third quarter proved more challenging than anticipated due to an increasingly difficult global environment and geopolitical complexities. We finished the third quarter at $538 million with a non-GAAP EPS of 47 cents. Four primary factors accounted for most of the shortfall versus our guidance. First, continued declines in mainland China due to the prolonged COVID-related disruptions, including expanded lockdowns throughout the country. Second, increasing weaknesses in South Korea related to economic pressures and company price increases. Third, persistent global inflationary pressures. And fourth, the strengthening of the U.S. dollar above expectations, placing pressure across our supply chain. Despite the current environment, we continue to execute on plans as we progress towards New Vision 2025 and becoming the world's leading integrated beauty and wellness company that's powered by our dynamic affiliate opportunity platform. In the third quarter, we began introducing LumaSpa IO, our new connected cleanse and treat device system. This input-output device introduction marks a major milestone for Nu Skin and the preliminary rollout of our Empower Me personalized beauty and wellness strategy as we gain greater data and insights about our customers' individual beauty and wellness journeys. The launch of LumaSpa IO, which is continuing into the fourth quarter, together with continued adoption of AgeLock Meta and BeautyFocus Collagen Plus, helped drive constant currency growth in four of our reporting segments, led by double-digit gains in Southeast Asia Pacific, as well as more modest growth in the Americas, Japan, and our Taiwan-Hong Kong segments. Our affiliate-powered social commerce strategy continued to show progress, especially in the U.S., helping us post 10 consecutive quarters of growth. Taiwan and parts of Southeast Asia that have adopted social commerce also achieved growth in the quarter. We'll continue to innovate around the model with initiatives like OnePrice, a new pricing model introduced with the LumaSpa I.O. that we anticipate will further our social commerce efforts by promoting affiliate productivity and retention. And regarding initiatives to advance our digital-first ecosystem, both Vera and Stella apps are now available in all markets. We continue to add languages, features such as product offer, and additional products available to purchase through these apps. Connecting LumaSpa IO with the Vera app provides direct customer feedback to optimize the efficacy of the device and products. Our ultimate goal with these apps is to provide an integrated beauty and wellness virtual experience to our customers and an increased ability for our affiliates to seamlessly build their businesses from the palm of their hands. From a geographic viewpoint, let me share some high-level perspectives on a couple of our key markets, and then Connie will provide additional detail in just a moment. We have reported the ongoing improvements in the geographic diversification of our business with no single market representing more than 20% of our revenue today. We believe this diversification will be beneficial given increasing global volatility and complexities. We anticipate challenges in China in the near to mid-term due to ongoing economic factors related to strict lockdowns in the market. We're working to counter these factors by making modifications to our business model to enable greater flexibility. We continue to work towards mid to long-term stability in this business as the environment improves. Mainland China now represents approximately 14% of our business. Our business in Korea experienced the setback in Q3 as we executed a local price increase to address growing inflationary pressures. We will be expanding our weight management offering there, which we believe will help improve the market into 2023. On a more positive note, four of our seven market segments reported constant currency growth, led by Southeast Asia Pacific, which experienced double-digit currency growth excuse me, double-digit constant currency results driven by a strong LumaSpa IO introduction and the ongoing rollout of Ageloc Meta, as well as the U.S., which posted another strong quarter and moderate growth in Japan, as well as Taiwan and Hong Kong. Despite the macroenvironmental uncertainties in the near to midterm, we remain focused on moving New Vision 2025 forward as we further our transformation to becoming the world's leading integrated beauty and wellness company. While it's too early to give details for 2023, I want to highlight a few specific strategic imperatives for the coming year that reinforce our vision. For our Empower Me strategy, we expect LumaSpa I.O. to continue ramping up over the next several quarters and are planning to introduce our next connected device, AgeLock Body I.O., in the second half of 2023. In the first half of the year, we'll also be rolling out enhancements to our TR90 weight management and body shaping line, with a more personalized approach called TR Me. We'll also continue to expand social commerce with additional initiatives that enhance our brand affiliates' productivity and retention, such as Bolt Kit offerings and new affiliate reward programs throughout the year. From a digital perspective, we'll continue to focus on enhancing capabilities and functionality across the Vera and Stella apps, leading to even deeper customer insights and engagement. and driving increased affiliate productivity. We'll also begin to deploy a new e-commerce platform together with our strategic partner Infosys that will further enhance our ability to drive social commerce globally. And lastly, during these challenging times, we are sharpening our focus, leaning into our core strengths, and leveraging the agility of our model to improve overall efficiencies across the company. We're making progress on our previously announced cost reduction plan as we realign capabilities and resources to deliver upon new vision 2025 and strengthen our financial position. We'll continue to evaluate the business in context of the global landscape, and I anticipate these efforts to result in approximately $100 million in cost savings this next year. Mark will speak through the details in just a moment. So these efforts together with our resilient entrepreneurial sales force give me confidence in the future of our business as we navigate these precarious times and remain focused on our long-term vision. So with that, I'll turn the time over to Connie.

Thank you so much, Ryan. While the macroeconomic factors Ryan discussed had a widespread impact across our reporting segments, we are happy to grow revenue in constant currency in four of our segments, highlighted by a 10th consecutive quarter of growth in the U.S. and continuing momentum in Taiwan and Southeast Asia. In the Americas, the U.S. market grew with revenue up 7% year over year, driven by social selling momentum. Overall, the America segment grew 3% in constant currency, with the success in the U.S. offset by macroeconomic issues impacting Latin America, leading to a decline in customers, paid affiliates, and sales leaders for the segment. We're looking forward to the consumer launch of LumiSpa IO throughout this region in the fourth quarter. We continue to look to the U.S. market as validation of our social selling strategy and as a model for expanding best practices globally. Although the U.S. has become our largest market, we are seeing some growing economic headwinds and more challenging comparisons. As Ryan noted, our mainland China business has been disrupted due to several macro factors. We also made some modifications to the compensation plan during the quarter. Given the impact of extended macro environmental factors in China, we implemented a more flexible structure designed to promote customer acquisition and build sales leaders long term. This did have a negative impact on sales leader productivity when it was introduced, but it also helped generate modest sequential growth in sales leaders We anticipate the environment to remain challenging, but we are working closely with our local team to find ways to regain momentum. Strong performance in Taiwan led to 6% constant currency revenue growth in our Hong Kong and Taiwan segment. While Hong Kong faces the impact of COVID lockdowns similar to mainland China, our Taiwan market is successfully driving adoption of social selling, which led to an increase in customer acquisition. We also drove growth in Taiwan with the launches of Ageloc Meta and Lumispa IO. EMEA revenue is down 6% in constant currency as a result of the distraction caused by conflict in the region, as well as inflation and energy concerns. All of these factors have impacted consumer spending throughout the region. We have seen some encouraging early results in the fourth quarter as energy builds around Lumispa IO. South Korea was challenged by inflationary pressures and corresponding company price increases. Revenue was down 15% in local currency, and FX pressure added a negative 12% impact to reported currency. Japan remained steady and has been less impacted by macroeconomic pressures. Revenue was up 3% in local currency, with reported currency weighed down by a 21% negative foreign currency impact. Finally, in Southeast Asia and Pacific, we were able to drive 12% revenue growth in constant currency. We held our first live expo in three years in Southeast Asia, which energized our sales leaders and built some momentum for the Q3 and Q4 launches of Beauty Focus Collagen Plus and LumiSpa.io. Our affiliate-powered social commerce model is also gaining some traction, particularly in Indonesia, and we see this recent momentum as being sustainable. Overall, the decline in customers, paid affiliates, and sales leaders is generally stemming from the same segments where we are seeing revenue pressure. As we look ahead across all of our markets, we continue to focus on New Vision 2025. Specifically, the majority of our markets have just launched or are preparing to launch LumiSpa IO. first product entry into the connected beauty device space which will help drive adoption of our consumer vera app through an enhanced connected customer experience we continue to train affiliates on our social commerce model and our year-end holiday promotions will be targeted toward customer acquisition to support sales leader productivity and now I will turn it over to mark to go into more details on our financial performance

Thank you, Connie, and thanks to all of you for joining today. I will give a Q3 financial review and then give initial Q4 projections and update full year 2022 guidance. For additional detail, please visit our investor relations website. For the third quarter, we posted revenue of $537.8 million with a negative foreign currency impact of 7% or $47 million. the U.S. dollar continues to strengthen ahead of expectations, which negatively impacted Q3 and will likely remain a headwind for the balance of the year. Reported earnings per share for the quarter was a negative 51 cents, or 47 cents, excluding restructuring and impairment charges associated with the previously announced company's strategic resource reallocation. Our reported gross margin was 67.7%. or 72.7% excluding the aforementioned charges. Gross margin was impacted by the geographic revenue mix, foreign currency exchange rates, and global inflationary pressure. Gross margin for the core Nu Skin business was 73% on a reported basis, or 76.7% excluding the restructuring and impairment charges. Selling expense as a percent of revenue was 40.3%. 30 basis points below the prior year period. For the core Nu Skin business, selling expense was 43.5%, even with the prior year. General and administrative expense declined $18.5 million year over year as we remain focused on cost control. As a percent of revenue, G&A was 25.7% compared to 24.4% in the prior year. Operating margin for the quarter was a negative 3.8% or 6.8% excluding previously mentioned charges. This compares to 10.2% in the prior year period driven by the lower revenue this year. The other income expense line reflects an $8.7 million expense or an adjusted $5.4 million expense compared to $2.8 million income in the prior year period. The adjustment in this line item reflects a $3.3 million unrealized investment loss related to our Q4 2021 exit from the GrowTech segment. Cash from operations for the third quarter was $28.4 million, or $36.3 million, excluding $7.9 million of cash restructuring payments during the quarter, compared to $30.2 million in the prior year. Our balance sheet remains strong And as a reminder, we completed a debt refinance in the second quarter of this year that provided further strength and security. We paid $19.3 million in dividends and repurchased $40 million of our stock, with $185.4 million remaining on the current authorization. Our tax rate for the quarter was 12.3%, or 24%, excluding the restructuring and impairment charges. compared to 27% in the prior year period. Our Rise segment, which includes our manufacturing partners, was even when compared to the prior year quarter. Remember that revenue reflected in this segment only represents sales to third-party customers. Our manufacturing entities continue to significantly benefit our core Nu Skin business by helping firm up our supply chain, increase our speed to market for new products, and generate US profit that lowers our overall tax rate. Let me give an update on our 2022 restructuring efforts. We are on track with our previously announced restructuring. In the third quarter, we incurred a $30.1 million charge and expect an additional $5 to $10 million in the fourth quarter with approximately $3 to $5 million in Q1 2023. In addition, As we more closely align our product offerings to New Vision 2025, we made the strategic decision to narrow our product portfolio and align inventory on hand with our future sales plans and promotional offerings, which resulted in an incremental $26.9 million write-off in the third quarter. Shifting focus now to guidance. Given the continued economic uncertainty, prolonged COVID-related factors, foreign exchange pressure, In geopolitical complexity, we are adjusting our annual guidance. We now expect 2022 revenue of $2.2 to $2.25 billion. We anticipate earnings per share of $1.25 to $1.45 or $2.40 to $2.60 when excluding charges associated with our Q4 2021 exit from Grotech and the second half restructuring and impairment charges. This guidance assumed a negative foreign currency impact of approximately 5% to 7% and an adjusted tax rate of 20% to 26%. We're projecting fourth quarter revenue of $500 to $550 million, assuming a foreign currency headwind of approximately 8% to 10%. Q4 earnings per share guidance is 30 cents to 50 cents. or 40 cents to 60 cents when excluding the anticipated fourth quarter restructuring charge of approximately $7 to $10 million. In summary, while the near-term environment remains challenging, we continue to execute on the strategic priorities that support New Vision 2025 and are aggressively ensuring that all resources are aligned to drive the transformation of our business to our vision of becoming the world's leading integrated beauty and wellness company. powered by our dynamic affiliate opportunity platform. And with that, operator, we will now open up the call for your questions.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A roster. Our first question comes from Jason Bender with Citi. Jason, go ahead with your question.

Great. Good afternoon, everyone. Thanks for slotting me in. I'd like to start on guidance. Just as I look at the 4Q guidance, the range is pretty wide there, and I imagine that reflects, you know, all of the uncertainty that still exists. But perhaps you can speak to, you know, the width of the range and kind of unpack some of the assumptions that are, you know, leading to, you know, the guide at either end.

Yeah, Jason, so I'll chat for a second and Mark can give some thoughts on that. So certainly, as you mentioned, the range is wide relative to the environment. We typically do give a bit wider of a range anyways. We're obviously watching the global uncertainties right now and trying to understand exactly what will be impacted with consumer sentiment with the holiday seasons coming around, which traditionally, you know, Q4 tends to be better, but there is a lot of uncertainty out there.

Mark, maybe anything you... Yeah, I think Ryan said it exactly as I would, Jason. In today's uncertain economic geopolitical environment, we felt it important to still give a guidance range, and we thought it was important maybe to give a little bit wider range just given the uncertainty that exists.

Gotcha. Fair enough. And in terms of gross margin, I think you had previously said you were expecting 2H to be kind of similar to 2Q. Any update or color on expectations for the remainder of the year on that front? Yeah, Mark.

Yeah. Gross margin was really impacted this last quarter based on where revenue came in. China and South Korea were the two markets that came in below our expectations, are two of our highest gross margin markets. markets for us, and those were replaced by the US, which is a little bit lower gross margin business for us. I think we're seeing similar expectations for the fourth quarter based on that geographic mix of our business.

Got you. That's helpful. And then just on the LumiSpa IO rollout, glad to hear it's coming along, but can you spend some time talking about the adoption rate of VERA for those markets where it's launched and, you know, how that's trending relative to expectations?

Yeah, yeah, no, and in fact, just as a reminder for everyone, a LumaSpa I.O., so we have a LumaSpa, you know, 1.0 non-connected device, and so the I.O. is really an expansion of an existing franchise, which is really important. It's our first I.O. connected device. It's very important. The integration, as you pointed out, Jason Tavera, is is also critical. And Vera and Stella are both in early stage downloads and utilization. So right now, we're seeing some good uptick with I.O. We see a lot of consumers still, as I'm sure you do as well, take time to connect those devices over time. I think we're seeing around a 30% connection right now of those who buy, and then that upticks as use goes on. But it's still very early, as I mentioned. really still in the launch stage. A lot of our larger launches are happening in Q4, so we'll see how that progresses. I think on Vera specifically, we're really encouraged by these apps. They're important to the future of the business, and as I mentioned, we're really focusing now around where we have it in every market. We have now in the key languages, as we've added language over the last few quarters, and really it's all about features and product availability on those apps. So still in an expansion mode for both of those, but we're pleased so far with the adoption of them.

Great. That's a super color. And then, sorry, not to be greedy, but just one more. In the last couple of quarters, one of the things you've been doing is clearing that LumiSpa, that 1.0 product. I'm just curious now that IO is out, have you discontinued sales of that? And if so, is there any lingering LumiSpa 1.0, if you will, that has yet to be cleaned up?

Yeah, no, it's actually mixed. In some of our markets, we've completely transitioned to the new I.O., but we see a space, at least for a time, for the non-I.O. device. There still seems to be good demand for that product. And in markets that have both, we're seeing sales in both. And so, at least for the near term, we anticipate having both options, at least while inventories last. But The process of managing those, Mark, and together with our global product and value stream team have done a good job of managing the transition. But I think there's room for both, at least in the near to midterm.

Gotcha. Great. I'll pause there and pass it on. Thanks so much, guys.

Thanks, Jason.

And our next question is coming from Ashley Helgens of Jefferies. Ashley, you have the floor.

Hi, it's Blake on for Ashley. Thanks for taking our questions. Wanted to ask about China. Looks like the comp from the prior year is pretty similar in Q3 versus Q4. So in this upcoming Q4, can you talk about maybe what kind of growth you're expecting there? Should we think of something similar to what you just posted in Q3?

Hey, Blake, and welcome to the call as well. So are you referring specifically to the sequential, the year-over-year sequential change?

Yes, the constant currency, mainland China.

Yeah, I think we would in the near term, it's probably similar to what you saw last year.

Yeah, that's really what I'm rolling up in the forecast is that mainland China is flat to slightly down sequentially, which would put it in a similar range to the way it performed year-over-year. Q3 versus Q3, Q4 versus Q4.

Okay, that's super helpful. And it sounds like Taiwan was off to a relatively stronger start with the launch of Wemyspa and the social selling benefit. Could you just talk about how that market performed versus your expectations in the quarter?

Yeah, I'll say just a couple things, and Connie can provide more context. You know, we're really actually impressed with Taiwan. It's really one of our longest running markets out there, and they, several years ago, began to lean into social practices, and they've continued to do a good job of kind of leading out, at least in that part of the world, and so we're pleased. But Connie, maybe any color you'd add to Taiwan? Sure.

The adoption of social commerce in Taiwan has continued to progress really very nicely. Really, fundamentally, their acquisition of customers has remained strong throughout the year, and in fact, For the segment between Hong Kong and Taiwan, led primarily with the Taiwan growth in customer acquisition, they are actually up 12% in year-over-year customer base count. We've also seen initiatives that were targeted for retention and second purchases and subscriptions, conversions for those customer bases to also take shape over the year with some really encouraging results that we expect will continue throughout next year.

Thank you. That's super helpful. And then last one for me, I was wondering if we could talk about the U.S. I know that America's was up about 3% constant currency. Can you talk about broadly what you're seeing for the health of the U.S. consumer and maybe any commentary on trends throughout the quarter by month and then maybe what you're seeing in October?

Yeah, no, as we mentioned, the U.S. had its 10th consecutive quarter of growth, and we've been really pleased with that. You know, I think our guide reflects that growing consumer sentiment in the markets is getting tough, inflationary pressures. We've seen the holiday reports coming out, et cetera. So, you know, we're really trying to guide, you know, in relative form to what the market is, and that rolls up to Q4. Mark, anything you or Connie would add? I think you captured it.

Yeah.

Makes sense.

Thanks so much. Thanks, Blake.

Stand by for our next question. Our next question comes from Tristan Chow of Stifel. Tristan, you have the floor.

Hey, guys. Good afternoon. This is Tristan on for Mark. Thanks for the question. You had mentioned promotions targeting some improvements in sales leader productivity. Are there any other specific measures being taken in real time to help improve performance?

Yeah, I think a couple of things, and Connie may have some additions to add. You noticed, and we've begun to report affiliate data as part of our social commerce transition, which are generally trending more closely to revenue. There's a lot of focus right now around affiliate productivity and as well as the sales leader productivity as we're focused. So there are various promotions that we're engaging around the world, including some of those flexibility modifications that we mentioned in China specifically. Connie, is there anything you'd highlight there?

We continue to focus on the entire channel, starting with fundamental consumer strength and purchasing behavior.

ensures that our affiliates also are realizing some success and productivity which in turn leads to sales leader retention as well as sales leader productivity i'd only add one thing if you remember a few years back we introduced our velocity compensation program and remember when we talked about the launch we talked about it being fast and flexible the fast being that we could offer daily pay weekly pay and monthly pay something that we were first in the industry, or at least I believe we were first in the industry to be able to operate that quickly. But the flexible is really important. And we've been able to make adjustments to our compensation programs around promotions, things that are more interesting to affiliates and customers and sales leaders as we see the world and the market changing. And I think that's just an important part to our compensation plan that we've had just for the last couple of years. And we take advantage of that as the world changes.

Okay. Got it. That's, that's helpful. And, um, how do you, like, I know you're working on different enhancements for the Vera and Stella and introducing Lumi IO and body IO soon. Um, is there just any change to innovation cadence given the current market conditions?

Yeah. Yeah, no. Great question. Um, there, there, There is, and I'll speak more on the innovation release side. So to your point, we've really intentionally tried to focus very much upon fewer digital experiences that are much deeper. So these Vera and Stella apps are really critical in terms of global consolidation of digital properties down to really focusing our efforts there, which will allow us to and has in 2022 allowed us to put more features more deeply into those apps. And so those sprints are pretty quick, like a traditional app, you know, every two to three weeks there's a new sprint. Lumi.io, of course, as you noted, being able to do firmware updates and even app updates quickly is a new dimension that Nu Skin historically has been, you know, slower to operate in. So I feel that that really marks the digital first company transition. That we're pleased with I think with respect to products and other products. We're looking at we talked about meta We talked about collagen plus we have other products we put into the pipeline new biome We've had we've had multiple other you know product releases that have been meaningful and that's in part due to the fact that we have our rise of partners that can move quickly and It's also in part because of the social model, we're able to release products more effectively. So I think you'll continue to see more rather than less, and of course we'll cadence that according to resources given the macro environment.

The only thing I would add is if you remember on our last earnings call, we talked about entering into this restructuring and strategic resource reallocation phase. We knew the economic environment was going to be challenging. I don't think anyone anticipated it would be as challenging as it is and as it looks to be. But the reason that we started this was really to make sure that we had the funds available to invest in technology. We believe that's our future. We believe connectivity is our future. And we believe that we have the resources available to see that through.

Okay, great. And one last one. What's the optimal leverage for the business just given the increase in debt in 2Q and I'm seeing reduced cash balance in 3Q?

It's a great question. We were really fortunate to finish a refinance in the second quarter of this year that put us in a really strong financial position. Our balance sheet continues to be strong. We continue to produce cash on a quarterly basis. I think we're well positioned. I think we'll continue to be opportunistic in our share buybacks and we'll continue to balance those tradeoffs of preserving cash ahead of tough economic times, as well as buying back shares as the opportunities present themselves. We're about $100 million off from cash to debt neutrality. I think we tend to be conservative and we tend to operate not too far from that range.

Great, thanks.

Thanks, Tristan. Okay, I think that's probably the end of the question set here. So I just want to thank everybody for joining the call. In times of uncertainty, it is imperative for companies to ensure operational excellence while adapting to emerging factors that can either act as headwinds or tailwinds for the future. At Nu Skin, we remain acutely focused on Nu Vision 2025 as we evolve our operations and to the changing environment. Our company's mission of being a force for good by empowering people to look, feel, and live better is as needed today as it ever has been. So with that, we'll end the call. And again, thanks for joining us. Have a good day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.