Q3 2022 NU Skin Enterprises Inc Earnings Call
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Good day, and thank you for standing by and welcome to the Nu skin third quarter 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 questions during the session.
Need to press Star one one on your telephone you will then hear an automated message advising you your hand is right.
Please be advised that today's conference is being recorded I would now like the hand your conference over to your first speaker today, Scott Pond VP of Investor Relations Scott you have the floor.
Thanks, Stacy and good afternoon, everyone today on the call with me are Ryan <unk>, President and CEO , Tony <unk>, 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.
Refer to today's earnings release, and our SEC filings for a complete discussion of these risks.
Also during the call certain financial numbers may be discussed that differ from comparable numbers obtained in our financial statements. We believe these non-GAAP 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, everybody and thanks for joining us on the call today, it's been an interesting year to date to say the least as we initiated a global strategic transformation that investor day earlier in the year just prior to the economic turmoil that we're now facing.
Third quarter proved more challenging than anticipated due to an increasingly difficult global environment and geopolitical complexities. We finished the third quarter at $538 million.
First with a non-GAAP EPS of <unk> 47.
Four primary factors accounted for most of the shortfall versus our guidance.
<unk> continued declines in mainland China due to the prolonged COVID-19 related disruptions, including expanded locked down throughout the country second increasing weaknesses in south Korea related to economic pressures and company price increases.
Persistent global inflationary pressures and fourth the strengthening of the U S dollar above expectations, placing pressure across our supply chain.
Despite the current environment, we continue to execute on plans as we progress towards new vision, 2025, and becoming the world's leading integrated beauty and wellness company. That's powered by our dynamic affiliate opportunity platform.
In the third quarter, we began introducing loomis spa Io, our new connected cleanse and treat device system.
This input output device introduction marks a major milestone for nu skin and the prime preliminary rollout of our empower me personalized beauty and wellness strategy as we gained greater data and insights about our customers individual beauty and wellness journeys.
The launch of <unk>, Io, which is continuing into the fourth quarter together with <unk> continued adoption of age lock meta and beauty focus collagen plus helped drive constant currency growth in four of our reporting segments.
Led by double digit gains in southeast Asia Pacific as well as more modest growth in the Americas, Japan, and our Taiwan, Hong Kong segments.
Our affiliate powered social Commerce strategy continued to show progress, especially in the U S. Helping us post 10 consecutive quarters of growth.
Taiwan and parts of Southeast Asia that have adopted social commerce also achieved growth in the quarter.
We'll continue to innovate around the model with initiatives like one price a new pricing model introduced with the alumina spot Io that we anticipate will further our social commerce efforts by promoting affiliate productivity and retention.
And regarding initiatives to advance our digital first ecosystem, both Vera and stellar apps are now available in all markets. We continue to add languages features such as product offer and additional products available to purchase three of these apps.
Connecting luma spot Io with the Werra App provides direct customer feedback to optimize the efficacy of the device and products.
Our ultimate goal with these apps is to provide an integrated beauty and wellness virtual experience to our customers and an increased ability for our affiliates to seamlessly build their businesses from the palm of their hands.
From a geographic viewpoint, let me share some high level perspectives on a couple of our key markets and then Connie will provide additional details in just a moment.
We have reported the ongoing improvements in the geographic diversification of our business with no single market, representing more than 20% of our revenue today. We believe this diversification will be beneficial given increasing global volatility and complexities.
We anticipate challenges in China in the next in the near to mid term due to ongoing economic factors related to strict lockdowns in the market. We are working to counter these factors by making modifications to our business model to enable greater flexibility.
We continue to work towards mid to long term stability in this business as the environment improves.
Mainland China now represents approximately 14% of our business.
Our business in Korea experienced the setback in Q3, as we execute execute at a local price increased to address growing inflationary pressures, we will be expanding our weight management offering there, which we believe will help improve the market into 2023.
On a more positive note four of our 7% market segments reported constant currency growth led by Southeast Asia Pacific, which experienced double digit currency.
It gives me double digit constant currency results driven by strong Loomis bio introduction and the ongoing rollout of age locked matter as well as the U S, which posted another strong quarter and moderate growth in Japan, as well as Taiwan and Hong Kong.
Despite the macro environmental uncertainties in the near to mid term, we remain focused on moving new vision 2025 forward as we further our transformation to becoming the world's leading integrated beauty and wellness company. While it's too early to give details for 2023 I want to highlight a few specific strategic imperatives for the coming year that re.
Reinforce our vision.
For our empowerment strategy, we expect <unk> to continue ramping up over the next several quarters and are planning to introduce our next connected device age lock body Io in the second half of 2023 in the first half of the year. We will also be rolling out enhancements to our TR 90 weight management and body shaping line with.
A more personalized approach called <unk>.
We will also continue to expand social commerce with additional initiatives that enhance our brand affiliates productivity and retention.
Such as bulk kit offerings, and new affiliate reward programs throughout the year.
From a digital perspective, we'll continue to focus on enhancing capabilities and functionality across the barra and stellar apps, leading to even deeper customer insights and engagement and driving increased affiliate productivity well.
We will also begin to deploy our new e-commerce platform together with our strategic partner Infosys that will further enhance our ability to drive social commerce globally.
And lastly during these challenging times, we are sharpening our focus leaning into our core strengths and leveraging the agility of our model to improve overall efficiencies across the company.
We're making progress on our previously announced cost reduction plan as we realign capabilities and resources to deliver upon new vision, 2025, and stress and strengthen our financial position we.
We will continue to evaluate the business in the context of the global landscape and I anticipate these efforts to result in approximately $100 million in cost savings. This next year Mark will speak through the details in just a moment.
So these efforts together with our resilient entrepreneurial sales force gives me confidence in the future of our business as we navigate these precarious times and remain focused on our long term vision, so with that I'll turn the time over to Connie. Thank you. So much Ryan while the macroeconomic factors Ryan discussed had a widespread impact across our reporting.
Segments, we are happy to grow revenue in constant currency in four of our segments highlighted by a 10th consecutive quarter of growth in the U S and continuing momentum in Taiwan and southeast Asia in the Americas. The U S market grew with revenue up 7% year over year, driven by social search.
<unk> momentum.
Overall, the Americas segment grew 3% in constant currency with the success in the U S offset by macroeconomic issues impacting Latin America, leading to a decline in customers paid affiliates and sales leaders for the segment.
We're looking forward to the consumer launch let me start IL throughout this region in the fourth quarter. We continue to look to the U S market as validation of our social selling strategy and as a model for expanding best practices globally, although the U S has become our largest market we are seeing some growing economic headwinds.
And more challenging comparisons as.
As Bryan noted our mainland China business has been disrupted due to several macro factors.
We also made some modifications to the compensation plan during the quarter.
Given the impact of extended macro environmental factors in China, we implemented a more flexible structure designed to promote customer acquisition and sales leaders long term.
<unk> did have a negative impact on sales leader productivity. When it was introduced but it also help generate modest sequential growth in sales leaders, we anticipate the environment to remain challenging, but we are working closely with our local team to find ways to regain momentum.
Strong performance in Taiwan led to 6% constant currency revenue growth in our Hong Kong, and Taiwan segment, while Hong Kong faces the impact of Covid Lockdowns similar to mainland China.
One market is successfully driving adoption of social selling which led to an increase in customer acquisition. We also drove growth in Taiwan with the launches of H block meta and Lumi Spa.
EMEA revenue was down 6% in constant currency as a result of the distraction caused by conflict in the region.
As well as inflation in energy concerns all of these factors have impacted consumer spending throughout the region.
We have seen some encouraging early results in the fourth quarter as energy builds around lumi spot IL.
First paid affiliates and sales leaders is generally stemming from the same segments, where we are seeing revenue pressure as we look ahead across all of our markets. We continue to focus on new vision 2025 <unk>.
Pacifically the majority of our markets have just launched or preparing to launch lumi spot IL, our first product entry into the connected beauty device space, which will help drive adoption of our consumer Vera app through an enhanced connected customer experience. We continue to train affiliates on our social.
[noise] Commerce model and our year end holiday promotions will be targeted towards customer acquisition to put support sales leader productivity and now I will turn it over to Mark to go into more details on our financial performance. Thank you've gone and thanks to all of you for joining today I will give a Q3 financial review and then.
Initial queue for production and a big full year 2022 guidance for additional detail, we visit our Investor Relations website.
For the third quarter, we posted revenue of $537.8 million with a negative foreign currency impact of 7% or $47 million.
The U S. Dollar continues to strengthen ahead of expectations, which negatively impacted Q3 and will likely remain a headwind for the balance of the year report.
Reported earnings per share for the quarter was a negative 51.
Or 47, excluding restructuring and impairment charges associated with the previously announced company's strategic resource reallocation.
Are reported gross margin was 67.7%.
Or 72.7%, excluding the awkward mentioned charges grew.
Gross margin was impacted by the geographic revenue mix foreign currency exchange rates and global inflationary pressure.
Gross margin for the core news can business was 73% on a reported basis or 76.7%, excluding the restructuring and impairment charges.
Felling expense of a percent of revenue was 43% <unk>.
30 basis points below the prior year period.
For the coordinate skin business selling expense was 43.5% even with the prior year.
General and administrative expense declined $18.5 million a year over year as we remain focused on cost control.
As a per cent of revenue G&A was 25.7% compared to 24.4% in the prior year.
Operating margin for the quarter was a negative 3.8%.
Six 8%, excluding previously mentioned charges.
This compares to 10.2% in the prior year period, driven by the lower revenue this year.
The other income expense line reflects an eight 7 million dollar expense.
Or an adjusted five 4 million dollar expense compared to $2.8 million income in the prior year period.
<unk> in this line item of Flex a 3.3 million dollar unrealized investment loss related to our queue for 2021 exit from the grow Tech segment.
Cash from operations for the third quarter was $28.4 million or 36 $3 million, excluding $7.9 million of cash restructuring payments during the quarter compared to $32 million in the prior year.
Our balance sheet remains strong and as a reminder, we completed a debt refinancing in the second quarter of this year that provided further strength and security.
We paid $19.3 million in dividends and repurchased $40 million of our stock with $185.4 million remaining on the current authorization.
Our tax rate for the quarter was 12.3%.
Or 24%, excluding the restructuring and impairment charges compared to 27% in the prior year period.
R. Ryan segment, which includes our manufacturing partners was even when compared to the prior year quarter.
Remember that revenue reflected in this segment only represents sales to third party customers.
Our manufacturing entities continued to significantly benefit our coordinate skin business by helping firm up our supply chain increase our seed to market for new products and generate use profit that lowers our overall tax rate.
Let me give an update on our 2022 restructuring efforts we are on track with our previously announced restructuring in.
In the third quarter, we incurred a 30.1 million dollar charge and expect an additional $5 million to $10 million in the fourth quarter with approximately $3 million to $5 million in Q1 2023.
In addition, as we more closely align our product offerings to new vision 2025, we made the strategic decision to narrow our product portfolio and a line inventory on hand, with our future sales plans and promotion offerings, which resulted in an incremental $26 $9 million right up in the <unk>.
Third quarter.
Shifting focus now for guidance.
Given the continued economic uncertainty prolonged COVID-19 related factors foreign exchange pressure and geopolitical complexity. We are adjusting our annual guidance. We now expect 2022 revenue of $2.2 billion to $2.25 billion, we anticipate earnings.
Per share of one dollar and 25 cents to one dollar and 45 cents or $2 and $42.60.
When excluding charges associated with our queue for 2021 exit from growth Tech and the second half restructuring impairment charges.
This guidance, assuming negative foreign currency impact of approximately 5% to 7% and and adjusted tax rate of 20% to 26%.
We're projecting fourth quarter revenue of $500 million to $550 million, assuming a foreign currency headwind of approximately 8% to 10%.
Q for earnings per share guidance is 32 50.
Or 40 to 61, excluding the anticipated fourth quarter restructuring charge of approximately $7 million to $10 million.
In summary, while the near term environment remains challenging we continue to execute on the strategic priorities that support new vision 2025, and are aggressively ensuring that all resources are aligned to drive the transformation of our business to our vision of becoming the world's leading integrated beauty and wellness company.
Powered by our dynamic affiliate opportunity platform.
And with that operator, we will now open up the call for your questions.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press Star One line on your telephone and wait for your name to be announced please.
Please stand by while we compile the Q&A roster.
Our first call. Our first question comes from Jason Bender with city taste and go ahead with your question.
Right. Good afternoon, everyone. Thanks for <unk> me and I'd like to start on guidance just as I look at the <unk> guidance. The range is pretty wide and I imagine that reflects and all of the uncertainty that still exist, but perhaps you can speak to the width of the rain can kind of unpack some of the assumptions that are.
Leading to.
The guide.
Yeah.
Yeah chasing now so I'll I'll I'll chat for a sacrament Mark can give some some thoughts on that so it's certainly that as you mentioned in the range is wide relative to the environment. We typically do give a bit wider of a range any ways. We're obviously <unk>.
Watching the global uncertainties, right now and trying to understand exactly what will be impacted with consumer sentiment with the holiday seasons coming around.
Traditionally Q4 tends to be better, but but there is a lot of uncertainty out there mark maybe anything you I I think Ryan inserted exactly as I would Jason in.
In today's uncertain economic geopolitical environment, we felt that important to still give the guidance range and we thought it was important maybe to give a little bit wider range just given the uncertainty that exists.
Gotcha fair enough and in terms of gross margin I think you'd previously said you were expecting two HD kind of similar to <unk> any update or color on expectations for the remainder of the year on that one.
Yeah, Mark Yeah gross margin was really impact of this last quarter based on where revenue came in.
China, and South Korea, where the two markets that came in below our expectations are two of our highest gross margin markets for us and those were replaced by the U S, which is a little bit lower gross margin business for it I think we're seeing similar expectations for the fourth quarter based on that yield geographic mix of our business.
Gotcha that's helpful.
And then just on the loony spot.
Rollout glad to hear it it's coming along but can you just spend some time talking about the adoption rate of Vera.
For those markets, where it's launched and you know how that's trending relative to expectations.
Yeah, Yeah, no and in fact that just as a reminder for everyone luma spot.
So we have a luminous spot.
<unk> non connected devices. So the the I O is really an expansion of an existing franchise, which which is really important. It's our first IL connected device. It's very important the integration as you pointed out Jason to Vera is is also critical.
Vera and stellar Bolton early stage.
Downloads.
And utilization so right now we're seeing sub some good optic with I O. We see a lot of consumer still as as I'm sure you do as well.
Take time to connect those devices overtime I think we're seeing around the 30 per cent connection right now those who who who buy and then that up Texas as use goes on but it's still very early as as I mentioned were really still in the launch stage a lot of our large larger launchers are happening in queue for so we'll see how.
That progresses I think on various specifically, we're really encouraged by these apps, they're they're they're important to the future of the business and as I mentioned, we're really focusing now around where we have it in every market. We have now and the key languages, but as we've added language over the last few quarters and.
Really it's all about features and product availability on those apsos. So stealing in expansion mode for both of those but we're pleased so far with with.
The adoption of them.
Right. That's that's super color, and then sorry, not to be greedy, but just one more.
The last couple of quarters, one of the things you can do is clearing that loony spa.
One point O product.
Curious now that I was out have you discontinued sales of that and if so is there any lingering.
Loony small one point out if you will that has yet to be cleaned up.
Yeah, No no it's actually mixed in some of our markets.
Sure we've completely transition to the new IL, but we see a space at least for a time for the non Io device. There still seems to be good demand for that product and in markets that have false we're seeing we're seeing sales involved and so.
<unk> for the near term, we anticipate having both options at least while inventories last but the process of managing those mark together with that are our global product and value stream team have done a good job of managing the transition, but I I think there's room for both at least in the near to mid term.
Gotcha right.
<unk>. Thanks, so much guys.
Thanks J Jason.
And our next question.
It's coming from Ashley Helga Jeffrey Ashley you have the floor.
Hi, its Blake on for asking thanks for taking our questions I wanted to ask about China looks like the <unk> from the prior year is pretty similar in Q3 versus Q4. So.
Come in queue for can you talk about maybe what kind of growth you're expecting there.
Should we think of something similar to what you just posted in Q3.
Hey, Blake and welcome to the welcome to the call as well.
So are you, referring specifically the sequential the year over year sequential change, yes constant currency, yes mainland China.
Yeah, I think we would in the in the near near term, it's probably similar to what you saw last year.
Really what I'm rolling up in the forecast is that mainland China's.
Flat to slightly down sequentially, which would put it in the similar range to the way it performed year over year Q3 versus Q3 Q for versus Q4.
Okay, that's super helpful and on it sounds like Taiwan was after a relatively stronger start with the expert with the launch of when was Bob and the social selling benefit could you just talk about how that market perform versus or expectations and a quarter.
Yeah, I'll I'll I'll say, just a couple of things and Connie can provide more context.
Really actually impressed with Taiwan, it's really one of our longest running.
Markets out there and they they several years ago began to lean into social practices and they've continued to do a good job of kind of leading out at least in that part of the world and so we're pleased but Connie maybe any color you'd ads, Taiwan the adoption of social contract in Taiwan has continued to progress really very nice.
And really fundamentally their acquisition of customers has remained strong throughout the year and in fact for the.
Segment between Hong Kong, and Taiwan, led primarily with the timeline growth in customer acquisition. They are actually up 12% year over year customer base account. We've also seen initiatives that were targeted for retention and second purchases and subscriptions.
Conversions for those customer basis, and also take shape over the year with some really encouraging results that we continue we expect will.
<unk> two out next year.
Thank you that's Super helpful. And then last one for me. It was wondering if we could talk about the U S. I know that America's what's up about 3% constant currency can you talk about broadly what you are seeing for the health of the us consumer.
And maybe any commentary on trends throughout the quarter by month and then maybe what you are seeing in October .
Yeah, no as we mentioned the U S had it's 10th consecutive quarter of growth and we've been really pleased with that.
Our our I think our guide reflects the growing consumer sentiment in the markets is getting tough inflationary pressures, we've seen the holiday reports coming out et cetera.
So we're we're really trying to guide you know in relative form to what the market is.
That rolls up to queue for marketing your Connie with it I think you captured it.
Makes sense. Thanks, so much.
Thanks Blake.
Standby for our next question.
Our next question comes from interest in Cal S default.
And yet so far.
Hey, guys. Good afternoon. This is <unk> from Mark. Thanks for the question you had mentioned promotion targeting.
Some improvements in sales later productivity.
Are there any other specific measures being taken.
Taken in real time to help improve performance.
Yeah, I think a couple of things and Connie May have some addition additions to add you noticed and we've begun to report affiliate data as part of our social commerce transition.
Which are generally trending more closely to revenue. There's there's a lot of focus right now around affiliate productivity.
As well as the sales leader productivity.
As we're focused so there are various promotions that were that were engaging around the world.
Including some of those flexibility modifications that we mentioned in in China, specifically Connie is there anything you'd highlight there we continue to focus on the entire channel starting with consumer fundamental consumer strength and purchasing behavior.
That insurance at our affiliates also realizing some success and productivity, which in turn leads sales leader of attention as well as sales leader productivity I'd only add one thing if you remember a few years back we introduced our velocity compensation program and remember when we talked about the launch we <unk>.
Talked about it being fast and flexible the fast being that we could offer daily pay weekly pay a monthly pay something that was first in the industry or at least I believe we are first in the industry to be able to operate that that quickly, but the flexible is really important and we've been able to make adjustments to our compensation programs around promotions.
Things that are more interesting to affiliates and customers and sales leaders.
We see the world in the market changing and I think that there is an important part to our compensation plan that we've had just for the last couple of years and we take advantage of that as the world changes.
Okay got it that's that's helpful and how do you like I know you're working on different enhancements Vera.
<unk> and Stella and introducing.
Looney I O N body IL soon.
Is there just any change to innovation kaden, given the current market conditions.
Yeah, Yeah, no great question.
Their their ads and I'll speak more on the innovation release side. So to your point, we've really intentionally tried to focus very much upon fewer digital experiences that are much deeper saw these vera and style of apps are really critical in terms of global consolidation of digital properties down to really foe.
Kissing our efforts, there, which will allow us to and has 2022 allowed us to put more features.
More deeply into those apps and so those sprints are pretty quick like a traditional app every two to three weeks, there's a new sprint lumi I Oh of course as you as you noted being able to do firm where updates and even asked updates quickly.
As a new dimension that new skin. Historically has has been slower to operate in so I feel that that really marks that digital first company transition.
We're pleased with I think with respect to products and other products were looking at we talked about matter, we talked about college and plus we have other products, we put into the pipeline new biome. We've.
We've had we've had multiple other product releases that have been meaningful.
And that's in part due to the fact that we have our rise a partners that can move quickly. It's also in part because of the social model, we are able to to release products more effectively so.
I think you'll continue to see more more.
Rather than less and of course will cadence that according to resources given the macro environment.
Only thing I would add is if you remember on our last earnings call, we talked about entering into this restructuring and strategic resource reallocation.
We knew the economic.
Environment was going to be challenging I don't think anyone anticipated it would be as challenging as it is and as it looks to be but the reason that we started this was really to make sure that we had the funds available to invest in technology. We believe that's our future. We believe connectivity is our future and we believe that we have the resources.
Available to see that through.
Okay, Great and one last one what's the optimal average for the business just given the increase in debt and keeps you in.
I'm seeing with cash balance in daycare.
It is a great question.
We were really fortunate to finish a refinance in the second quarter of this year that put us in a really strong financial position our balance sheet continues to be strong we continued to produce cash.
On a quarterly basis, I think we're well positioned I think will continue to be opportunistic in our share buybacks and will continue to balance those trade offs preserving cash ahead of tough economic giant time as well as buying back shares as the opportunities present themselves were about one.
Hundred million dollars offering cash to that neutrality.
I think we tend to be conservative and we tend to operate not too far from that range.
Alright. Thanks.
Thanks Tristan.
Okay, I think that that's probably the end of the question set here. So I just wanted to thank everybody for joining the call.
In times of uncertainty uncertainty it is imperative for companies to ensure operational excellence, while adapting to emerging factors that can either act as headwinds or tailwinds for the future and new skin. We remain acutely focussed on new vision 2025, as we evolve our operations to the changing environment, our company's mission of being a force.
For good by empowering people to look feel and live better is is needed today as it ever has been so with that will end the call and again, thanks for joining us have a good day.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
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