Q2 2021 NU Skin Enterprises Inc Earnings Call
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Good day and thank you for standing by welcome to the Q2.2021 Nu skin Enterprises 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 a question. During the session you will need to press star 1 on your telephone.
Be advised that today's conference is being recorded if you acquire any further assistance. Please press star zero and I would now like to hand, the conference over to your Speaker today, Scott Pond, Vice President of Investor Relations. Please go ahead.
Thanks, Joelle and good afternoon, everyone today on the call with me are Ritch Wood, Chief Executive Officer, Ryan and appear ski President and CEO elect and Mark Lawrence Chief Financial Officer.
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.
From those discussed or anticipated. Please refer to today's earnings release, and our SEC filings for a complete discussion of these risks and also during the call certain financial numbers may be discussed that differ from comparable numbers obtained and our financial statements.
We believe these non-GAAP financial numbers assist and comparing period to period results in a more consistent manner. Please refer to our investor page at IR Dot Nu skin dot com for any required reconciliation of non-GAAP numbers and with that I'll turn the time over to ritch.
Thank you Scott and good afternoon, everyone. We really do appreciate you joining us today.
As many of you may know this will be and my last earnings call as CEO of Nu skin before transitioning leadership to Ryan on September 1.
We truly have an amazing nu skin team around the globe and the future continues to get brighter for growth and prosperity of this business and.
I'm excited about all that we've accomplished and I'm, even more positive about the future and these are some of the reasons for my optimism.
First we have taken deliberate actions to evolve into a more customer obsessed enterprises that delivers world class beauty and wellness products through a socially enabled affiliate platform.
We've also positioned our business to leverage powerful macro trends and shifts and consumer behaviors. For example, we've focused our product development on beauty device systems, and we have now been recognized by Euro monitor as the world's number 1 brand for beauty device systems for 4 consecutive.
Years.
And we formed key partnerships with Amazon Web services, and Alibaba and have revamped our tech strategy by moving our infrastructure to the cloud.
While this transition has greatly expanded our load capability and increased our ability to scale.
And I'm, most encouraged by the new tools and digital experiences that we plan to introduce which will delight, our customers and empower our affiliates.
And we've modified our incentive structure to speed payments and increased flexibility to our affiliates and attract a younger demographic.
We purchased manufacturing assets to increase our speed and agility, and bringing beauty and wellness products to market and securing our supply chain.
We established aggressive sustainability goals around people product and planet with a focus on building a better tomorrow for our world.
This foundation will continue to drive growth and profitability going forward.
And the second quarter, we generated very strong results, which highlight our corporate focus on improving our geographic balance and operating margin, we reported revenue growth of 15% with the western segments accounting for approximately 40% of our revenue.
We also improved our operating margin by 260 basis points to 12, 1%, which contributed to a reported 42% earnings per share growth.
Through all my years at Nu skin and I can truly say that we are better positioned for the future than we have ever been.
And the transition of management and has been going very well.
Ryan and I have worked hand in hand over the past several years and building the strategy of the company and executing our growth plans and I am confident that he and our team will accelerate our growth into the future let.
Let me now turn the time to Ryan to report on the business and give more detail around our second quarter results. Thanks.
Thanks, Rich and on behalf of our entire Nu skin team I wanted to say thank you for your leadership and your mentor shift during your time as CEO and these amazing contributions that you've given over the last 30 plus years with the company for the past nearly 5 years, we've been working together tirelessly to drive Nu skin's transformation into an even more customer of <unk>.
<unk> Global and digital first company and I'm really extremely proud of and the progress that were making.
Before we describe the quarter and more detail I'd like to discuss how we will accelerate our vision to becoming the world's leading innovative beauty and wellness company. That's powered by our dynamic affiliate opportunity platform. We're all familiar with the emerging macro trends that are shaping the broader consumer marketplace, including product personalization and <unk>.
Every brand's desire to know their customers on a more intimate level digital social and mobile connectivity of the direct to consumer experience and the disruption of retail and e-commerce with social media and Influencers to what is now being called social commerce as we look to the future we're aligning our V.
Asian and strategy to take advantage of these emerging market forces and reposition nu skin as a disruptive beauty and wellness leader through 3 key transformational moves first building on our heritage of developing innovative products and leveraging our leading position and beauty device systems, we will be introducing connected device CIS.
<unk> as we personalize our product offerings and deepen our relationships with more than $1.4 million registered customers second we will continue to transform our business by leveraging the power of social commerce, and our unique person to person affiliate marketing channel to build brand awareness and acquire customers at greater.
Scale via social media and media platforms in a deeper and more personal manner than traditional retail or e-commerce.
And third we will enable all of this through our enhanced digital ecosystem that improves our ability to attract connect and nurture customers, which currently makes up more than 90% of Nu skin's revenue.
Together. These 3 transformational moves will enable us to accelerate our vision to becoming the world's leading innovative beauty and wellness company.
So let me dive a little deeper into our strategy beginning with our innovative beauty and wellness products. We continue to focus on expanding our leadership position and beauty device systems with the launch of age lock boost and several markets and the first half and the remainder of our markets in the second half. These beauty device systems now make up approximately.
30% of the company's total revenue.
Additionally, we're pleased with the first half results of neutral Central's bio adaptive our customizable skincare line, that's targeted towards millennial and Gen Z emerging skin care enthusiasts.
For the remainder of the year, we will introduce 2 new product innovations first we've leveraged our unique inside outside R&D capabilities to develop our first beauty from within solution beauty focused college, and plus which will be launched in several markets throughout the second half.
This proprietary formula is our entry into the rapidly expanding $40 billion beauty supplement market.
Second we will be introducing and several of our markets. Our next significant farm and X product innovation age lock meta a supplement that supports metabolic health and helped shift the body's biochemistry towards a healthier mode.
Looking ahead into 2022, we will expand our device system leadership position by introducing next generation connected devices, which will further enhance the company's ability to provide consumers with more personalized product experiences to meet their needs.
The second part of our strategy our dynamic affiliate opportunity platform is how we take these products to market in order to acquire and serve our customers.
Virtually every consumer brand today is looking to build lasting relationships directly with their customers build a struggle to do so due to the constraints with their retail partners.
At Nu skin, we are leveraging our global team of micro Influencers and nearly 50 markets, who utilize the power of their personal brand and relationships to provide authentic product recommendations and personalized customer engagement via social media. This form of social commerce is now, enabling us to expand our target market and.
Reach new customer segments at greater scale, evidenced by the acceleration of our business over the past year.
Overall, we have a growing number of affiliates adopting social commerce and the west and we are actively proliferating this model and key markets throughout the east.
Grand view research is projecting social commerce to grow from an estimated $474 billion and 2020 to $3.3 trillion by 2028 with Asia currently accounting for 68% of total social commerce revenue.
We believe Nu skin is ideally positioned to take advantage of this growth opportunity as our social commerce business model evolves and those markets.
We continued to expand our digital ecosystem by incorporating new digital tools to empower our affiliates to make this shift including Vera our personal product recommendation App, which is currently in beta form and will be migrated to a new consumer experience. App. Later this year my site, our most popular affiliate tool.
And which will be migrated into a more robust affiliate app with enhanced social commerce functionality.
And are we shop Tencent powered social commerce tool set that will be introduced and China beginning in the second half.
Our dynamic affiliate opportunity platform is enabling us to accelerate our shift to a social commerce business model through the coming quarters.
So turning to our global markets, we have been able to sustained growth and the west over the past year. Despite ongoing COVID-19 related disruptions in certain markets, our trends are improving and our eastern markets as we expand our product offering and social commerce business.
Our customers remained relatively flat due to the surge in the prior year, while sales leaders grew 15% related to new product introductions and enhanced new leader qualification programs.
In the Americas specific regions. The successful launch of neutral Central's bio adaptive has helped sustain the gains we achieved during the past year, we achieved strong revenue and leader growth due to promotional product cadences and leadership alignment the.
And the year over year moderate customer decline and the region is primarily due to a slowdown in Argentina related to inflationary challenges.
As I mentioned earlier, we look forward to the college and plus and boost launches in the U S and the second half of the year along with the digital tool enhancements that will begin to rollout in Q4.
Moving onto EMEA age lock boost exceeded our expectations during the product preview in Q2, and we expect the excitement to continue into consumer launches in the second half of the year, social Commerce continued to propel our business and the first half, but we are seeing some leveling in the summer months as personal travel.
Increases over the prior year.
And with new product launches and strong product promotions kicking into gear, we remain optimistic about the future of EMEA and our business there.
This was a busy quarter for us and mainland China, where the launches of boost and neutral essentials contributed to the ongoing stabilization of this market. We are strongly focused on growing this region and we were excited to hold trainings and July with more than 10000, and sales leaders and preparation for social commerce and the rollout of our enhanced digital tool.
We'll set including we shop personal storefronts.
We're also preparing for the introduction of meta and college and plus and the second half.
And Hong Kong, and Taiwan, we remained stable with solid sales of boost and neutral essentials bio adaptive we're focused on advancing social commerce training and these markets as well and expect to benefit from the introduction of <unk> Mehta and Q4.
Turning to Japan, a successful promotion of our <unk> products, including devices contributed to the fifth consecutive quarter of local currency growth. Our business continues to perform well as we focus on engaging and training leaders on social commerce platforms ahead of our meta previews and the quarters to come.
And Korea is strong promotion of our TR 90 weight management system, and the quarter led to solid 6% growth and local currency.
Social Commerce trainees continue in the region as well with meta preview scheduled for the fourth quarter.
And finally southeast Asia. This market has been perhaps most impacted by COVID-19 with deepening lockdowns in various markets that said, we saw revenue and sales leader growth and the region led by Indonesia, offset by continued challenges in Vietnam, and Thailand that contributed to our customer decline.
We look forward to the introduction of meta and the second half.
So wrapping up we continue to transform our business to become the world's leading innovative beauty and wellness company powered by our dynamic affiliate opportunity platform. Our vision is on point to take advantage of the most significant beauty and wellness trends and the market and our social Commerce go to market strategy is aligned to enable us to reach even more.
Consumers through the power of our micro Influencer affiliates, we will continue to invest and our business to drive growth through innovation, while improving our operational efficiencies to generate shareholder value in the near and long term I am excited about what lies ahead for us at Nu skin as we mean aggressively into this vision and with that.
And I'll turn the time over to Mark.
Thanks, Ryan and thanks to all of you for joining our call today I will provide a financial overview and then give Q3 and 2021 guidance for additional details. Please visit the Investor Relations section on our website.
For the second quarter revenue increased 15% to $704.1 million.
Quarterly revenue was positively impacted 6% due to favorable foreign currency.
Earnings per share improved 42% to $1.15.
And benefited nicely by improved gross margin and overall cost containment.
Gross margin for the quarter improved 80 basis points to 75, 6% due to product mix product cost focus and supply chain efficiencies.
Gross margin for the core Nu skin business was 78, 3% compared to 77, 6% and the prior year.
Moving on to selling expense, which as a percentage of revenue was 39, 5% compared to 46% and the prior year.
For the new skin business selling expense was 42, 4% compared to 43, 3%.
And as a reminder, selling expenses, often fluctuate quarter to quarter, plus or -1%.
General and administrative expenses as a percentage of revenue were 24% compared to 24, 7% year over year as we continue to carefully manage expenses and gain leverage as we grow revenue.
I am very pleased with our operating margin improvements during the quarter, which improved 260 basis points to 12, 1% compared to 9.5% and the prior year quarter. This was another strong step towards our stated goal of a 13% operating margin.
The other income expense line reflects a $4 million expense compared to a $1.6 million gain and the prior year.
And the change was largely the result of fluctuating foreign currencies, along with any loss on an asset disposal.
Cash from operations was $20 million for the quarter as we continued our strategic investment and inventory to meet customer demand for our new products.
<unk> more product via ocean to reduce freight charges and built some protection from global supply chain constriction in this period of uncertainty.
We believe this elevated inventory level will decrease over the next few quarters.
We paid $19 million and dividends and repurchased $10 million of our stock with $265.4 million remaining in authorization.
Our tax rate for the quarter was 27, 1% compared to 29, 8%.
And our tax rate continues to be benefited by increased proppant and the west specifically the U S.
Our manufacturing.
Factoring partners had another strong quarter growing 27% with steady momentum heading into the back half of the year.
These entities continue to benefit our core business by strengthening our supply chain and bringing U S profit that helps our overall tax rate.
Our annual revenue guidance is $2.8 1 to $2.87 billion and.
And based on ongoing efficiencies, we are driving and the business. We are now raising our annual EPS guidance by <unk> <unk>.
To a range of $4.30.
$2.4.50.
This guidance assumes a positive foreign currency impact of 3% to 4% and a tax rate of 25% to 29%.
While our Q3 is historically slightly softer seasonally than Q2 due to summer vacations and many markets. Our prior year quarter included product launch revenue and we saw less impact from travel last year.
Our third quarter revenue guidance is 700 million to $730 million.
Assuming a positive foreign currency impact of approximately 2% to 3%.
Q3 earnings per share guidance is $1.10.
$2.1.20.
And assumes a tax rate of 25% to 29%.
With that operator, we will now open up the call for your questions.
Thank you as a reminder to ask a question Neal and need to press star 1 on your telephone.
And Joe Your question press the pound key please standby will be compile the Q&A last day.
So my first question comes from Doug Lane with Lane Research. Your line is open.
Yes, hi, good afternoon everybody.
And looking at the business.
The geographic mix shift you've been talking about out of Asia into the western markets has been fairly pronounced and I'm not seeing it elsewhere and the channel any meaningful effect. So what is it specifically about nu skin that's driving this.
Somewhat dramatic geographic mix shifts.
And out of Asia into the western markets.
Hi, Doug Yes. This is Ryan great question and to your point, we've been focusing heavily on this geographic diversification for us really propel.
Propelling the West currently is our social commerce enabled business, which has really accelerated well throughout EMEA and the Americas and that's really driving the balancing of the mix there as we said, we do see bright future.
Future for social Commerce, and the east, but it's taking a little longer for the the model to adapt their but longer term, we see that has great potential and that's the main driver.
Is there any impact from the velocity comp plan change and this or in your product mix offerings or is it really just the social commerce and the marketing tools.
No, we really do deploy outside of China, we deploy the same.
Sales compensation model globally, and our product portfolio and product launch strategy is predominantly global as well and so it really is.
And focused on social Commerce I do think the other factor obviously that has some relative impact is the state of the business relative to Covid implications and I've mentioned and southeast Asia for instance, that's more proximity driven as a business model and so there is probably some of that effect that that we're seeing as well.
Okay. Thanks, Ron.
Thanks, Doug.
Thank you. Our next question comes from Mark Astrachan with Stifel. Your line is open.
Hey, guys, good afternoon, and Chris arms on for Mark.
I guess, firstly, maybe just want to understand more broadly.
To provide some more color around expectations for for key geographies and the back half of the year.
Yes, I think as we look around.
We don't typically break guidance down by by market by any means, but but I think we continue to see our west.
And to do well despite difficult comps and we'll see ongoing improvements throughout our eastern markets.
Mark out of book you have anything to add to that no I think we at our Investor Day. We gave some initial ranges by market and those are largely performing in line from a revenue perspective.
And as is our overall revenue guide, which is why we left that revenue number alone profitability is obviously what is what is improving and caused us to <unk>.
Raise.
Again, we are seeing continued strength and the west from the adoption of the social.
Model, which Brian has referenced.
Got it.
If I could follow up on.
And so it looks like customers are down just a little bit I mean, how should we think about that in terms of.
Just kind of being tough compares year over year or losing customers.
Yes, I think that you hit the nail on the head there Chris It really is when you look year on year with that surge of what 400000 or so customers. Our focus really has been how to then sustain customer acquisition retention at that new level, which I think we've done.
Well I think there were a couple of areas South East Asia for instance that had had a hit it customers related to what I described earlier, but generally it really is ingesting that that new incremental 400000, and then stabilizing that and I would.
Only add that we had a couple of markets. For example, Argentina took a pretty big hit to their customer number is that market struggling from a macro perspective, with hyper inflation and thats affecting our ability to run the business effectively and grow the business there and then and southeast Asia, we called out a couple of markets in Vietnam and.
And Thailand that are struggling a bit and again as COVID-19 and other things affect them.
When you take out and now thanks, guys and that's.
And really good.
Thanks.
Thanks, Chris.
Thank you. Our next question comes from Steph Wissink with Jefferies. Your line is open.
Thank you good afternoon, everyone.
And if you just step back bigger picture, Ryan and have you share with us a little bit about the data that youre capturing through your affiliate model any learnings that you think could be relevant to call out at the midyear point and as Youre kind of thinking about planning into the next couple of years, how youre going to be using data differently to inform whether it's product plan their programs and marketing initiatives et cetera.
And.
Yes, great question step and I think.
Sure.
Theres, probably a few dimensions, we could talk about there so I'll try to keep it short we certainly believe that the future of our company and our growth is really reliant upon the data we'll be able to collect and this is why that connected device move is so important for us to be able to acquire beyond purchase.
<unk> data be able to acquire purchase intention habit, driven and that sort of data of course, all delta and our security and privacy basis, which is critical there, but it will inform a lot of different areas. In addition to of course the products that we serve up.
The evolution of our of our social Commerce model, our business model that way as well.
And as critical and informed that way and so we're really trying to to build that digital ecosystem in a manner that enables our data late to capture all of these different types of data and then utilize them more effectively I think as we look to the future I think there's going to be a lot more focus from the company around persona driven.
Work as we think about personalization and you think of companies like Netflix debt that personified their product and their case digital content through persona mapping, that's the sort of direction, we'll be able to accomplish through connected devices and <unk> and.
And learning so it's a big pivot, it's 1 we've been investing and for with our data Lake and with the cloud for the last several years and we're looking forward to being able to do more of it and in 2022.
Okay, Great and then as a follow up Mark a question for you just related to capital efficiency. It seems like the business is becoming more capital efficient I know there was a little bit of a setback with the manufacturing investment, but it starts it seems like it's starting to really kick in and again, maybe talk a little bit about.
How the combination of.
Your infrastructure and the assets combined with the migration towards social commerce, how that might drive continued improvement and your overall capital efficiency. Both at the working capital level and then also have the return on invested capital.
And thank you Steph and this has been and area of focus for us for a long period of time and part of the strategy and why we acquired manufacturing entities to shore up our supply chain you can see our inventory numbers have spiked. The last few quarters. This is a strategic decision that we made as we saw global supply chain constraints around the world We decided.
To go long and our own products and really be able to meet the demand of our customers.
And many other people were struggling in that area and then it also allowed us to put more product on the ocean and you see that benefit flowing through and our gross margin line and Thats not 1 that will go away as we are able to get more product where our customers are lastly, we are investing in a factory in China and we've talked about this for a period of time and that investment should finish.
This year, and so that capital will be able to be reallocated towards digital tools and digital tool expansion.
Very helpful. Thank you.
Thank you. Our next question comes from Faiza <unk> with Deutsche Bank. Your line is open.
Yes, hi, good evening everyone.
First of all right and just wanted to congratulate you again on your retirement and all the our success at Nu skin and Brian and congratulations to you again as well and.
I wish you the best.
Hey, guys.
You're welcome I guess price I.
And I just wanted to follow up on Stephens question around sort of the growth margin improvement and margin.
I don't know that I fully understand how.
And then sort of what's flowing through gross margin and <unk>.
What exactly you benefited from this quarter.
On line, just expanding at a little bit further that would be really helpful.
Sure thing either there's a number of things that benefited gross margin. The first is we really set out a couple of years ago to improve product cost and so our supply chain our value stream team as we call them is really worked on improving product costs, particularly.
And our devices and and our new product launches and what devices now, making up nearly 30% of our business those products, which were historically.
Potentially challenging the gross margin are now accretive to gross margin. So the big driver is cost improvements.
Mix and then lastly supply chain efficiencies, we were able to put more product on the ocean, which meant we spent less extra cost in air freighting product to our customers.
Okay got it.
And what's driving the lower product cost as it is.
Is it sort of.
Access to better suppliers or is it.
Anything else.
I would say the first area that is improving our product cost is owning our own manufacturing so about.
We are producing more products through our owned entity factories and those products of course come to us at cost and.
And so that would be the first area and where we own manufacturing entities and the other areas just improved efficiencies and product development. We're now 4 years into shipping luminous spa and we've taken cost out of the production of that product, which is still a very big top seller for us.
Okay, Great. That's very helpful. Thank you.
And then I just wanted to see and do you have any specific targets that you can share regarding age lock matter. Okay. Thank you I'll have to go back and check I think Brian you mentioned, a number of places where it is launching in the back half I believe Q4 in particular.
So just wondering if there is there because they are going to be and yield type process as you've done historically.
Or is there.
Just share a little bit more around that launch.
Sure Faiza, yes. So there are 2 different products that will be introduced.
Around the globe not all of them all markets will have meta and the second half and so we need to temper across the 2 products based upon our guide models model. So to speak you could expect something similar between the 2 products of what we saw last year with our launches and Mark.
I think that was what and the range of what we did with the introduction and boost and interest and interest we did about $70 million between the 2.4 and between the 2 so so we think it will be similar to that.
And again it will it will be split from meta and and our beauty focused product as well.
And our current forecast.
Got it okay. Thank you and then just last 1 Ryan you made some comments around social commerce and the eastern markets. It sounds like you have a number of initiatives.
And what.
What's the timing of that is that happening right now in real time.
And should we begin to see the benefit of sort of above and beyond the product launches.
Or is it more of a 2020 to drive buyer for the eastern market.
Yes, I think we anticipate so to answer your question, Yes, social Commerce training <unk>.
<unk> going on and in March the different states and every market at a little different state and.
In terms of the adoption.
The model, we don't have a lot built and incremental for social commerce and in this back half as we anticipate the timing.
To take longer so I think it is more kind of a 2022.
Effect level, but the activities and the trainings are taking place now and it's really the company aligning with leaders around a new approach to market that debt.
We're learning over there.
Perfect. Thank you so much.
No.
Thank you <unk> debt and.
And it looks like that all of our questions. We really appreciate all of you and I think it's truly been my honor to be the CEO of Nu skin and lead such an amazing team focused on really improving lives all around the world and true.
Really appreciate our global new skin family, our talented sales leaders are faithful and dedicated employees and and many of you who I've worked with for a lot of years. Thank you for your great support to our company.
Just in closing I will let you know that I'm really confident that we'll continue to build on our 37 year history of developing innovative beauty and wellness products and helping people look and feel their best providing opportunities for our affiliates to succeed.
Wood repeat to you and the message I continue to share with our Nu skin family and that is the world needs. What we have to offer and I truly believe the best is yet to come from new skin. Thank you again for your time today.
This concludes today's conference call. Thank you for participating you may now disconnect.
And.
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Okay.
Thanks.
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Okay.
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