Nu Skin Enterprises Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 1, 2023

There are 6 speakers on the call.

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Nu Skin Enterprises Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please note that today's conference may be recorded.

Operator

I will now hand the conference over to your speaker host, Mr. Scott Pond, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thanks, Olivia, and good afternoon, everyone. Today on the call with me are Ryan Napierski, President and CEO and James Thomas, CFO, on today's call, comments will be made that include some forward looking statements. These statements involve risks 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 numbers assist in comparing period to period results in a more consistent manner.

Speaker 1

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.

Speaker 2

Thanks, Scott. Hello, everyone. Thanks for joining us today. These are very important times for our company as we continue to navigate Our enterprise transformation amidst the macro environmental headwinds impacting consumers around the globe and pivot our business accordingly. Our Q3 performance was mixed with notable progress on strategic initiatives overshadowed by escalating pressures in key markets of our Nu Skin core business, Particularly evident during the last half of this past quarter, this led to sales below our expectation and non GAAP earnings per share to the low end of our guide.

Speaker 2

In the Q3, our revenue was $499,000,000 with Q3 non GAAP earnings per share of 0.56 When excluding a strategic inventory write down. The primary factor leading to our underperformance was Mainland China. We had projected to grow for China in the second half of the year based on improving trends in the first half and even into early Q3, But a significant slowdown in consumer spending across the broader economy reversed those early trends. In the Americas, Prolonged inflation has constrained incomes and led to a more cautious and price sensitive consumer. However, growth in our regions In other regions partially offset these challenges, Japan, Hong Kong, Taiwan and Europe all experienced notable gains with the introduction of Agelock Well We also generated sequential growth in our Southeast Asia Pacific and South Korea segments.

Speaker 2

It's important to call out our RISE segments that performed well above expectations, which I'll discuss more in just a moment. While our strategic initiatives associated with our Nu Skin core business transformation have generated some positive lift in key areas over the past The pace of improvement has been slower than expected primarily due to macro factors that I just discussed. Consequently, we'll continue refining our tactics to sync with market dynamics and maximize our investments across 3 strategic imperatives Empower Me Personalization, Social Commerce and our Digital Ecosystem. During the quarter, we continued and the introduction of our 2nd connected device system, AgeLock WellSpa IO into many of our markets. We remain focused on enhancing our personalization journey with our connected device roadmap with IO device systems currently contributing 14% of revenue in 3rd quarter.

Speaker 2

This aligns with our near term goal of 15% and our long term target of 30% by 2025. To date, we have logged more than 9,000,000 connected device treatments and collected over 100,000,000 unique data insights, which will play an increasingly meaningful role as we lean further into our personalization, beauty and wellness journey. Next, we continue to make modifications to our affiliate powered business model to better support new business builders, which are yielding some promising outcomes in recent trials across multiple markets, most notably in Japan and parts of Latin America. We will continue to lean further into this new affiliate journey as an increasing portion of today's work For our digital ecosystem, we are continuously enhancing the features and capabilities of our Verra and Stella apps to strengthen connections with our customers and affiliates. Following recent tests of new promotional features of Verra in Europe, We were very encouraged by the revenue that was generated and the potential for coordinated app based global promotions in 2024.

Speaker 2

Our monthly active user ratio increased to 18% of monthly active customers for Verra, which is tracking behind our target of 30% mostly due to slower adoption in Asia. For Stella, we have more than doubled our annual target of monthly active Users this year with 68% of average monthly paid affiliates on the app. We will be focusing on 2024 upon driving deeper connections with our Given the robustness of RISE, it's important for us to dive deeper into these business segments as we lean further into our broader enterprise strategy. RISE consists of several dynamic businesses, including Mabley, a leading affiliate marketing and technology platform, which connects nearly 800 Retailers and brands to more than 45,000 Mabley Affiliates and helps power our Vera app. Wasatch and Elevate Manufacturing, which currently service more than 120 customers, including Nu Skin Beauty Bio, our most recent clean beauty omnichannel acquisition, which continues to expand its retail and digital channels and Life DNA, a DNA recommendation, which holds significant future potential for our broader personalization strategy.

Speaker 2

RISE NOW accounts for 12% of our business and we anticipate it growing to 20% to 25% of revenue over the next 2 years. This segment delivered more than 40% growth year over year in the quarter, underscoring the robustness of these businesses. Moreover, it advances our enterprise strategy of evolving RISE into a synergistic ecosystem of consumer, technology and manufacturing companies that not only enhance our core business, but all facilitate our broader beauty and wellness ecosystem, enterprise transformation. While we have not yet talked in-depth about our RISE strategy, I'm personally very excited about sharing our broader enterprise vision with you early next year. Before wrapping up, I'd like to share some insights on our approach to managing the business in the near term as we navigate the macro environmental uncertainties.

Speaker 2

Striking a balance between executing our long term strategy while upholding our commitment to delivering value to our shareholders, The continued headwinds around the globe remain exceedingly dynamic and visibility is constrained as conditions can evolve swiftly. At the same time, we have ambitious plans in place for 2024 to accelerate growth in our Nu Skin Core business as well as the enterprise, including the introduction of an entirely new mental wellness category, which will incorporate several strategic investments made over the past few years. Therefore, it is paramount that we simplify our business to the core value drivers, focus strictly on priority work and execute with excellence in areas where we have the greatest control. To this end, we are strategically reevaluating our Nu Skin core business under the premise of 1 Global Business, a holistic competitive advantage that enables us to operate more effectively and efficiently around the globe. This retooling will include: number 1, a strategic global realignment of our product portfolio focusing on our hero brands number 2, global process and organization remapping the way we work as one global team and number 3, an operational footprint review including where and how we operate in our markets.

Speaker 2

This retooling will improve overall effectiveness of execution and efficiency of work that will result in increasing cash flows, improving margins and enhanced earnings per share in the coming year. For example, we are thoroughly reevaluating our product portfolio relative to our integrated beauty and wellness strategy and anticipate eliminating 20% to 30% of non strategic SKUs over the next 12 to 18 months. We are also exploring additional opportunities to optimize our global operations adhering to our 1 global business approach to market. I'd also like to note that Connie Tang has decided to step down from her role as Global Growth Officer due to family health matters. Connie has been a great strategic partner over the past 2 years.

Speaker 2

But with this change, we will be realigning our organization to create greater Throughout our nearly 40 year history, we have confronted numerous challenges and have repeatedly demonstrated our ability to navigate With our resilient business model and sales force, we maintain a strong balance sheet and financial prudence to ensure that we're able to invest in the business as needed While returning value including a healthy dividend to our investors, I'm confident that we'll continue to discover new and compelling opportunities amidst

Speaker 3

Thank you, Ryan, and thanks to all of you for joining today. I'll provide a brief Q3 financial review and then give Q4 projections and update full year 2023 guidance. For additional details, please visit our Investor Relations website. For the Q3, we posted revenue of $498,800,000 with a negative foreign currency impact of 1.5% for $8,100,000 Reported earnings per share for the quarter was negative $0.74 or $0.56 when excluding inventory write off charge. Given the state of the business and in line with the strategic review Ryan mentioned, We've made the decision to rebalance and narrow our product portfolio resulting in a $65,700,000 inventory write off.

Speaker 3

This decision helps accelerate our product portfolio optimization by further aligning our product offerings with our Empower Me integrated beauty and wellness strategy. We expect the benefits from the product portfolio optimization to be realized over the next 2 to 3 years With the ability to support our business with lower inventory levels to free up our cash to invest in areas of growth across the enterprise, as well as enabling faster responses to market demand, customer preferences and shifts in the competitive landscape. Our gross margin was 58.6 percent or 71.8 percent when excluding the inventory charge. Gross margin for the core Nu Skin business was 61.8% or 76.8%, excluding the inventory write off compared to 73% or 76.7 percent excluding restructuring charges in Q3 of 2022. With the 45% growth of our RISE segments, this has a negative impact on our overall reported gross margin, while positively affecting selling expenses for the consolidated group.

Speaker 3

Selling expense as a percentage of revenue was 37.6%, 2 70 basis points below the prior year period. The lower selling expense is due in large part to growth in our RISE Manufacturing segment, which represented 10% of our total sales. For the core Nu Skin business, selling expense was 41.7% compared to 43.5 percent. General and administrative expenses declined $7,000,000 year over year As prudent expense management remains a top priority, as a percentage of revenue, G and A was 26.2% compared to 25.7 percent in the prior year. Operating margin for the quarter was negative 5.3% or 7.9 percent excluding inventory write off charges compared to negative 3.8% or 6.8% Excluding restructuring charges in the prior year, the other income expense line reflected an $8,100,000 expense.

Speaker 3

We generated strong cash from operations for the Q3 at $51,000,000 compared to $28,400,000 in the prior year period. This was mainly driven by greater inventory conversion led by the market previews of TR. Me and WellSpa. Io. We paid $19,500,000 in dividends and repurchased $13,000,000 of our stock with $162,400,000 remaining on the current authorization.

Speaker 3

Our tax rate for the quarter was negative 7.3% or 10.1% excluding inventory write offs compared to 12.3% or 24% Excluding restructuring charges in the prior year period, our tax rate was negatively impacted by the reduced earnings in the U. S. As a result of the inventory write offs. We expect additional pressure with our Q4 2023 restructuring and are anticipating a Q4 adjusted tax rate of 26% to 30% or an annual adjusted tax rate of 20% to 24%. Shifting focus now to guidance.

Speaker 3

Given the aforementioned economic conditions and the recent business trends, We are adjusting our annual guidance, which includes an anticipated Q4 restructuring charge of $15,000,000 to $25,000,000 We now expect 2023 revenue of $1,92,000,000 to $1,960,000,000 We anticipate earnings per share of negative $0.10 to $0.05 or $1.62 to 1 $0.77 which excludes the inventory write off and restructuring charges for 2023. This guidance assumes a negative foreign currency impact of approximately 2% to 3%. We are projecting 4th quarter revenue of $440,000,000 to $480,000,000 Assuming a foreign currency headwind of approximately 3% with reported earnings per share of negative $0.14 to 0 point 1 dollars or $0.15 to $0.30 when excluding the 4th quarter charge. In closing, while our Nu Skin business continues to decline from macro challenges. We remain steadfast in our dedication in driving forward our key initiatives, while also prioritizing our financial strength.

Speaker 3

This involves streamlining expenses, maximizing our cash flow and actively pursuing avenues for Increased operational efficiencies by further leveraging our RISE ecosystem in order to invest in future growth. And with that, operator, we'll now open the call up for questions.

Operator

Please stand by while we compile the candidate roster. And I'm showing we have a question from Tristan Chiao with Stifel. Your line is open.

Speaker 4

Everyone, thanks for taking my question. Just a follow-up on your China commentary. I was wondering how the weakening of the Chinese Consumer impacts how you're thinking about new product launches and go to market changes if The weakness continues for a little bit longer. And then I have 2 other questions after that. Thanks.

Speaker 2

Yes, Tristan, great question. Yes, and I know we're all reading the same research coming out, but James and I have Been over in China now a couple of times over the course of the last couple of months and we've seen notable Implications around consumption in general there, certainly research is pointing more towards a very cost conscious consumer. We fortunately, our product portfolio, while we do play in a premium and more mass to each place, we do have Lower price products are more value driven products for the affordable consumer, mass consumer There. So as we see these trends moving along, I would see opportunities for us To lean further into product lines like our Nutrisentials line, even TR Me versus our TR90 system is a more price sensitive line. And so we'll see you'll likely see more of that from us.

Speaker 2

From a go to market side, we will continue to Expand our Tencent partnership, our go to market, leveraging our e commerce capabilities over there as well in the near to mid term. So those And

Speaker 4

then just staying on China, it seems that Consumers are responding more to promotions, compared to historical levels. And so does that change how you're thinking about how You have to compete in the region?

Speaker 2

Yes, absolutely. I think, again, it goes all the way back to the price value and price competitiveness Right now for the consumer, in our business promotions are very we have to be very how we apply them because they do tend to disrupt traditional product cycles and such. But when we think about things like November 11 and major events like that, promotion is certainly a critical part of our strategy And will continue to be so as we manage brand equity through that process. I think for us, Making certain we lean on the value proposition per brand is going to be very important. So the more price conscious brands, We can be more aggressive on than maybe those that are more premium position that have a higher level of science, research and development, that sort of thing.

Speaker 4

Got it. And then last one, have you seen any changes in the growth rates in the parts of the beauty market Will you compete? Yes.

Speaker 2

So, yes, that's a great question. So, in terms of like most recent research, when we look at The Q3, I haven't seen any direct research yet on categories within beauty and wellness that would point us what we're Reading anecdotally, I'm speaking more from like the Euromonitor side. I think that's going to take a little more time to research. What we are seeing though Our mass consumer goods, you like the Procter and Gamble, those sorts playing well. Obviously, people needing the net necessities, while luxury is under a bit more pressure from those types of companies.

Speaker 2

But I still we still believe In the long tail of the device beauty device market and the wellness device market that we now plan with WellSpa We believe in the mid to long term that deep customer connection and that insights driven approach to personalization is going to be a winning strategy Long term, so we're continuing to invest in the devices and the device systems we think are important. We'll continue to invest in premium, but We are making more and more room for the value consumer in our portfolio as well.

Operator

Thank you. One moment for our next question. And our next question coming from the line of Doug Lane with Water Tower Research. Your line is now open.

Speaker 5

Yes. Hi. Good afternoon, everybody.

Speaker 1

Ryan, staying on China here,

Speaker 5

you continue to Sound a cautious tone on the business near term, but can you step back and give us your outlook for maybe 3 to 5 years? Has there been any Change in your longer term impact to that market despite the difficulties there for the last 4 or 5 years?

Speaker 2

Yes, Doug, it's Ben. By the way, great to have you on the call and connect again. This is really appreciate you spending some time with us. Yes. China is interesting.

Speaker 2

Again, we've spent a lot of time. In fact, we were on with the team again last night. China continues it's really interesting at the macro because obviously the economies had severe setbacks over the past few years. They're having struggles more immediately with this consumption and even the consumption push and that decrease that's happening at the GDP level. But they still have an enormous middle class.

Speaker 2

They're still in our business specifically and some of the Xi Jinping's party talking about economic opportunity, again, 2nd and third tier cities where Nu Skin today, we don't really operate. It's a very small portion of our business outside of those 1st tier cities in China. So we know that there's a big middle class. We know near term there's Sure. But mid to long term, that middle class will continue to consume goods and we believe there's expansion potential In 2nd and third tier cities and so we're by no means do we write off China.

Speaker 2

We just think it's going to be an economic Recovery period for time and then we as a company need to be smarter in how we reach those consumers and this is why we're investing more and more in Our Tencent engagements because clearly that's kind of the dominant channel.

Speaker 5

With all the changes going on at Nu Skin over the last couple of years, there have been a substantial retooling of how you go to market. Has there been any real change in China? Or is it still pretty much the same model you've been operating for the last several years?

Speaker 2

Yes, I would say yes, it's a great Question. We have continuously retooled that business, but this is where and I appreciate you asking the question. Where our business Transformation has been interrupted. It really is around kind of the go to market. And during that COVID period with lockdowns, Especially in China, that most certainly disrupted the way we were historically going You'll recall some of our meetings historically were all about large group meetings.

Speaker 2

There were a lot of conversations with COVID that clearly stopped, But there are companies signaling that that's kind of the return to growth path. We continue to believe that's not the return to growth path, although meetings for Training purposes always play value for our sales force training and education. But in terms of reaching the mass customer, that's got to be through a digital first strategy that we started investing in and we believe in that future. And so where I would say is China's probably been less Progressive in or we've been less progressive in China in evolving our go to market strategy than in other certain markets. It's just Because of the dynamics of the macro and trying to get that business restarted there with a new approach It has been more prolonged than we had hoped.

Speaker 5

Yes. No, that's very helpful. Thanks, Ryan. And just shifting gears here, James, can you talk about I know you're not talking about 2024 specifically yet, but just on the inflation front, we've gone through this huge wave of inflation that's impacted everybody all over Can you just sort of give us your sense on how the inflationary environment is going to impact your outlook for 2024?

Speaker 3

Yes, Doug, and it's good to speak to you again, like Ryan mentioned. This is something from inflationary pressures that we've been Monitoring and evaluating throughout the last two years, we've looked at it, how it impacts pricing. We've passed on some of those prices to the consumers, but also through our supply chain channels too and how well it's been doing to our costs. So We're trying to be cognizant to make sure that we're protecting our operating margins in the go forward. And so as we look out and we project End of year Q4, we're looking at an operating margin very consistent with where we landed in Q3.

Speaker 3

As it pertains to 2024, we're still monitoring and looking at evaluating what's going to happen to our Channel, what's going to happen to our top line. Also in addition to what type of growth we think we can see within our RISE investment arm Through those different businesses that we've acquired.

Speaker 5

Okay, thanks. Great to speak with you again.

Speaker 2

Thanks, Doug. Okay. Well, this has been a fairly abbreviated call. I know some of you are stacked up with Other readouts, so from other companies, so we will keep it short. But I just wanted to thank you all for joining the call.

Speaker 2

As we reflect on this, many of the world's greatest companies right now are experiencing near term challenges given the macros. I want you to know our team is very committed to continuously evolving our business to position it for greater opportunities ahead. We firmly believe in our mission of being a global force for good by empowering people to improve lives and doing that through our products and our opportunity to help people look, feel and live better. We will continue to be focused very much on this, Refining our strategic positioning and go to market plans to really give the world what it's looking for. So we look forward to updating you continuously.

Speaker 2

We know touching basis

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Key Takeaways

  • Nu Skin’s Q3 revenue was $498.8 million with non-GAAP EPS of $0.56 (after a $65.7 million inventory write-down), falling short of expectations mainly due to a sharp consumer slowdown in Mainland China and continued inflation-driven caution in the Americas.
  • The RISE segment—which includes Mabley, Wasatch & Elevate Manufacturing, Beauty Bio and Life DNA—grew over 40% year-over-year, now represents 12% of total revenue, and is targeted to reach 20–25% of company revenue within two years.
  • Connected device sales (AgeLock WellSpa iO) accounted for 14% of Q3 revenue, with over 9 million treatments logged and 100 million unique data insights collected, moving toward the near-term goal of 15% and long-term target of 30% by 2025.
  • Under the “One Global Business” initiative, Nu Skin will realign its product portfolio around hero brands, remap global processes and review its operational footprint—eliminating 20–30% of non-strategic SKUs over the next 12–18 months.
  • Full-year 2023 guidance was revised to $1.92–1.96 billion in revenue and adjusted EPS of $1.62–$1.77 (excluding write-off and restructuring charges), with Q4 revenue expected at $440–480 million and adjusted EPS of $0.15–$0.30.
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Earnings Conference Call
Nu Skin Enterprises Q3 2023
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