Q3 2021 NU Skin Enterprises Inc Earnings Call

November 3, 2021

[music].

Good day and thank you for standing by welcome to the third slaughter attorney to anyone you Skeena Enterprises and youth conference call.

At this time, all participants even though they send you an email.

Please be advised that today's conference is being recorded.

After the speaker's presentation, there will be a question and answer session.

To ask a question during that time, you will need to press star one on your telephone if you require any further assistance. Please press star zero.

And I'd like to have a conference or with your first speaker for today, Scotland. Thank you. Please go ahead.

Thank you and good afternoon, everyone today on the call with me <unk>, President and C E O K.

K G Global growth officer, and Martin Lawrence CFO.

On today's call comments will be made that include some forward looking statements. These.

These statements involve risks and uncertainties, an actual results may differ materially from those discussed one anticipated.

Please refer to today's Ernie Jeebies and or a SEC filing for complete discussion of these risks.

Also during the call certain financial numbers may be discuss that differ from comparable numbers, obtaining our financial statements.

We believe these non-GAAP financial numbers assist in comparing period to period result in a more consistent manner. Please refer to our industrial website for any required reconciliation of non-GAAP numbers and with that I'll turn the call over there right.

Scott Good afternoon, everyone. We really appreciate you joining the call. Today. This is my first earnings call Us new skin C. E O. So I'd like to take a few minutes to share my perspectives on our business, both historically and for the future as we work to further transform our business towards our vision of becoming the world's leading innovative beauty and wellness company.

Bini powered by our dynamic affiliate opportunity platform.

New skin has a rich heritage of building innovative beauty and wellness products for nearly four decades, including billion dollar brands like new skin personal care farm and accent age lock. However, the value of our business has often been defined through the narrow lens of our historic direct selling distribution channel but.

But when you examine our business for what it is becoming we are better described as a beauty and wellness company that connects consumers to innovative products that help them look feel and live better through our trusted brand affiliates via are socially enabled digital platform affiliate powered direct the customer.

Social commerce, new skin is fundamentally a beauty and wellness company based on our global reputation for high quality innovative products and deep consumer connections, we provide a holistic inside outside approach backed by robust R&D and scientific rigor, which very few companies provide.

And we are a category leader for beauty divide systems. According to your own monitor for four years running which provides a very unique opportunity for us as we expand our device ecosystem moving forward.

There are three key strategic imperatives that will enable our next era of growth first we will launch empower me are personalised beauty and wellness strategy as we begin to connect or beauty divide systems too are expanding digital ecosystem beginning in 2022.

Second will continue to evolve or go to market approach from a traditional direct selling business model to an emerging affiliate powered social commerce business model around the globe and third will expand our digital platform with an enhanced dot com experience as well as two new apps, they're up for our.

Customers and Stella for our affiliates.

Let me give a bit more context on our work in each of these three strategic areas.

Building upon our leadership position as the world's number one beauty divide systems brand, we will expand our device systems by introducing next generation connected devices beginning in 2022.

The beauty device category continues to be the highest growth sector and beauty and personal care and we believe that are connected device strategy will further expand our share of that category are products are loved by well more than a million registered customers today and many more unregistered customers around the globe and through empower me <unk>.

Analyze beauty and wellness, we will be able to connect even more customers nurture deeper engagement and build stronger community of brand lovers, which will result in greater lifetime value, we aspire to achieve what other great device companies like Apple Amazon and peloton have done making us the leader in <unk>.

<unk> beauty and wellness neck.

Next social Commerce is disrupting traditional e-commerce, just as e-commerce disrupted retail more than 20 years ago Global research estimates of social Commerce will expand from approximately $500 billion in 2020 to three four trillion by 2028 with nearly 70% of that stemming from Asia.

The power of Influencer in affiliate marketing is now regarded as the next generation advertising model by most leading beauty brands. This is where new skin wins, our route to market has almost or has always been through micro influencers well before social media.

We're evolving our business model to further leverage social scale and reach for our authentic affiliate marketing channel around the globe, including further refinements to our sales incentives campaigns and promotion plans.

This leads to the third strategic imperative extending our digital platform, which currently accounts for more than 90% of new skins revenues to fully capitalize on both our empower me personalized beauty and wellness product strategy and our affiliate powered social Commerce business model, we will continue to invest in our digital eco.

System by developing new tools to empower our customers and affiliates.

These include are we shop <unk> powered social commerce toolset that began rollout in Q3 in China to help drive customer acquisition.

Vera our product personalization, app, which is being expanded with new functionality.

Enabled deeper customer engagement and our newest staff, Stella, which will contain my site and product offer our most popular affiliate tools, which is in beta test now.

We are expanding our social commerce capabilities within both of these apps through our recent acquisition of May bully and emerging social Commerce technology company that will help our affiliates more effectively share and sell products via social media.

And will continue to make investments that drive growth and advanced the business objectives for new skin, providing value creation potential for the overall enterprise.

This multiyear transformation will lead new skin into a new era of growth and opportunity as we evolved from our traditional direct selling routes to become the world's leading beauty and wellness company powered Biodynamic affiliate opportunity platform are sustained growth in the west over a strong 2020 gives us confidence that.

Our strategy is directionally accurate as we continue to execute our plans I'm confident you will begin to see the business through a much broader lens with a significantly larger total addressable market.

We will share more about our long term strategy ended upcoming Q1 Investor day will also introduce additional metrics. We believe to be instrumental in evaluating are evolving business and provide measurable mice milestones to track our progress against our transformation objectives.

Now, let me share some thoughts on the third quarter results before turning it over to Connie and Mark for additional detail.

As we stated in our pre release, we were disappointed with our third quarter revenue, which was lower than anticipated due to COVID-19 delta very of disruptions unexpected government restrictions interrupted selling and promotional activities in several markets specifically in mainland China and southeast Asia.

China continues to be a challenging market due to macro environmental factors. Nevertheless, it continues to hold enormous potential for beauty and wellness brands and will continue to explore additional approaches to market to rejuvenate growth in the midterm, including our 10 cent we shop partnership.

Additionally, macroeconomic issues in Latin America, an extended summer time return to vacation patterns in Europe affected our performance as well. Despite these had headwinds we were pleased with 46% reported year to date growth in EMEA and see a bright future ahead is this market continued to lean into social commerce.

We were pleased with steady gains in the U S driven by social Commerce expansion and the launch of beauty focus College and plus we also experienced double digit growth in Korea related to TR 90 body shaping system campaigns and various affiliate promotional initiatives both markets are well positioned for future growth.

For Q4, we are now focused on the rollout of beauty focused college, and plus and farm and X meta in most of our markets.

Collagen plus leverages are unique inside outside R&D capabilities to enter the growing 53 billion dollar global beauty supplement supplements market.

Murder is particularly interesting for us given the growing metabolic health challenges around the world both products hold great potential as we roll them out this quarter.

So in summary, while the third quarter was a near term was.

It was a near term setback, we remain on track to grow 3% to 5%. This year on top of a strong 2020 in fact, our two year growth is projected to be tend to 11% as we further our strategic transformation, we anticipate challenges along the way, but I am very optimistic about our future as we leave.

The beauty and wellness industry into a new era of connected consumerism with empower me through our dynamic affiliate powered social Commerce model, we have the right vision strategy and plans to achieve it and we have built the right team who will lead new skin into the future. In fact, we were pleased to be recognized this past month.

By four it's on its list of the one of the world's top female friendly companies.

And with that I'll turn the call over to Connie Tang for some additional insight on our market performance and then Mark for a review of our financials and are updated 21 guidance.

Connie is new to all of you, but not new to business transformation global markets or our industry. She spent almost her entire career and beauty and wellness and there's been a significant addition to our new skin leadership team over the past several months as we partner together to transform our global business. You'll then here for Mark, whom you all know and is also true.

A transformational leader coming out of Silicon Valley, and the connected devices World of Amazon Lab, 126, which provides critical perspective and experience for our future direction. So Connie with that taken away. Thank you. So much trying I'm excited to speak and share my perspective with you today choosing to join new skin in April with an easy.

Decision to me as I believe the company is on the brink of something truly remarkable there are a couple of key things that drew me to new skin first and working in the beauty and wellness space most of my career.

No new skin for having exceptional products.

Is the opportunity to draw upon the unique strain of can be a community to better track.

Gage entertain millions of customers and maximize that power and influence.

Digital first approach and customer obsession commitment to deliver community building interaction.

In addition.

Spending sharing economy and another macro trends Ryan mentioned are lining up in our feedback you'll be hearing more details about our specific plans at an upcoming investor Dang, but rest assured we are focused on providing high quality customer experiences for those who are curious and just starting to explore new skin.

Products to our most loyal fans, who count on receiving their subscription of new skin products each month as.

As we do that we are confident that we will drive customer attraction loyalty longevity and lifetime value.

So let me now provide a little more insight into each of our market segment at the highest level the challenges in China have been offset by accelerated growth of the business in the west.

Up 35% year to date over a very strong 2020.

Improve the geographic balance in our business with less reliance upon any given market.

And the Americans region. The successful introduction of beauty focus college and plus in the U S led to 14% revenue growth in the quarter.

67% growth in Q3 of 2020.

The U S continues to benefit from the increased adoption innovative products and social commerce. The U S achieved strong revenue and leader growth due to promotional product cadency and leadership alignment. However, the America segment decline in revenue during the quarters predominantly due to the continued economic.

MC instability in several Latin America market.

America's plans for the balance of the year include the continued launches of beauty focused college implants, and boost followed by connected devices in 2022.

Moving onto and man the 9% decline in revenue for the quarters, primarily attributable to extended summer vacation. Some pent up demand after a restricted 2020 and a challenging compared to Q3 2020 growth of 72%.

<unk> continues to be the gold standard when it comes to social commerce adoption with strong product promotions plan for Q4, we remain optimistic about the future.

Mainland China continues to face industry and macro environmental pressure. However, we remain committed to this market and continue to innovate our approach to market with the rollout of accent digital tools, which include a we shop personal storefront Q.

Q3 revenue with further negatively impacted by the COVID-19 Delta variant and the associated government restriction.

Customer account increased modestly due to the September we shopped rollout our focus will continue to be increasing social commerce adoption and what has traditionally been a person to person market.

Q4, we expect to benefit from the introduction of eight schlock meta and college and plus and will continue these efforts throughout 2022.

And Hong Kong, and Taiwan revenue remained relatively stable despite being negatively impacted by the COVID-19 Delta variant, we remain focused on advancing social commerce training in these markets and expect to benefit from introduction of each lock meta in queue for.

Now turning to Japan, because it impact caused us to give back some of the momentum we had been experiencing various japan with the market not only impacted by government restrictions, but also supply chain disruption impacting product availability, we continue to ramp up social commerce training for our leaders in this mature market and have also.

Begun introducing H lock Mehta, which will continue throughout 2022.

In Korea, we are highly encouraged without Q3 results as we continue to improve in this important market.

10% revenue and 18% growth in sales leaders, it's driven by successful product promotion around our Ti 90 body shaping system.

Focus for the balance of the year will be previewing H like mirror and expanding leader training around social commerce.

And finally southeast Asia Pacific. This segment has been perhaps the most impacted by Covid with deepening lockdowns in various markets and local market distribution challenges hindering our ability to fulfill orders and some market.

But the balance of the year, we are looking forward to the introduction of age documented in the fourth quarter.

I look forward to further participating on these call and hopefully meeting some of you in person.

And with that I will turn it over to Mark.

Thanks, Tony and thanks to all of you for joining a call today.

I'll provide a financial review and then get Q4 and full year 2021 guidance for additional detail. Please visit our Investor Relations website.

For the third quarter, our revenue was $641.2 million and benefited 2% due to foreign currency.

While this represents an eight 8% decline versus Q3 2020 at his growth of eight 7% on a two year look back versus Q3 2019.

Earnings per share for the quarter when 97.

Down 10% year over year, but up up 22.8% versus the same period in 2019.

Gross margin for the quarter improved 130 basis points to 75, 2%.

Gross margin for the core new skin business was 78.6% compared to 76.3% driven.

Driven by product mix product cost reductions.

And supply chain efficiencies.

Selling expense as a percent of revenue remain consistent with the prior year at 39.9%.

For the new skin core business selling expense was 42.7% compared to 42.4%.

General and administrative expenses as a percentage of revenue, where 25.1% compared to 23.5% in the prior year.

For the quarter G&A decline.

Three $9 million year over year, as we remain focused on carefully managing expenses.

Operating margin for the quarter was 10.2% compared to 10.6% in the prior year period largely impacted by revenue.

We still anticipate an approximate 50 basis point year over year improvement and operating margin for 2021.

On our way to our stated mid term goal.

Percent.

The other income expense line reflect.

$2.8 million gain compared to $8.5 million gain in the prior year the.

The benefit this quarter largely stems from unrealized gains and a rise investment holdings.

As our investments and rise increase you can expect more variability in our other income expense line item.

Cash from operations.

$32 million for the quarter and was impacted by our continued strategic investment and inventory to meet customer demand for new products and build some protection from global supply chain constriction.

We anticipate this elevated inventory level will decrease over the next few quarters.

We paid $19 million in dividends and repurchased $10 million of our stock with $255.4 million remaining in authorization.

<unk> tax rate for the quarter was 27% compared to 24.8% in the prior year period.

Our rise segment, which includes our manufacturing partners grew 4% in the quarter.

These manufacturing entities continued to benefit our core business by helping shore up our supply chain and generate U S profit that lowers the overall tax rate.

As Ryan mentioned, we also acquired an emerging social Commerce technology Company Maybelline.

And we continue to carefully seek investment opportunities.

Given our Q3 results we are adjusting our annual guidance and now expect revenue of 2672 $270 billion, which is annual growth of 3% to 5%.

Or growth of 10% to 11% versus 2019.

We anticipate earnings per share of $3 and 93.

Two $4.03.

Year over year improvement of 8% to 11%.

Or 27% to 30% on a two year look back.

This guidance assumes a positive foreign currency impact of 2% to 3%.

And a tax rate of 26% to 28%.

We are projecting fourth quarter revenue of $645 million to $675 million, assuming a foreign currency headwind of approximately 1%.

Q for earnings per share guidance is 90.

To one dollar and assumed 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 you will need to press Star then the number one on your telephone.

Taiwan on your telephone keypad.

Yeah. The first question from the line and staff let.

Let me think from Jeffrey.

<unk> is now open.

Thank you good afternoon, everyone right. My first question is for you and just listening to your opening remarks sounded very much like in the <unk> to the industry community looking at you differently as a partner. So I wanted to just have you talk a little bit more about the power of the platform.

<unk> powered opportunity platform that you talk about and what that could look like and do you use your own brand as proof of concept is there an opportunity to start partnering with emerging brand disruptive brands, maybe some of those that are in your manufacturing segment.

Two months, three a new channel to consumers.

Yes staff no. Thanks for thanks for the question, yes, it's.

We really are excited about the future and we've been talking about our business as a platform now for for quite some time, obviously, you're distributing our own brand as you describe that through that we see so much runway in.

50 markets, where we are as we continue to evolve our traditional direct selling model into this new.

Social commerce kind of hybrid model between a typical influencer marketing type approach and traditional direct sales taking the best of both worlds. So there's a lot more potential that we need to really focus on and get right for our core brands.

A lot of room and devices, obviously and connected devices to make that happen.

What we do longer term with the platform and an additional brands and partner brands I think is in a trading intriguing idea.

And will continue to explore that I do think it's important as we talked about the <unk> acquisition as well.

Hearing that we have the right technology to do it so I would say in the near term of the transformation, we're very focused on getting it right for our new skin core.

And core brands and mid to longer term the opportunities expand from there.

Very helpful. In Denmark, I have a couple of just technical I'm more tedious questions I apologize, but I wanted to just breakdown, but the gross margin interceded gross margin expand with actually quite surprising just given what we're seeing out there in terms of supply supplies 10 constraints.

So can you talk a little bit about your commentary supply chain efficiencies cost reductions I know, there's some mix in there too but.

To hold the gross margins stronger year over year on the core business. If you could talk a little bit about that that'd be helpful.

Sure. Thanks, Beth and thanks for the question gross margin is an area, where we've been focused on for for quite some time and as you know we have built up inventory and our channel.

Some of that build up an inventory was intended to get ahead of the supply chain constrictions, which we saw coming so that would be the first thing that we did is we got ahead of some of the inflation that we're seeing we got ahead of some of the supply chain constriction that we're seeing the second benefit is we have our own manufacturing entities and as we saw demand ramp up and as we saw some.

Supply chain constrict, we were able to shift those resources to our own manufacturing into Keith and the more product that we produce for ourselves the more gross margin benefits that we get.

I do think there's still opportunity and gross margin and the last thing I would say is FX did move in our favor this year, which did provide some additional benefit.

Okay very helpful. And then the last one is just the the DNA.

I recognize that had declined a bit year over year and rod dollars, but it was still higher as a percentage of sales maybe just help us think through the flexibility in the cost structure.

As we look ahead and looking at the corner, it's going forward how much flex is there to drive variable leverage relative to some of the six deleverage yes.

Yet. Thank thank you staff G&A really wanted the revenue story in this quarter, we did bring down spending about $4 million a year over year and that was really through our focus on making sure. We're spending money on the most important things we continue to invest in emerging markets. We continue to invest in technology, we continue to invest in.

Areas, where we think our business needs to go as far as transforming so we are investing in our business, but it's mostly a shifting of resources of that investment Guy.

Guided the original the year at about 24.5% to 25% G&A as a percent of revenue and I think we'll be about there at the end of the year.

Alright very helpful. Thank you.

Step.

Thank you. Our next question comes from the line in stock Lane from mainly suits. Your line is that okay.

Yes, hi, good afternoon, everybody just a couple of things first thinking about the the new module move towards the social model.

Do you think that your current compensation plan is properly tuned for that shift or should we expect some sort of modifications to your compensation plan.

Yes, Hi, Doug Yeah, I'll take that one.

You'll recall a few years ago that we did evolve the model towards what we called velocity, which is a more flexible business model that allows for people to build in diverse ways really sharing products predominantly on a social basis at a at a greater scale and or build.

A team of sharers.

And so the framework itself has really been put in place that enables that to happen. We do continue to evaluate the model to ensure that we're optimizing it for.

Rapidly evolving social commerce world, but I think the framework generally is right, but we will continue to to look at that model.

Okay, Yeah, I remember that and then the other thing I wanted to probe here is is China is getting worse and this is across the channel. It's not just new skin and I know you are making sure others are making shifts but the channel is just under a lot of pressure I mean your business is basically half what it was three years ago. So why is China still.

Good market for our Usda's direct selling company.

That's a great question and I'll provide my perspective, I would love to have corny as well. She spent a lot of time with our China team remotely. Unfortunately in the current environment, but at you are absolutely right the direct selling industry as a whole in China has has been challenged really since 2019 and continues to be challenge.

<unk>.

From that time, I think our our view of direct selling in China is that it will continue to be challenging as long as regulations are less clear and the macro environment evolves.

Which is why we are so focused on innovating in that world Connie talked a little bit about our 10% Wechat partnership we're looking at at opportunities to get our products to consumers in China that are obviously over 1 billion consumers and from a broader perspective dug and this is something I think that's really.

Important we're viewing ourselves more as a beauty and wellness company. So.

So how do we get those products to market more effectively leveraging the capabilities of our of our channel in terms of.

Affiliate and social Commerce type models, although it is very different in China, how do we leverage the unique ecosystem.

Ecosystem, there and those emerging trends there to bring these amazing products because for beauty and wellness as you know a lot of companies that they Lauder l'oreal are getting a lot of big China boom from the consumer actions, so our app or access and so we need to find a better way to do that but <unk> any thoughts sure. Thank you just add a little bit of my end.

Site, China remains a strong and growing market segment for beauty and wellness product consumption and for us the opportunity. So really lays very much. So in the area of accessing the wider customer and consumer base, which is why social commerce lends itself.

As the right platform for that to maximize.

Accent, bringing access to our products to a wider consumer base, reaching a more diverse geographic mix and then where we currently have and at the same time.

Is it.

Statistically still the fastest growing largest market share of social commerce today and is projected in fact into more than three trillion to 2028, so the marketplace opportunity there with relevant correct.

Lean into a leading duty and wellness company and Brian. He does limit let me add one comment there that I think might be important for the audience and our balance geographically is probably better than it ever has been made.

Mainland China is making up about 20% of our business, where you know better than most that is that's a very low number for us. We now have a 20% market in the Americas, 20% market in in China, and then several 10% markets and so the geographic balance provides much more stability and consistency for us then.

Relying on a single market to generate all of our growth.

Okay.

Good thank you.

Thanks, Doug Thank you.

Thank you all of our next question comes from the line asthma astronauts on your.

Your line is now.

Hey, everyone. This is Chris arms on for Mark.

Hi, Chris.

To start off with maybe you could provide some color kind of on the cadence of sales and sales leaders in customer level and maybe through the quarter I guess more in Asia, just kind of given the the disruptions in China as we kind of theme was more in July August.

And then maybe there is kind of a readout in September so maybe if you could kind of speak through that that would be great.

Yeah, I think I think Chris.

My observation Coney may have some as well clearly the China and when we look at sales leader trend in particular in China, and Southeast Asia were pretty heavily disrupted I think.

A critical part of our model continues to be the motivation and incentivization of of our sales force and one of the Covid effects of the Delta variant that hit us that we were hoping to roll out of in 2021, frankly, especially the back half was around our incentive to.

Trips and and promotional activities tied to motivating those those groups and so we had the we had to make adjustments to those incentive trips the location the venue the time the dates and it really causes some level of de motivation in the sale of course it. So that's really the disruption you're seeing there is around.

Valves those events in particular for Michelle's leader perspective, but Connie.

Additional thoughts on that is this also inform the reason why.

Focus and a revisiting of the focus of customer acquisition is so critically important having direct access to customers, having purposeful and target a campaign to drive customer engagement. When we are struggling with governmental regulations or macro environmental challenges that.

Challenging to keeping an independent sales force motivated that's where we can look for opportunities to buffer that and to Sam no challenges that we see.

And lastly add one thing is is.

September preliminary rolled out of that Henson digital program did help us see some modest improvement in the customer number which we're looking to continue to leverage and also to create long term value from from the customers and the plan.

I think forward looking Chris if we think about.

Where the world is with regard to Covid and vacation or.

Patterns, obviously airlines are clearly filling backup hotels are feeling back up our hope is that the COVID-19.

Effects on travel will over time, less and then enable us to <unk>.

<unk> some of those important incentive and promotional activities that will and even in a social commerce world continue to be important to motivating our sales force. So we don't see this being a longterm lag as the world kind of a continues to adjust back.

Got it that's helpful. And then if I could just follow up on on kind of a gross margin peace.

Seems like it's in pretty good shape relative to what a lot of other companies are seeing.

Is there any need are kind of plans to take price in the future and term and reaction that any of these pressures there.

Yes, pricey. So so I think the way I would define it mark talked about the strategic investments in inventory that we made in advance which has been good and I think helping us to to not suffer as much from supply chain constraints as many companies around the globe, but there are there are costs associated.

That we really view ourselves as a customer obsessed company. We are a premium goods company and so we want to be careful in setting prices that are realistic to to market. So we will continue to evaluate that over time, we do apply.

A relatively consistent pricing our approach to pricing around the globe, we had a moderate price increase earlier. This year will continue to evaluate based on inflation and the like as we see the world change Mark anything you'd at night I think we have a standard process, where we look into every market around the world.

And we understand the inflationary environment, how are our products are priced in those markets and we make adjustments every year Accordingly, and I think that practice will continue in addition to our efforts and our supply chain to bring down cost of products. So that we don't have to be as influenced by inflation going forward.

Got it thank you.

Thanks, Chris we appreciate it doesn't look like there are any more questions in the queue. So let me just wrap it up by thanking you all for attending our call today I hope that what you've taken from the call is that new skin is well underway and our transformation towards a significantly brighter futures, we lean into our vision of becoming the world's leading innovative beauty and wellness comes.

Sydney that's powered by this dynamic affiliate opportunity platform. This vision will be enabled through our introduction of empower me personalized beauty and wellness through connected devices and our unique affiliate powered social commerce business model evolution, beginning in 2022, while our aspirations are great our track records.

Product and device innovation and business model evolution give me confidence that our best years are yet to come you'll learn more about our strategy and plans at an upcoming Investor day in early Q1 as I mentioned, so we look forward to seeing you all hopefully in person or at least remotely very soon thanks.

Goodbye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

[music].

Good day, and thank you for standing by welcome to the third quarter attendance anyone youth skin Enterprises earnings conference call. At this time, all participants are in a listen only mode.

Please be advised that today's conference is being recorded.

After the speaker's presentation, there will be a question and answer session.

SaaS a question during that time, you will need to press star one on your telephone if you require any further assistance. Please press star zero.

I'd now like to hand, the conference over to your first speaker for today Scott Pond. Thank you. Please go ahead.

Thanks, Dan and good afternoon, everyone today on the call with me are Ryan appears skeet, President and CEO, Tony Kim Chief Global growth Officer, and Mark Lyons 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 complete discussion of these risks.

Also during the call certain financial numbers may be discussed that differ from comparable numbers obtained in our financial statements.

We believe these non-GAAP financial numbers assist in comparing period to period results in a more consistent manner.

Please refer to our Investor website for any required reconciliation of non-GAAP numbers and with that I'll turn the call over to Ryan. Thanks, Scott. Good afternoon, everyone. We really appreciate you joining the call. Today. This is my first earnings call as <unk> CEO, So I'd like to take a few minutes to share my perspectives on our business both historically.

And for the future as we work to further transform our business towards our vision of becoming the world's leading innovative beauty and wellness company powered by our dynamic affiliate opportunity platform.

<unk> has a rich heritage of building innovative beauty and wellness products for nearly four decades, including $1 billion brands like Nu skin personal care pharma and accent age lock. However, the value of our business has often been defined through the narrow lens of our historic direct selling distribution channel.

But when you examine our business for what it is becoming we are better described as a beauty and wellness company that connects consumers to innovative products that help them look feel and live better through our trusted brand affiliates via our socially enabled digital platform affiliate powered direct to customer so.

<unk> commerce, new skin is fundamentally a beauty and wellness company based on our global reputation for high quality innovative products and deep consumer connections, we provide a holistic inside outside approach backed by robust R&D and scientific rigor, which very few companies provide.

And we are a category leader for beauty device systems. According to Euromonitor for four years running which provides a very unique opportunity for us as we expand our device ecosystem moving forward.

We are now engaged in transforming our business from a traditional direct selling company to becoming the world's leading beauty and wellness company powered by our dynamic affiliate opportunity platform. There are three key strategic imperatives that will enable our next era of growth first we will launch empower me or <unk>.

Personally <unk> beauty and wellness strategy as we begin to connect our beauty device systems to our expanding digital ecosystem. Beginning in 2022 second we will continue to evolve our go to market approach from a traditional direct selling business model to an emerging affiliate powered social commerce business model around.

The globe and third we will expand our digital platform with an enhanced dot com experience as well as two new apps, they're up for our customers and stellar four our affiliates.

Let me give a bit more context on our work in each of these three strategic areas.

Building upon our leadership position as the world's number one beauty device systems brand, we will expand our device systems by introducing next generation connected devices beginning in 2022.

The beauty device category continues to be the highest growth sector in beauty and personal care and we believe that our connected device strategy will further expand our share of that category. Our products are loved by well more than 1 million registered customers today, and many more unregistered customers around the globe and through empower me person.

<unk> beauty and wellness, we will be able to connect even more customers nurture deeper engagement and build stronger community of brand lovers, which will result in greater lifetime value, we aspire to achieve what other great device companies like Apple Amazon and peloton have done making us the leader in.

<unk> beauty and wellness next.

Next social Commerce is disrupting traditional e-commerce, just as e-commerce disrupted retail more than 20 years ago Global research estimates the social commerce will expand from approximately $500 billion in 2020 to $3 four trillion by 2028 with nearly 70% of that stemming from Asia.

The power of Influencer and affiliate marketing is now regarded as the next generation advertising model by most leading beauty brands. This is where our new skin wins. Our route to market has almost there has always been through micro influencers well before social media.

This leads to the third strategic imperative extending our digital platform, which currently accounts for more than 90% of Nu skin's revenues to fully capitalize on both our empower me personalized beauty and wellness product strategy and our affiliate powered social Commerce business model, we will continue to invest in our digital ethos.

System by developing new tools to empower our customers and affiliates.

These include our we shop <unk> powered social commerce tool set that began rollout in Q3 in China to help drive customer acquisition.

Era, our product personalization, app, which is being expanded with new functionality.

Enable deeper customer engagement and our newest apps, Stella, which will contain my site and product offer our most popular affiliate tools, which is in beta test now.

We are expanding our social commerce capabilities within both of these apps through our recent acquisition of <unk>, an emerging social Commerce technology company that will help our affiliates' more effectively share and sell products via social media and we'll continue to make investments that drive growth and advance the business objectives for new skin.

Providing value creation potential for the overall enterprise.

This multiyear transformation will lead new skin into a new era of growth and opportunity as we evolved from our traditional direct selling routes to become the world's leading beauty and wellness company powered by our dynamic affiliate opportunity platform, our sustained growth in the west over a strong 2020 gives us confidence that our.

Our strategy is directionally accurate as we continue to execute our plans I am confident you will begin to see the business through a much broader lands with a significantly larger total addressable market.

We will share more about our long term strategy ended upcoming Q1 Investor day will also introduce additional metrics, we believe to be instrumental in evaluating our evolving business and provide measurable milestones to track our progress against our transformation objectives.

Now, let me share some thoughts on the third quarter results before turning it over to Connie and Mark for additional detail as.

As we stated in our pre release, we were disappointed with our third quarter revenue, which was lower than anticipated due to COVID-19 delta various disruptions unexpected government restrictions interrupted selling and promotional activities in several markets specifically in mainland China and Southeast Asia, China continues to be a challenging <unk>.

Due to macro environmental factors. Nevertheless, it continues to hold enormous potential for beauty and wellness brands and we'll continue to explore additional approaches to market to rejuvenate growth in the mid term, including our Tencent we shop partnership.

Additionally, macroeconomic issues in Latin America, and extended summer time returned to vacation patterns in Europe affected our performance as well. Despite these headwinds headwinds we were pleased with 46% reported year to date growth in EMEA and see a bright future ahead as this market continues to lean into social commerce.

We were pleased with steady gains in the U S driven by social Commerce expansion and the launch of beauty focused college and plus we also experienced double digit growth in Korea related to TR 90 body shaping system campaigns and various affiliate promotional initiatives both markets are well positioned for future growth.

For Q4, we are now focused on the rollout of beauty focused college, and plus and farm <unk> Mehta and most of our markets.

Collagen plus leverages, our unique inside outside R&D capabilities to enter the growing $53 billion global beauty supplement supplements market.

<unk> is particularly interesting for us given the growing metabolic health challenges around the world.

Both products hold great potential as we roll them out this quarter.

So in summary, while the third quarter was a near term was.

It was a near term setback, we remain on track to grow 3% to 5%. This year on top of a strong 2020 in fact, our two year growth is projected to be 10% to 11% as we further our strategic transformation, we anticipate challenges along the way, but I am very optimistic about our future as we lead.

Lead the beauty and wellness industry into a new era of connected consumerism with empower me through our dynamic affiliate powered social Commerce model, we have the right vision strategy and plans to achieve it and we have built the right team who will lead new skin into the future. In fact, we were pleased to be recognized this past month.

By Forbes on its list of the 100 of the world's top female friendly companies.

And with that I'll turn the call over to Connie <unk> for some additional insight on our market performance and then Mark for a review of our financials and our updated 'twenty one guidance.

Connie is new to all of you, but not new to business transformation global markets or our industry. She spent almost her entire career in beauty and wellness and has been a significant addition to our new skin leadership team over the past several months as we partnered together to transform our global business. You will then hear from Mark, whom you all know and is also.

A transformational leader coming out of Silicon Valley, and the connected devices World of Amazon Lab, 126, which provides critical perspective and experience for our future direction. So Connie with that take it away. Thank you. So much Brian I'm excited to speak and share my perspective with you today choosing to join youth skin in April was an easy one.

Decision for me is I believe the company is on the brink of something truly remarkable there are a couple of key things that drew me to Nu skin first and working in the beauty and wellness space. Most of my career I've known Nu skin for having exceptional products.

Is the opportunity to draw upon the unique strength of our affiliate community to better attract engage and retain millions of customers and maximize that power of influence through our digital first approach and customer obsession commitment to deliver community building interaction.

In addition, the expanding sharing economy and other macro trends Ryan mentioned are lining up in our favor youll be hearing more details about our specific plans at an upcoming investor day, but rest assured we are focused on providing high quality customer experiences for those who are curious.

And just starting to explore new skin products through our most loyal fans, who counts on receiving their subscription of nu skin products. Each month as we do this we are confident that we will drive customer attraction and loyalty longevity and lifetime value.

So let me now provide a little more insight into each of our market segments at the highest level of the challenges in China have been offset by accelerated growth of the business in the west.

Up 35% year to date over a very strong 2020.

This improves the geographic balance in our business with less reliance upon any given market and.

In the Americas region. The successful introduction of beauty focused college in plus in the U S led to 14% revenue growth in the quarter on top of 67% growth in Q3 of 2020.

The U S continues to benefit from the increased adoption of innovative products and social commerce. The U S achieved strong revenue in leader growth due to promotional product cadences and leadership alignment. However, the Americas segment decline in revenue during the quarter predominantly due to the continued economic.

<unk> and stability in several Latin American markets are.

Our Americas plans for the balance of the year include the continued launches of beauty focused collagen plus and boost followed by connected devices in 2022.

Moving onto EMEA, the 9% decline in revenue for the quarter is primarily attributable to extended summer vacation from pent up demand after a restricted to 2020 and a challenging compare to Q3 2020 growth of 72%.

EMEA continues to be the gold standard when it comes to social commerce adoption with strong product promotions planned for Q4, we remain optimistic about the future of the knee.

Mainland China continues to face industry and macro environmental pressures. However, we remain committed to this market and continue to innovate our approach to market with the rollout of our Tencent digital tools, which include a workshop personal storefront Q.

Q3 revenue was further negatively impacted by the COVID-19 Delta variant and the associated government restrictions our customer account increased modestly due to the September wechat shop rollout, our focus will continue to be increasing social commerce adoption in what has traditionally been a person to person mark.

It does.

During Q4, we expect to benefit from the introduction of H block meta and collagen plus and we will continue these efforts throughout 2022.

In Hong Kong, and Taiwan revenue remained relatively stable despite being negatively impacted by the COVID-19 Delta variant, we remain focused on advancing social commerce training in these markets and expect to benefit from the introduction of <unk> in Q4.

Now turning to Japan, the Covid impact caused us to give back some of the momentum we had been experiencing there is Japan was the market not only impacted by government restrictions, but also supply chain disruptions impacting product availability, we continue to ramp up social commerce training for our leaders in this mature market and have also.

Begun introducing H block meta, which will continue throughout 2022.

In Korea, we were highly encouraged with our Q3 results as we continue to improve in this important market.

10% revenue and 18% growth in sales leaders was driven by successful product promotion around our TR 90 body shaping system, our focus for the balance of the year will be previewing HVAC meta and expanding leader training around social commerce.

Quarter.

I look forward to further participating on these calls and hopefully meeting some of you in person soon and with that I will turn it over to Mark.

Connie and thanks to all of you for joining our call today I'll provide a financial overview and then good Q4 and full year 2021 guidance for additional detail. Please visit our Investor Relations website.

For the third quarter, our revenue was $641 2 million.

And benefited 2% due to foreign currency.

While this represents an eight 8% decline versus Q3 2020. It has growth of eight 7% on a two year look back versus Q3 2019.

Earnings per share for the quarter were <unk> 97.

Down 10% year over year, but up 22, 8% versus the same period in 2019.

Gross margin for the quarter improved 130 basis points to 75, 2%.

Gross margin for the core new skin business.

Was 78, 6% compared to 76, 3% drew.

Driven by product mix and product cost reductions and supply chain efficiencies.

Selling expense as a percentage of revenue remained consistent with the prior year at 39, 9%.

For the new skin core business selling expense was 42, 7% compared to 42, 4%.

General and administrative expenses as a percent of revenue were 25, 1% compared to 23, 5% in the prior year.

For the quarter G&A declined.

$3 $9 million year over year, as we remain focused on carefully managing expenses.

Operating margin for the quarter was 10, 2% compared to 10, 6% in the prior year period largely impacted by revenue.

We still anticipate an approximate 50 basis point year over year improvement in operating margin for 2021 on our way to our stated mid term goal of 13%.

The other income expense line reflects a.

$2 8 million gain compared to $8 $5 million gain in the prior year the.

The benefit this quarter largely stems from unrealized gains in our rise investment holdings.

As our investments in rise increase you can expect more variability in our other income expense line item.

Cash from operations was $32 million for the quarter and was impacted by our continued strategic investment in inventory to meet customer demand for new products and build some protection from global supply chain constriction.

We anticipate this elevated inventory level will decrease over the next few quarters.

We paid $19 million in dividends and repurchased $10 million of our stock with $255 $4 million remaining in authorization.

Our tax rate for the quarter was 27% compared to 24, 8% in the prior year period.

Our <unk> segment, which includes our manufacturing partners grew 4% in the quarter.

These manufacturing entities continue to benefit our core business by helping shore up our supply chain and generate U S profit that lowers our overall tax rate.

As Ryan mentioned, we also acquired an emerging social Commerce technology Company <unk>.

And we continue to carefully seek investment opportunities.

Given our Q3 results we are adjusting our annual guidance and now expect revenue of $2 67 to $2 $701 billion.

Which is annual growth of 3% to 5%.

Our growth of 10% to 11% versus 2019.

We anticipate earnings per share of $3 93.

Two $4 <unk>.

Year over year improvement of 8% to 11%.

Or 27% to 30% on a two year look back.

This guidance assumes a positive foreign currency impact of 2% to 3%.

And a tax rate of 26% to 28%.

We are projecting fourth quarter revenue of $645 million to $675 million.

Assuming a foreign currency headwind of approximately 1%.

Q4 earnings per share guidance is <unk> 90.

To one dollar 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 you will need to press Star then the number one on your telephone.

Star one on your telephone keypad.

Yeah.

From the line of Steph Wissink from Jefferies. Your line is now open.

Thank you good afternoon, everyone. Ryan My first question is for you I guess listening to your opening remarks, you sounded very much like in the <unk> to the industry community looking at you differently as a partner. So I wanted to just have you talk a little bit more about the power of the platform.

<unk> powered opportunity platform that you talk about and what that could look like as you use your own brand as proof of concept is there an opportunity to start partnering with emerging brands disruptive brands, maybe some of those that are in your manufacturing segment.

Two months through a new channel to consumers.

Yes, Steph thanks for thanks for the question yes.

We really are excited about the future and we've been talking about our business as a platform now for for quite some time, obviously, you're distributing our own brands. As you described that through that we see so much runway in.

In the 50 markets, where we are as we continue to evolve our traditional direct selling model into this new.

Social commerce kind of hybrid model between a typical influencer marketing type approach and a traditional direct sales taking the best of both.

World, So theres a lot more potential that we need to really focus on and get right for our core brands a lot of room in devices. Obviously in connected devices to make that happen, what we do longer term with the platform in additional brands and partner brands I think is an intriguing intriguing idea.

And we will continue to explore that I do think it's important as we talked about the <unk> acquisition as well.

During that we have the right technology to do it so I'd say in the near term of the transformation, we're very focused on getting it right for our new skin core.

In core brands.

And mid to longer term the opportunities expand from there.

Very helpful. And then Mark I have a couple of just technical and more tedious questions I apologize, but I wanted to just breakdown. The gross margin you can see the gross margin expand with actually quite surprising just given what we're seeing out there in terms of supply chain supply chain constraints. So can you talk a little bit about your commentary supply chain efficiencies cost reductions I know there.

There's some mix in there too but.

To hold the gross margins stronger year over year on the core business. If you could talk a little bit about that that'd be helpful.

Sure. Thanks, Jeff and thanks for the question gross margin is an area, where we've been focused on for quite some time and as you know we have built up inventory in our channel.

Some of that buildup in inventory was intended to get ahead of the supply chain constrictions in which we saw coming so that will be the first thing that we did is we got ahead of some of the inflation that we're seeing we got ahead of some of the supply chain constriction that we're seeing the second benefit is we have our own manufacturing entities and as we saw demand ramp up and as we saw some.

Supply chain constrict, we were able to shift those resources to our own manufacturing entities in the more product that we produce for ourselves.

Gross margin benefit that we get.

I do think there's still opportunity in gross margin and the last thing I'd say is FX did move in our favor this year, which did provide some additional benefit.

Okay very helpful. And then the last one is just on the.

G&A.

I recognize that it declined a bit year over year in raw dollars, but it was still higher as a percentage of sales maybe just help us think through the flexibility in the cost structure.

As we look ahead and looking at the quarters going forward, how much flex is there to drive variable leverage relative to some of the <unk> deleverage.

Thank you Steph G&A really was a revenue story and this quarter, we did bring down spending about $4 million year over year and that was really through our focus on making sure. We're spending money on the most important things we continue to invest in emerging markets. We continue to invest in technology, we continue to invest in the air.

It is where we think our business needs to go with forest transforming so we are investing in our business, but it's mostly a shifting of resources of that investment.

I guided the original the year at about 24, 525% G&A as a percent of revenue and I think we'll be about there at the end of the year.

Alright very helpful. As always thank you.

Thanks Steph.

Thank you. Our next question comes from the line of Doug Lane from Lane Research. Your line is now open.

Yes, hi, good afternoon, everybody just a couple of things first.

Thinking about the new models is to move towards a social model.

Do you think that your current compensation plan is properly tool for that shift or should we expect some sort of modifications to your compensation plan.

Yeah, Hi, Doug I'll take that one.

Youll recall, a few years ago that we did evolve the model.

Towards what we call velocity, which is a more flexible business model that allows for people to build in diverse ways really sharing products predominantly on a social basis at a greater scale and or building a team of shares.

And so the framework itself has really been put in place that enables that to happen.

We do continue to evaluate the model to ensure that we're optimizing it for the rapidly evolving social commerce world, but I think the framework generally is right, but we will continue to look at that model.

Okay, Yeah, I remember that.

And then the other thing I wanted to probe here is is China is getting worse and this is across the channel. It's not just new skin and I know youre, making shifts others are making shifts but the channel is just under a lot of pressure on your business.

This is basically half what it was three years ago. So why is China is still good.

Market for our U S based direct selling company.

No. That's a great question and I'll provide my perspective, I'd love to have Connie as well. She spent a lot of time with our China team remotely. Unfortunately in the current environment, but youre absolutely right the direct selling industry as a whole in China has has been challenged really since 2019 and continues to be challenging.

<unk>.

From that time, I think our view of direct selling in China is that it will continue to be challenging as long as regulations or are less clear and the macro environment evolves.

Which is why we're so focused on innovating in that world Connie talked a little bit about our Tencent Wechat partnership we're looking at at opportunities to get our products to consumers in China that are obviously over 1 billion consumers and from a broader perspective, Doug and this is something I think that's real.

Important were viewing ourselves more as a beauty and wellness company.

So how do we get those products to market more effectively leveraging the capabilities of our of our channel in terms of.

Affiliate and social Commerce type models, although it's very different in China, how do we leverage the unique ecosystem.

We ecosystem, there and those emerging trends there to bring these amazing products because for beauty and wellness as you know a lot of companies that they Lauder l'oreal are getting a lot of big China boom from the consumer actions. So our app, our access and so we need to find a better way to do that but Connie what's any thoughts you sure. Thank you just to add a little bit of my end.

Site, China remains a strong and growing market segment for beauty and wellness product consumption and for us the opportunity still really lays very much. So in the area of accessing the wider customer and consumer base, which is why social commerce lends itself.

As the right platform for us to maximize our <unk>.

Access, bringing access to our products to a wider consumer base, reaching a more diverse geographic mix than where we currently have and at the same time.

Is.

Statistically still the fastest growing largest market share of social commerce today and as projected in fact into more than $3 trillion through 2028, so the marketplace opportunity still as relevant for us as we lean into being a leading beauty and <unk>.

Wellness company, and Brian Hey, Doug, Let me add one comment there that I think might be important for the audience.

And our balance geographically is probably better than it ever has been.

Mainland China is making up about 20% of our business, where you know better than most.

That's a very low number for us we now have a 20% market in the Americas at 20% market in China, and then several 10% markets and so the geographic balance provides much more stability and consistency for us than being reliant on a single market to generate all of our growth.

Okay. That's good color. Thank you.

Thanks, Doug Thank you.

Thank you. Our next question comes from the line of Mark Astrachan from Stifel. Your line is now open.

Hey, everyone. This is Chris arms on for Mark.

Hey, Chris.

To start off with maybe you could provide some color kind of on the cadence of sales and sales leaders in customer level.

Maybe through the quarter I guess more in Asia, just kind of given.

The disruptions in China, as we kind of Athene was more in July August.

And then maybe there is kind of a rebound in September so maybe if you could kind of speak through that that would be great.

Yes, I think I think Chris.

My observation Connie may have some as well clearly the China and when we look at sales leader trend in particular in China and Southeast Asia, We're pretty heavily disrupted I think as a critical part of our model continues to be the motivation and incentives nation of of our sales force.

And one of the Covid effects of the Delta variant that hit us that.

We were hoping to roll out of in 2021, frankly, especially the back half was around our incentive trips and promotional activities tied to motivating those those groups and so we had that we had to make adjustments to those incentive trips the location the venue the times of dates and it really causes some level.

The motivation in the sales forces so thats really the disruption youre seeing there is around.

Those events in particular from a sales leader perspective, but Connie.

For additional thoughts on that is this also informs the reason why.

Focus and a revisiting of the focus of customer acquisition is so critically important having direct access to customers, having purposeful and targeted campaigns to drive customer engagement. When we are struggling with governmental regulations or macro environmental challenges that.

It is challenging to keeping an independent sales force motivated that's where we can look for opportunities to buffer that and to Sam <unk>.

<unk> that we see.

And I'll ask add one thing is as our September preliminary rollout of that Tencent Digital program did help us see some modest improvement in the customer number.

We're looking to continue to leverage and also to create long term value from some of those new customers that have been acquired.

I think forward looking Chris if we think about.

Where the world is with regard to Covid and vacation.

Patterns, obviously airlines are clearly filling backup hotels are filling back up our hope is that that the COVID-19.

Effects on travel will over time, less and then enable us to.

Resume some of those important incentive and promotional activities that will and even in a social commerce world continue to be important and motivating.

Our sales force. So we don't see this being a long term lag as the world kind of continues to adjust back.

Got it that's helpful. And then if I could just follow up on kind of the gross margin piece.

It seems like it's in pretty good shape relative to what a lot of other companies are seeing.

Is there any need or kind of plans to take price in the future in term and reaction that any of these pressures there.

Yes pricing so I.

I think the way I would define it as mark talked about the strategic investments in inventory that we made in advance which has been good and I think helping us to to not suffer as much from supply chain constraints as many companies around the globe, but there are there are costs associated that we really view ourselves as a customer a SaaS company.

We are a premium goods company and so we want to be careful in setting prices that are realistic too to market. So we will continue to evaluate that over time, we do apply a relatively consistent pricing.

Our approach to pricing around the globe, we had a moderate price increase earlier this year.

We will continue to evaluate based on inflation and the like as we see the world changed Mark anything you would add I think we have a standard process, where we look in every market around the world and we understand the inflationary environment, how our products are priced in those markets and we make adjustments every year Accordingly, and I think that practice will continue in addition to.

Our efforts in our supply chain to bring down cost of products. So that we don't have to be as influenced by inflation going forward.

Got it thank you.

Thanks, Chris we appreciate it doesn't look like there are any more questions in the queue. So let me just wrap it up by thanking you all for attending our call today I hope that what you've taken from the call as the new skin is well underway and our transformation towards a significantly brighter future as we lean into our vision of becoming the world's leading innovative beauty and wellness.

Company. That's powered by this dynamic affiliate opportunity platform. This vision will be enabled through our introduction of empower me personalized beauty and wellness through connected devices and our unique affiliate powered social commerce business model evolution, beginning in 2022, while our aspirations are great our track records.

Goodbye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

Q3 2021 NU Skin Enterprises Inc Earnings Call

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