Nu Skin Enterprises, Inc. Q2 FY2024 Earnings Call

Good day. Thank you for standing by. Welcome to the Nu Skin Enterprises' Second Quarter 2024 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 session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Scott Pond, VP of Investor Relations. Please go ahead.

Thanks, Shannon, 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'd like to turn the call over to Ryan.

Thanks, Scott. Hello everyone. Thanks for joining us today. I'll start by providing a performance summary of Q2 and then share a progress update on our ongoing enterprise transformation vision, strategy, and plan as we continue to evolve our core Nu Skin business from a traditional direct selling model towards a more expansive integrated beauty, wellness, and lifestyle company, including our Rhyz ecosystem. The second quarter played out similar to the first, with revenue slightly above the midpoint of our guidance despite a stronger-than-anticipated FX headwind of over 4%. Non-GAAP earnings per share were near the top end of the range, reflecting continued progress to plan for our business transformation while managing costs and driving efficiencies. Overall, the operating environment remains challenging for our core Nu Skin business, due in large part to macroeconomic factors and pressures on the direct selling industry itself. Despite these challenges, we were encouraged by sequential gains in several of our markets, including the U.S., South Korea, and parts of Southeast Asia-Pacific. Most notably, we experienced year-over-year improving trends and paid brand affiliates globally, which translated into improving new sales leaders. China remained challenging due to macro trends in the market. Our Rhyz business continued to perform well, with revenue up 32% to nearly $68 million, accounting for over 15% of our second-quarter total. Growth at Rhyz was led by our Mavely affiliate platform and our Wasatch Manufacturing business. Rhyz plays a critical role in our enterprise transformation that I'll speak to in a moment, and we expect revenue from Rhyz to continue to grow at a faster pace, reaching 20% to 25% of overall revenue mix by 2025. Let's dive deeper into both our Nu Skin Core and Rhyz businesses. In our core Nu Skin business, new products, including Ageloc, Wellspa IO, and RenewspA IO, along with our TRME weight management system, were the main growth drivers delivering over $60 million of revenue in the quarter. Adding these new wellness IO devices to our cadre of beauty devices has resulted in Nu Skin being named the World's Number One Company for Beauty and Wellness Device Systems by Euromonitor this past year. To date, our IO devices have produced more than 20 million connected treatments and over 100 million data points that are helping us to better understand our consumers' unique habits and behaviors, which drive 2 times to 3 times greater purchasing than that of non-connected device consumers. During the quarter, we continued to feel the impact of the challenging macro environment affecting consumer spending and customer acquisition in the majority of our regions, particularly for premium goods. Nevertheless, we were encouraged with sequential gains in several of our KPIs, including double-digit customer growth in our two largest segments, the Americas and Mainland China, along with gains in sales leaders in the key markets of South Korea and Southeast Asia-Pacific. We just held our first in-person live event for our Western markets in over five years with even larger events slated for our Eastern markets in September. It was a great reminder of the power of getting together in person, and we were able to drive energy and alignment among our leaders as we shared three key initiatives. First, we previewed our next major product division, Mind 360, a holistic approach to supporting cognitive health that will be launched around the globe over the next several quarters. Mind 360 is built to serve customers who are seeking support for stress management, cognitive performance, and sleep in this rapidly growing $9 billion global cognitive health market. Second, we discussed plans to enhance our overall brand awareness, announcing our integrated brand building plans as we strive to build greater presence wherever our customers seek to find us, including enhanced digital marketing and third-party marketplaces like Amazon. Improving overall brand awareness will lead to greater engagement and conversion for our customers and affiliates as we build synergistic value in the marketplace. And third, we announced our increasing efforts and focus to further penetrate developing and emerging markets around the globe, beginning with revised operating models in Latin America and some Southeast Asia markets beginning in the second half of this year. Developing markets represent more than half of the markets in which Nu Skin currently operates and are significantly underrepresented in revenue and operating performance. Our revised operating plan will include a more localized product portfolio and business model that will enable us to reach a broader demographic than historically feasible through our current business model in these markets, as well as streamlined operations. We will leverage these learnings as we prepare for our previously announced exploration of the India market. Our team is very focused on building successful developing and emerging market business models that will take Nu Skin's mission of being a global force for good by empowering people to improve lives to new markets around the world. Shifting next to Rhyz. As I mentioned previously, Rhyz continues to perform at an accelerated pace as we invest in, build, and scale these businesses towards a long-term integrated beauty, wellness, and lifestyle ecosystem. Rhyz is made up of several businesses ranging from technologies, manufacturing, and more recently, brands. Every investment in Rhyz holds synergistic value to the other businesses in our ecosystem and plays critical roles in our long-term vision and strategy. One critical business within Rhyz is Mavely, our everyday influencer platform that connects more than 70,000 affiliates to over 1,200 beauty wellness and lifestyle brands in the United States. Mavely is rapidly becoming a leading affiliate brand platform, leveraging technology that enables brands to access our army of everyday influencers to share their brands via social media. Leveraging machine learning and working to implement next-generation AI, Mavely curates brands for its affiliates to share via social media in a simple, fast, and easy manner. We're leveraging the Mavely platform to develop a Nu Skin Mavely app instance that will enable our affiliates to share Nu Skin brands more easily while gaining access to hundreds of other brands to promote and share. Additionally, Mavely enables the promotion of other Rhyz brands such as BeautyBio to Mavely affiliates. We anticipate that affiliate marketing will continue to outpace virtually all other forms of advertising and promotion, and we believe that our approach to integrated affiliate marketing via Mavely will become a more meaningful player in this rapidly evolving industry. In addition to Mavely, the benefits of vertical integration across manufacturing and our owned and partnered brands enable us to accelerate product innovation and speed to market as we move more quickly to keep pace with consumer trends in beauty and wellness. Rhyz also provides us with optionality to drive brand awareness and engagement, meeting more consumers where they discover and shop. We continue to invest in Rhyz as a critical innovation accelerator for our overall enterprise transformation strategy. Leveraging the expertise of companies within Rhyz has been instrumental in accelerating our innovation agenda in product and device research and development, sustainability, and supply chain capabilities. We'll continue to expand on this and share progress with you in the coming quarters. So, in summary, our enterprise transformation remains on track with second-quarter results in line with guidance and the halfway point of 2024. We've continued to demonstrate our ability to adapt to challenges and deliver within expectations. We're focused on accelerating innovation across our Nu Skin core business with our Mind 360 product division, an enhanced business model for developing and emerging markets, and integrated brand-building efforts. We're also investing in key enterprise growth initiatives, including Mavely and several other businesses in Rhyz, which continue to deliver strong growth. We have a long runway into the future that provides us with synergistic tools and capabilities that we can leverage across the enterprise. Operationally, we continue to focus on managing costs and driving efficiencies throughout our ongoing transformation. Despite the persistence of macroeconomic headwinds, we remain focused on executing our long-term vision of becoming the world's leading integrated beauty, wellness, and lifestyle ecosystem. So, with that, I'll turn the time over to James to cover second-quarter results in more detail, along with our guidance, and then we'll open it up for questions.

Thank you, Ryan. Thanks to all of you for joining today. I'll provide a brief Q2 update and then speak to Q3 and 2024 guidance. For additional details, please visit our Investor Relations website. For the second quarter, we posted revenue of $439.1 million, which was at the midpoint of our previous guidance range and included a slightly larger-than-expected negative foreign currency headwind of 4.2% or $21 million. Reported earnings were negative $2.38 or $0.21 excluding restructuring and impairment charges. Our gross margin was 70% compared to 72.9% in the prior year quarter. Our overall gross margin continues to be impacted by growth in our Rhyz business, which carries a lower gross margin. Gross margin for the Nu Skin core business was 76.1% compared to 77.2% in the prior year quarter. This decline in margin can largely be attributed to the geographic shift of revenue in the core and fixed overhead costs on lower volume. We are accelerating our SKU rationalization project and expect to see sequential improvements in gross margin with an approximate 20% reduction in our overall SKU count by the end of 2024. Selling expense as a percentage of revenue was 37.7% compared to 37% in the prior year quarter. For the Nu Skin core business, selling expense was 42.2% compared to 40.2% in the prior year period. Our core Nu Skin selling expense typically ranges between 40% to 42%, with a slight increase mainly attributed to enhancements made to the compensation plan targeting customer and affiliate acquisition. General and administrative expense declined nearly $20 million due to the continued execution of our cost efficiency program, related restructuring activities in the quarter, and bringing overall operating costs more in line with current revenue levels. As a percent of revenue, G&A for the quarter was 26.9% compared to 27.4% in Q2 2023. Over the past several years, our core Nu Skin business has faced challenges due to global economic downturns, the rising cost of capital, and overall direct selling industry pressures. These factors have contributed to a depressed market valuation, which resulted in a non-cash goodwill and intangibles impairment of $141 million, mainly across the Nu Skin reporting units. Additionally, in the second quarter, we incurred $8.4 million in restructuring charges and plan to extend our restructuring program as we continue to evolve our operating footprint as we transform our business. Our operating margin for the quarter was negative 28.6% or 5.4% excluding restructuring and impairment charges compared to 8.5% in the prior year quarter. Interest expense was $6.7 million for the quarter compared to $5.8 million in the prior year. The other income expense line reflects $0.6 million of income compared to $0.4 million of income in the prior year quarter. In the second quarter, we continued to make strides in our inventory management and portfolio optimization plan, which helped generate healthy cash flows from operations of $51.2 million, which also generated free cash flow of $43.1 million in the quarter. We paid $3 million in dividends and paid down $25 million of our outstanding debt during the quarter. We did not repurchase any stock and have $162.4 million remaining on our current authorization. Our tax rate for the quarter was 10.2% or 41.4% excluding restructuring charges compared to 27.5%. For both the third quarter and the year, we anticipate an adjusted tax rate of 36% to 42%. This annual rate reflects an anticipated higher global effective tax rate, primarily due to the expected geographical mix of our earnings. Shifting attention now to guidance. Based on our first half performance in 2024 at the midpoint of our prior guide, increased FX pressure in the current state of the business, we are tightening our annual guidance. We now expect 2024 revenue in the $1.73 billion to $1.81 billion range with earnings per share of negative $2.01 to negative $1.81 or adjusted earnings of $0.75 to $0.95. Our guidance now assumes increased foreign currency headwind of approximately negative 4% to negative 3%. We are projecting third quarter revenue of $430 million to $465 million, assuming a foreign currency headwind of approximately 4% to 3%, with reported earnings per share of $0.08 to $0.18 or adjusted earnings of $0.15 to $0.25. Looking ahead, we are confident in our ability to navigate the challenges and opportunities that lie before us. Our solid balance sheet and strong cash flow position us well to invest in growth initiatives while returning value to our shareholders. We will continue to execute our enterprise vision and strategy with discipline and focus, ensuring that we remain well-positioned for success. And with that, operator, we'll now open up the call for questions.

Thank you. Our first question comes from the line of Chasen Bender with Citi. Your line is now open.

Great. Thanks. Afternoon, guys. I wanted to first ask if you could give a little bit more detail about this Nu Skin Mavely app and explain how it will work specifically from the perspective of a sales leader. Once I have it in hand, how do I operate it? What does it mean? And how do I interface with it? But then at a higher level, obviously, you are launching products like Mind 360, you have more affordable luxury. You have this new app coming online. It seems like there's a lot coming at sales leaders really one at a time; they need to get back to basic blocking and tackling. So, just generally, how do you think about balancing all of these launches with competing attention versus stabilizing the core of the business?

Yes, those are good questions. We'll go through a few of those things quickly. You can download the Mavely app from the app store and see how it works for curating brands as an everyday affiliate. As we develop the Nu Skin Mavely version, Nu Skin affiliates will also be able to download the app and have a similar experience in selecting brands that suit them. The app features a straightforward post and share technology, making it easy to share links. This approach simplifies sharing brands and accessing various beauty, wellness, and lifestyle products on the Mavely app. Regarding our field's focus, we agree; much of our internal discussion revolves around how to innovate while allowing our sales force to concentrate on fundamental principles. A significant part of our live event's discussions emphasized returning to basics, which means sharing products you love and encouraging others to do the same. As we introduce new products, whether it's affordable luxury or Mind 360, these are additional offerings for affiliates to share with their loved ones. It's not solely about adding new products; rather, it's about products that resonate with people, especially in the affiliate marketing space, where personal connection is key. In recent years, the landscape has shifted; in the past, when we launched a new product, the entire sales force typically concentrated on it. However, the affiliate world now focuses on identifying products that connect with individual influencers and their target audience. By providing a range of products to choose from, we empower them to build their business uniquely. We remain mindful of balancing innovation with fundamental practices. Again, returning to basics means sharing products you love and encouraging others to do the same, regardless of what we put in front of them. We aim to target products that help them reach diverse demographics and target markets.

Got it. No, that's good detail. And then just mechanically, if a sales leader uses the Mavely app, shares a product, and generates the sale, how is that booked? Is that booked as core Nu Skin sale? Is that booked as Rhyz sale?

Yes, I mean, we're still working through the mechanics of how that will come through. But a sale that runs through the Mavely app will be recorded in Mavely, but it will all come to the same parent company in Nu Skin.

Okay. Okay, got it. And then I wanted to ask about the revised operating model in Lat Am and those Southeast Asian markets. Could you just expand on that? What the key changes are in your mind? And frame how quickly you think you could see positive activity and productivity changes and then ultimately, translating that into a timeline for those changes to hit the P&L?

Yes, absolutely. As we examine the developing markets where Nu Skin operates, we recognize that over half of our markets are located in regions like Latin America, Southeast Asia, Eastern Europe, and parts of China, specifically outside major urban centers. There are three key areas of our operation that we are currently reviewing. The first is our product portfolio, ensuring that we offer the right products at the appropriate price points. The second is our business model, aimed at encouraging the right selling behaviors. The third involves our operational infrastructure, which varies across different regions. For example, in Latin America, payment methods often include quotas or installment payments rather than credit cards, which are more common elsewhere. We're actively working on these developing markets, having already initiated efforts in Latin America, particularly in Argentina. There, we have streamlined our product offerings and are exploring local manufacturing options for new products to align prices with our target demographic. Additionally, we are assessing our business model, with existing tests underway in Latin America that involve revising our compensation system to better reward performance. These tests are already in motion and will be expanded through the end of the year as we also evaluate markets in Southeast Asia, such as the Philippines, Thailand, and Vietnam, which have different socioeconomic conditions compared to more developed markets. In terms of how these changes will impact our profit and loss statement, we are still in the testing and refining phase and have not fully integrated this into our outlook for the remainder of the year. We plan to provide more insights and details during our 2025 guidance discussions.

Got it, that's helpful. And I'm sorry, I don't mean to hog the entire call here. So, apologies. But just one more, if I may. I wanted to ask about the updated 2024 guidance. It looks like the implied second half net sales guidance went from down about 4.3% at the midpoint to down about 7.5%, but the implied second half EPS guide went from down $0.91 to $0.55, if my math is right. And so James, I was hoping maybe you could spend a little time framing the difference there just in context of the expense management efforts you're calling out. Are you investing more? If so, where are those dollars going? Just some additional color on that side, unpacking the change and any investment posturing would be helpful? Thanks.

Absolutely, that's a great question. We've analyzed the first half's performance in relation to our revenue guidance midpoint. It's true that we have narrowed the revenue range, which performed under the high guide in the first and second quarters. A significant point we didn't foresee when we provided guidance was a foreign currency impact exceeding 4%, which we've factored into our models. This adjustment to the top line has led us to lower our revenue expectations. However, we have managed to maintain our bottom line in light of our projections for the third and fourth quarters. We are experiencing pressure on gross margin, particularly when comparing our quarterly performance to the previous year. This pressure is exacerbated by foreign exchange fluctuations and some geographic shifts within our Nu Skin segments, where we are gaining more revenue from less profitable regions while seeing a decline in revenue from more profitable areas. This mix shift, along with a slight increase in selling expenses due to our investments aimed at enhancing performance, has contributed to the challenges we face. In terms of general and administrative expenses, we remain highly focused on driving cost efficiency. We aim to stay on track with our original savings target of $65 million in G&A expenses for 2024 compared to the prior year. This provides some insight into the sources of pressure on our profitability. Additionally, this pressure has impacted our tax rate, which we have modeled and communicated. We are seeing an increased tax rate due to profitability variations by geographic segment worldwide. We are working to clarify our expected earnings outcome in this context.

Got it. That's really helpful color. I appreciate it. I'll pass it on from here.

Thank you.

Thank you. Our next question comes from the line of Sydney Wagner with Jefferies LLC. Your line is now open.

Hi, this is Sydney on for Ashley Helgans. Thanks for taking our question. Just three from us. So, any update that you can give on some of the affordable luxury launches you discussed last quarter and how those have been received by the market? And then the second one was last quarter, you mentioned while you did see some pressure from the consumer side, demand for higher-priced items was still resilient. Just curious if that was a trend you still saw play out this quarter? And then just any additional color you can give on China and what you're seeing there? Thank you.

Yes, it's great to have you on the call. We are currently focusing on research and development for affordable luxury products, and we have more items in the pipeline. Recently, we launched a product called Peptide Pout, a lip application that has been very well received and sold out quickly. It's expected to be an effective promotional product worldwide. We plan to bring more similar products to market in the upcoming quarters. These affordable luxury items typically move quickly and are sold out rapidly, similar to influencer brand launches. We anticipate similar trends with Peptide Pout and the other products we are developing. Regarding the resilience of higher-priced products, our devices have performed well in this challenging inflationary environment, although some of our higher-end consumables have faced difficulties. Consumer behavior with high-priced items has been mixed, but durable goods are showing better performance. As for China, it remains a complex market. I was there recently meeting with our team, and while the economy is struggling, there is still significant ambition in the market. We're taking a cautious approach due to some near-term hesitancy, but I remain optimistic about China's potential. It remains the second-largest market globally with strong consumer demand. Local beauty brands are gaining market share at a rapid pace, partly due to the influence of platforms like TikTok, which is a shift from five to seven years ago. We believe in the long-term potential of our premium devices and brand in this market, but it may take time for the economy to recover.

Thank you.

I think that's all of the questions we had for the call today. I appreciate all of you dialing in. We acknowledge you're kind of juggling between other calls across the board. So, we appreciate the time you're able to give us. We look forward to giving you more updates in the quarters to come as we continue to evolve our business towards our vision of becoming the world's leading beauty, wellness, and lifestyle ecosystem. So, with that, we'll speak with you next quarter. Thanks a lot.

This concludes today's conference call. Thank you for your participation. You may now disconnect.