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 this speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please note that today's conference may be recorded.

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

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 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 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. 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 third quarter 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.

In the third quarter, our revenue was $499 million 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 the growth for China in the second half of the year based on improving trends in the first half and even in the 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 and other regions partially offset these challenges. Japan, Hong Kong, Taiwan, and Europe all experienced notable gains with the introduction of ageLOC WellSpa iO.

We also generated sequential growth in our Southeast Asia Pacific and South Korea segments. It's important to call out our Rhyz 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 [indiscernible] quarters, 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 three strategic imperatives, EmpowerMe personalization, social commerce and our digital ecosystem.

During the quarter, we continued to advance our EmpowerMe strategy through the Mainland China and Korea rollouts of ageLOC TRMe personalized weight management system and the introduction of our second connected device system, ageLOC 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 the third quarter. 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 million connected device treatments and collected over 100 million 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 workforce – workforce seeks more flexible ways of working in the gig and more economy.

As a reminder, our affiliate numbers were impacted by adjustments made to the eligibility requirements for affiliate rewards in some markets beginning in Q2 and continuing through 2024.

For our digital ecosystem, we are continuously enhancing the features and capabilities of our Vera and Stella apps to strengthen connections with our customers and affiliates.

Following recent tests of new promotional features of Vera in Europe, we were very encouraged by the revenue that was generated and the potential for coordinated app-based global promotions in 2024.

Our monthly active user ratio increased to 18% of monthly active customers for Vera, 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 customers and affiliates through these apps to expand engagement and conversion resulting in improved lifetime value. Given the robustness of Rhyz, it's important for us to dive deeper into these business segments as we lean further into our broader enterprise strategy.

Rhyz consists of several dynamic businesses including Mavely, a leading affiliate marketing and technology platform, which connects nearly 800 retailers and brands to more than 45,000 Mavely affiliates and helps power our Vera app.

Wasatch and Elevate Manufacturing, which currently service more than 120 customers including Nu Skin, BeautyBio, our most recent clean beauty omnichannel acquisition, which continues to expand its retail and digital channels, and LifeDNA, a DNA recommendation which holds significant future potential for our broader personalization strategy.

Rhyz now accounts for 12% of our business and we anticipate it growing to 20% to 25% of revenue over the next two 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 Rhyz 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 indepthly about our Rhyz 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.

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 one global business, a holistic competitive advantage that enables us to operate more effectively and efficiently around the globe.

This retooling will include number one, a strategic global realignment of our product portfolio focusing on our [indiscernible] brands. Number two, global process and organization remapping the way we work as one global team. And number three, an operational footprint review including where and how we operate in our markets.

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 skews over the next 12 to 18 months. We are also exploring additional opportunities to optimize our global operations adhering to our one 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 two years.

But with this change, we will be realigning our organization to create greater strategic alignment between regions and global functions in order to further enhance our go-to-market execution.

Throughout our nearly 40-year history, we have confronted numerous challenges and have repeatedly demonstrated our ability to navigate uncertainties with our resilient business model and sales force.

We maintained 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 these disruptive times, generating long-term growth and value for shareholders. So with that, let me turn the time over to James to take you through our financials in more detail, including our guidance for Q4 and end of year, and then on to Q&A.

James?.

Sure. 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 third quarter, we posted a revenue of $498.8 million with a negative foreign currency impact of 1.5% or $8.1 million. 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 $65.7 million inventory write-off.

This decision helps accelerate our product portfolio optimization by further aligning our product offerings with our EmpowerMe integrated beauty and wellness strategy.

We expect the benefits from the product portfolio optimization to be realized over the next two to three 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% or 71.8% 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% excluding restructuring charges in Q3 of 2022.

With the 45% growth of our Rhyz segments, this has a negative impact on our overall reported gross margin while positively affecting selling expenses for the consolidated group. Selling expense as a percentage of revenue was 37.6%, 270 basis points below the prior year period.

The lower selling expense is due in large part to growth in our Rhyz manufacturing segment, which represented 10% of our total sales. For the core Nu Skin business, selling expense was 41.7% compared to 43.5%. General and administrative expenses declined $7 million year-over-year as prudent expense management remained the top priority.

As a percentage of revenue, G&A was 26.2% compared to 25.7% in the prior year. Operating margin for the quarter was negative 5.3% or 7.9% 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 $8.1 million expense.

We generated strong cash from operations for the third quarter at $51 million compared to $28.4 million in the prior year period.

This was mainly driven by greater inventory conversion led by the market previews of TRMe and WellSpa iO, we paid $19.5 million in dividends and repurchased $13 million of our stock with $162.4 million remaining on the current authorization.

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, 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 million to $25 million. We now expect 2023 revenue of $1.92 billion to $1.96 billion.

We anticipate earnings per share of negative $0.10 to $0.05, or a $1.62 to a $1.77, which excludes the inventory write-off and restructuring charges for 2023. This guidance assumes the negative foreign currency impact of approximately 2% to 3%.

We are projecting fourth quarter revenue of $440 million to $480 million, assuming a foreign currency headwind of approximately 3% with reported earnings per share of negative $0.14 to $0.01, or $0.15 to $0.30, when excluding the fourth quarter charge.

In closing, while our Nu Skin business continues to decline from macro challenges, we remain steadfast in our dedication and driving forward our key initiatives, while also prioritizing our financial strength.

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

[Operator Instructions] I am showing we have a question from Tristen Chau with Stifel. Your line is open..

Hey everyone, thanks for taking my question. Just to 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 two other questions after that. Thanks..

Yes, Tristen, great question. 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 each place, we do have lower price products or 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 Nutricentials line, even TRMe versus our TR90 system is a more price sensitive line. And so you'll likely see more of that from us.

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 midterm. So those are probably the two biggest things..

Got it. And then to say on China seems that consumers are responding more to promotions compared to historical levels.

And so does that change how you are thinking about how you have to compete in the region?.

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 sensitive in 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, and, you know, major events like that promotion is certainly a critical part of our strategy and will continue to be 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 positioned that, that have a higher level of science, research and development, that sort of thing..

Got it.

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

So yes, that's a great question. So in terms of like most recent research, when we look at the third quarter, I haven't seen any direct research yet on categories within beauty and wellness that would point us. What we are reading anecdotally, and I'm speaking more from like the Euro monitor side.

I think that's going to take a little more time to research. What we are seeing though are mass consumer goods like the Procter & Gamble, those sorts playing well, obviously people needing the necessities while luxury is under a bit more pressure from those types of companies.

But we still believe in the long tail of the device – beauty device market and the wellness device market that we now plan with WellSpa iO, 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 on 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..

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

Yes. Hi, good afternoon everybody.

Ryan, staying on China here, you continue to sound a cautious tone on the business near term, but can you step back and give us your outlook for maybe three to five years, has there been any change in your longer term impact to that market despite the difficulties there for the last four or five years?.

Yes, Doug, by the way, great to have you on the call and connect again. Really appreciate you spending some time with us. Yes, China is interesting. 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 are having struggles more immediately with this consumption and even at the consumption push and that decrease that's happening at the GDP level. But they still have an enormous middle class.

They are still in our business specifically, and some of the Xi Jinping's party talking about economic opportunity in second 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 first tier cities in China.

So we know that there is a big middle class, we know near term there is pressure, but mid- to long-term that middle class will cons continue to consume goods and we believe there's expansion potential in second and third tier cities.

And so by no means do we write off China, 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 that's kind of the dominant channel..

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 it still pretty much the same model you've been operating for the last several years?.

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, 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 to market. You will recall some of our meetings historically were all about large group meetings.

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 a value for our salesforce training and education.

But in terms of reaching the mass customer, that's got to be through a digital first strategy that we've started investing in and we believe in that future.

And so where I would say is China's probably been less progressive or we've been less progressive in China in evolving our go-to-market strategy than in other certain markets as just because of the dynamics of the macro and trying to get that business restarted there with a new approach has been more prolonged than we had hoped..

Yes, that's very helpful. Thanks Ryan.

And just shifting gears here, James, can you talk about – I know you are 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 the place, can you just sort of give us your sense on how the inflationary environment is going to impact your outlook for 2024?.

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 a operating margins very consistent with where we landed in Q3.

As it pertains to 2024, we're still monitoring, and looking at and 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 Rhyz investment arm through those different businesses that we've acquired..

Okay, thanks. Great to speak with you again..

Thanks, Doug..

Okay, well this has been a fairly abbreviated call and I know some of you are stacked up with other readouts from other companies. So, we'll keep it short, but I just wanted to thank you all for joining the call. As we reflect on this, many of the world's greatest companies right now, we're 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, fill 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, we know touching bases quarterly is very important. We'll continue to do that and sharing more about our enterprise strategy in the months to come.

So thank you all..

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation. You may now disconnect..