Nu Skin Enterprises, Inc. (NYSE:NUS) Q1 2024 Earnings Call Transcript

Nu Skin Enterprises, Inc. (NYSE:NUS) Q1 2024 Earnings Call Transcript May 8, 2024

Nu Skin Enterprises, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day. Thank you for standing by. Welcome to the Q1 2024 Nu Skin Enterprise Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Scott Pond, Vice President, Investor Relations. Please go ahead.

Scott Pond: Thanks, Michelle, and good afternoon, everyone. Today on the call with me are Ryan Napierski, President and CEO; and James Thomas, CFO. On today’s call, comments will be made that include some forward-looking statements. These statements involve risks and uncertainties, and actual results may differ materially from those discussed or anticipated. Please refer to today’s earnings release and our SEC filings for a complete discussion of these risks. Also during the call, certain financial numbers may be discussed that differ from comparable numbers obtained in our financial statements. We believe these non-GAAP numbers assist in comparing period-to-period results in a more consistent manner. Please refer to our investor website for any required reconciliation of non-GAAP numbers. And now I’d like to turn the call over to Ryan.

Ryan Napierski: Thanks, Scott. Hello, everyone. Thanks for joining us today. Having just returned from our top sales leader, alignment and activation, all in event in Abu Dhabi and Dubai, I’m eager to provide an update on the state of our business as we enter our 40-year anniversary, pursuing our mission of being a global force for good by empowering people to look, fill and live better lives. I’ll provide a performance summary for Q1 as well as the progress update on our ongoing enterprise transformation vision, strategy and plans. Our results for the first quarter were in line with guidance. At a high level, our business is on track with established expectations, and we are maintaining our full year outlook. Revenue for the quarter was in the middle of our guidance range despite experiencing more FX pressure than we had anticipated.

We were also pleased with our progress on expense reduction initiatives, which helped us deliver first quarter non-GAAP earnings per share at the high end of our range. Our Rhyz business delivered another strong quarter with revenues up 57% to more than $62 million, led by both our Mavely technology platform and Wasatch manufacturing business. The revenue contribution from Rhyz accounted for approximately 15% of total enterprise revenue in the first quarter, and we continue to expect this segment to account for 20% to 25% of our overall mix by 2025. Looking at the performance of our core Nu Skin business, our new product innovations delivered solid results. Ageloc, Wellspa IO and RenewspA IO, the holistic wellness and beauty devices we launched recently, along with Ageloc Trme, our personalized weight management system that also launched in 2023 contributed approximately $42 million to our Q1 revenue.

Europe and Africa, there was a very favorable response to Trme during Q1. There were also positive trends in a handful of our Southeast Asia Pacific markets, and we were encouraged by continued improvements in our sales leader trend in Mainland China despite a generally tepid macroeconomic climate. In other regions, we continue to battle macroeconomic challenges, including heavy inflationary pressures on consumer spending for premium goods, which, together with our aggressive price increases from a year ago have hampered our customer and affiliate acquisition efforts. In the Americas region, our subscription business in North America continues to be pressured by these factors, and we’re making some adjustments to our model in Latin America to counter macro forces, particularly in Argentina.

In South Korea, consumer sentiment remains negative due to the housing market crisis, making it difficult to grow with customers and build the channel. Consumer sentiment is also a factor in Japan in addition to significant FX pressure on our results. So to combat these external factors, we are placing more emphasis on product innovation in the affordable luxury space, and we will be introducing several new products at our upcoming West and East live sales conferences in Q3, our first multimarket in-person events since COVID. Despite these headwinds, we remain committed to our long-term enterprise vision of transforming our core Nu Skin business while building out Rhyz in our long-term beauty, wellness and lifestyle ecosystem. As I mentioned earlier, we just returned from our meetings with our top leaders where there was a palpable level of energy and excitement about the future.

We introduced our next major product innovation, Mind 360 [ph] a new division targeted at the rapidly growing $10 billion cognitive health market. Mind 360 takes a holistic approach to addressing the interrelated factors of stress, sleep and cognitive performance that are impacting the well-being of consumers in today’s busy world. We’re excited to preview Mind 360 at our upcoming live events in Q3 with planned introductions of Mind 360 to follow towards the end of the year and into 2025. Channel activation within our core Nu Skin business is a top priority for us, and we’re pleased to announce the promotion of Justin Keisel as our new President of Global Sales. Justin has been leading the work to expand our affiliate model across the Americas over the past several years.

He has extensive sales leadership experience, both at Nu Skin and in prior roles and has demonstrated his commitment to our leaders success. Justin is spearheading our efforts to retool our entire global sales organization and bring a much more rigorous lens to the sales performance management and channel activation. To this end, we recently launched a new series of incentives, including a new customer acquisition and leadership performance program to reenergize the field. We anticipate these new initiatives to take root through the remainder of this year. Also, let me quickly give an update on last quarter’s announcement of our intent to enter India, one of the fastest-growing direct selling markets in the world. We are taking a very new approach to this high potential emerging market that will enable us to reach a much wider array of customers and entrepreneurs.

Our product offering, business model and operational footprint will be synchronized to enable broader market – mid-market appeal. We are just beginning to activate our channel towards a targeted market opening in 2025 with a digital-first approach that is more agile and will enable us to scale more quickly throughout the market. We see India and our emerging market business model as a gateway to many new markets in the future and anticipate these learnings will help us delve deeper in the second and third-tier markets within Latin America, Southeast Asia and China. Growing out rise in our Rhyz and our Rhyz business is a critical element of our overall enterprise vision as we seek to build out the world’s leading beauty, wellness and lifestyle ecosystem.

Over the past several years, we’ve constructed essential infrastructure consisting of manufacturing, technology and operations to support Nu Skin’s core business while enabling other brands to grow. We are now applying this ecosystem to BeautyBio to enable it to scale and see additional opportunities to extend our comprehensive suite of services, spanning product R&D, production, packaging, cutting-edge technology and logistics to the Indybeauty [ph] and wellness industry for influencers and creators. We see great potential for this influencer incubator over the mid to long term, and we are well positioned to capitalize on these opportunities as we lean into the disruption of the beauty and wellness industry due to social influencers and Indy brands.

We are utilizing our capital to invest in additional manufacturing, services, capabilities and opportunities to enable future growth. So in summary, first quarter results were in line with guidance, and we are maintaining our 2024 outlook. From a top line perspective, we are acutely focused on channel activation with new incentives and continue to lean into our product strategy, including the upcoming launch of Mind 360 as well as affordable luxury. We also continue to invest in our Rhyz business to accelerate growth and further transform our enterprise to leverage our competitive advantages within the beauty, wellness and lifestyle industries. Expense prudence remains a critical focus in 2024. And while we made significant progress on these initiatives during the first quarter, there are still opportunities to drive further efficiency, including our SKU optimization plan to eliminate 25% to 30% of our SKUs by the end of 2025.

Despite the challenging conditions in many of our markets in the near to midterm, we remain focused on executing our long-term vision of becoming the world’s leading integrated beauty and wellness ecosystem. And with that, I’ll turn the call over to James to cover the first quarter results in more detail along with our guidance. James?

James Thomas: Thank you, Ryan, and thanks to all of you for joining today. I’ll provide a brief Q1 update and then speak to Q2 and 2024 guidance. For additional details, please visit our Investor Relations website. For the first quarter, we posted revenue of $417.3 million, which was at the midpoint of our previous guidance range and included a negative foreign currency impact of 3.8% or $18.2 million, which created more pressure from our initial guidance. Reported earnings landed near the top end of our guidance range at negative $0.01 or $0.09, excluding restructuring charges. Our gross margin was 70.5% compared to 72.3% in the prior year quarter. Gross margin for the Nu Skin core business improved 50 basis points to 76.9% compared to 76.4% in the prior year quarter due to our SKU rationalization initiatives and targeted promotion mix.

Selling expense as a percentage of revenue decreased to 36.8% and compared to 39.1% in the prior year quarter. For the Nu Skin core business, selling expense was 41.7%, flat with the prior year. The lower overall gross margin and selling expense is due in growth due to growth in our Rhyz segment, which now accounts for 15% of our business. General and administrative expense declined $9.3 million year-over-year and as a percentage of revenue, was 29.9% compared to 27.8%. The increased percentage can be attributed to lower quarterly revenue levels. As previously discussed, we’ve been strategically evaluating our Nu Skin core business and better aligning our operating costs to be in line with revenue. In the first quarter, we incurred an additional $7.1 million restructuring charge, and we will continue our cost efficiency plan through next quarter with an anticipated $3 million to $8 million of restructuring charges.

We continue to expect this cost efficiency plan to deliver annual savings of between $40 million and $65 million before taxes. We will continue to seek business efficiencies in all areas and believe these actions will help us maximize cash flows, focus on improved margins and enhanced earnings per share going forward. Our operating margin for the quarter was 2.1% or 3.8% excluding restructuring charges compared to 3.3% or 5.4%, excluding restructuring charges in the prior year. Our interest expense was $7.3 million for the quarter compared to $4.9 million in the prior year. The other income expense line reflects a $0.4 million expense compared to a $3.4 million gain in the prior year quarter. In the first quarter, our cash flow from operations rose to a positive $3.3 million, driven by a concentrated effort on inventory management.

In contrast with the $22.1 million cash outflow in the same period last year. Cash from operations is typically the lowest in the first quarter due to lower revenue levels in what is seasonally our slowest quarter. We paid $3 million in dividends and paid down our outstanding debt, $20 million in the quarter. We did not repurchase any stock and have $162.4 million remaining on the current authorization. Our tax rate for the quarter was 148.4% or 48.5% excluding restructuring charges compared to 22%. For the second quarter, we anticipate an elevated tax rate in the range of 45% to 55% and anticipate a projected 2024 annual tax rate of 25% to 35%. This annual rate reflects an anticipated higher global effective tax rate, primarily due to the expected geographical mix of earnings during the year and the rate impact from our stock awards in Q1.

Shifting focus now to guidance. In light of the continued economic pressures, challenges associated with our transforming our business and increased volatility in foreign exchange rates, we are reiterating 2024 revenue in the $1.73 billion to $1.87 billion range. We anticipate earnings per share of $0.77 to $1.16 or adjusted earnings of $0.95 to $1.35. Our guidance now assumes an increased foreign currency headwind of approximately 2% to 3%. We are projecting second quarter revenue of $420 million to $455 million, assuming a foreign currency headwind of approximately 3% to 4% with reported earnings per share of $0.01 to $0.10 or $0.10 to $0.20, excluding restructuring charges. And with that, operator, we’ll now open the call up for questions.

Operator: Thank you [Operator Instructions] Our first question comes from the line of Chasen Bender with Citi. Your line is open. Please go ahead.

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Q&A Session

Chasen Bender: Thanks. Afternoon, guys. I wanted to first ask about kind of expectations for the remainder of the year. Looking specifically at the implied year-over-year currency growth, kind of based on the midpoint of the 2Q and the 2024 guidance, it seems to suggest that you guys are going to go from down nine and a quarter in the first half to about minus 3 in the second half. And if I look at the sales leaders, the customer counts and the affiliate numbers, even when adjusting for that change in qualification for affiliates, the trend looks like it’s worsening. So the question is, what’s really giving you confidence in that second half improvement? And maybe can you just dimensionalize any of the initiatives that you expect to contribute to that improvement?

Ryan Napierski: Yes, Chasen. Great question and happy to drive into the high-level side of that. And then, James, if he has any to add to it. That’s great. So really, as I mentioned, we have our – as we came out of the top leader sales alignment event in Q2, really got clarity around channel activation plans and incentives built towards the channel, which is exactly what you’re highlighting, concerns around those KPIs leading into Q3 when we have our live events. We’re really looking at these activation incentives. We’re looking at continued build of energy around India in open markets, to be clear, not in India itself, but in markets where we are open, where there are local Indian populations or what we call India eligible populations.

And then our new products hitting market in both Mind 360 and affordable luxury, which are both priced and positioned to help combat the inflationary effects that have been had on kind of customer and affiliate acquisition growth. So we’ve aligned – we’ve really aligned with the sales force to kind of attack at that level, both at the channel activation level and ensuring that we have the product ammunition to strengthen that as well. So that’s kind of what we’re looking at. I’d also say with Rhyz, we continue to expect to see favorable improvements there as well. James, anything you’d add?

James Thomas: Yes. I would just call out the – similar to what you did in the channel activation that we see that we launched at the sales leader event coming on strong in the back half of the year with the – in combination with the product introductions. And then seasonally, Q3 and Q4 have been stronger on the back half of the year in the beauty and wellness industry overall. And so that’s built into our forecast, where we’re still showing overall decline in Q3, but on the high end guiding towards year-over-year growth on the high currently.

Chasen Bender: Got it. That’s helpful. And then just, Ryan, staying on your commentary about affordable luxury innovation, I want to give you an opportunity to kind of expand and elaborate on that, perhaps address what categories and how quickly the products that you’re bringing to market are actually going to hit? And I guess also more strategically, can you just give us an update on how you’re thinking about the price architecture of the portfolio? And whether this makes sense or whether it makes sense to expand the portfolio kind of more meaningfully into this affordable massive level like you’re doing now?

Ryan Napierski: Yes. No, exactly right on point there. Maybe I’ll start by describing the portfolio architecture, Chasen and then go to kind of what we see in the second half coming. We’ve really been looking at this for quite some time, obviously, with inflation being pressuring consumers around the globe as we’ve seen it and the effect that, that has on channel growth because if you can’t get customers, you can’t grow the channel as a new business entrepreneur. And so we’ve really been looking at this, our global product team, led by Steve Hatchett, has put together a portfolio architecture that really helps us span better from the premium area, which is where we’ve always been focused from devices and premium goods down to this new tier, which kind of gets to that masstige or affordable luxury level.

We actually – our research and development engine here at Nu Skin and with our manufacturing partners is very robust in this area. We manufacture for hundreds of brands. And so we’re fairly familiar with the trends that are taking place, what is and isn’t selling. And so with utilizing that kind of that expanded data and insights, we’ve looked at our second half portfolio. There are multiple product innovations that fit within that, call it the affordable luxury range, which can range really from that $10 to $30 price point. And so we really are making intentional effort to expand the portfolio as well as reduce SKUs. So that clearly means we’re going after, as we said, that 25% to 30% of overall SKUs, a lot of that is eliminating products that are in that the premium prestige levels that simply aren’t selling with today’s customers or selling at lower quantities and replacing those with the masstige or the what we call affordable luxury.

So that’s kind of how we’re approaching the portfolio side. It’s a much more robust approach. We think it has much better appeal for the next 3 or 4 years. I mean inflation, while that stabilized, clearly the pressure on the consumer wallet is still high. And so we need to play much better in that area, and that’s what we’re looking at. Now for second half, again, the good news is that from an R&D perspective, our teams have been cranking on product innovations. And have dozens of products at any time that we’re able to launch. The challenge is really getting alignment with our sales force so that when we launch a new product, it actually gets the right stage time that it needs for an understanding of how to sell it, the USPs all of that. And so for – this is important for our live events in both East and West at those events where we’ll have those opportunities to explain these products, how they work, why they work the way they work, what the quality rationale is because clearly, while we go to a more of a an affordable luxury level, we do not sacrifice on quality, we’re taking more of an elements level approach to innovation rather than having comprehensive innovations that might do 6 or 8 different customer benefits, really focusing on the 1 or 2 benefits that matter most so that we can sustain high quality to sustain innovation, but at a more targeted and price conscious level.