Nu Skin Enterprises, Inc. (NUS) Earnings Call Transcript & Summary

Good day, everyone. I'm Steph Wissink, Senior Research Analyst at Jefferies. I cover the beauty and personal care space as well as the wellness companies for us. And it's my pleasure to have the team today from Nu Skin. We've got 2 separate groups coming to us from the office. It looks like I can see the beautiful mountains in the background of Salt Lake City. So first, Ryan Napierski is on your bottom left, is the screen I see. He's the President of the company. Mark Lawrence, the CFO, will give us a quick wave. They are in the office. And then Scott Pond, VP of IR, is also joining us today. So I'm going to start really quickly, guys, with just a introductory question that we'd like to start these sessions with, just introduce the company to the audience, just in case there are some that are not familiar. So Ryan, maybe I'll pitch it over to you, and feel free to toss it back and forth between the 2 of you. But just a quick introduction in your own words, how you would describe the company.

Yes. Well, thanks, Stephanie. We really appreciate the opportunity to be on this call with you. Wish we were all in Nantucket at the conference, but this is the second best. So great to be with you all. Yes, Nu Skin Enterprises, we're a 35-year-old personal care and wellness company. As you mentioned, we use a distribution model, a direct sales distribution model. We operate today in nearly 50 countries around the globe with pretty even distribution of -- or revenue spread, I should say, across multiple geographies. Obviously, Greater China is our largest business. We're fairly strong as well in North Asia, Southeast Asia and then the Americas and Europe. And so our revenue split is around that. We are in personal care and wellness. Our business has historically been very much split between the 2. But more recently, as we've worked on establishing ourselves as the world's #1 beauty device systems brand, according to Euromonitor in 2018, our personal care business, specifically in our device platform has really become a stronger pull. We're also very focused and acutely focused on a digital-first approach to market. As I mentioned, we started out in 1984 as a face-to-face, person-to-person business. Obviously, with e-commerce and now what we call social commerce, which is a major driver in our business, that technology shift has enabled us to reach directly through our army of entrepreneurs or what we call sales leaders in our financial statements to reach millions of customers of our products, predominantly through a digital-first approach. Over 80% of our business today, Stephanie, is digital-first around the globe. And so for us, this is a very big and important thing. And maybe the one other thing I would mention, of course, because we empower this army of sales leaders, they are all independent contractors with the exception of China where -- and they work in independent businesses, which, as you know, the gig economy has fueled a lot of economic growth over the course of the last 4, 5 years. Certainly, the gig is also being disrupted right now with regulatory pressures. Our unique business model has enabled us to kind of utilize or leverage the gig economy elements of providing opportunity for those entrepreneurs or what we call affiliates, the social commerce arena of how we market and sell our products has been a powerful attribute to that. And then finally, when you think about the word-of-mouth advertising model that we historically called the word-of-mouth advertising, now it's called an affiliate model, which Amazon and Alibaba and many companies are utilizing. We've employed that model for 35 years. So we really look at the future, Stephanie, and say convergence of the gig, of social Commerce and of this influencer affiliate marketing model is really playing to our sweet spot in a -- but just doing it very much in a digital-first approach. And Mark, I don't know if you'd add anything.

No. I think that's -- Ryan gave a really good overview. I would just touch maybe the leadership team has been in place for about 3 years now. So Ryan has extensive experience out in the markets and understanding what it is that customers want and ask for every single day as well as what our sales leaders need and want. Rich was a CFO for 15 years before he took the CEO role, and then I've been with the company for about 3 years. I spent my whole career in Silicon Valley and most recently came from Amazon.

That's great. I want to use a couple of examples. Let's start with LumiSpa because I think it does an amazing job of illustrating your go-to-market strategy, this idea of a personal care platform business, the razor, razor-blade logic that we've talked about in the past. But also just how you amplify that affiliate network, those influencers, those independent sellers to really drive meaningful volume in a relatively short period of time. So maybe let's use LumiSpa as an example, then we'll come back later and talk about a sneak peek on the fourth quarter this year.

Yes. Absolutely, Stephanie. So we've been working on what we define as a proprietary product launch process here at Nu Skin actually for over a decade. And frankly, in the years that we have major product innovations like LumiSpa, but also the Boost product that you mentioned earlier, we've leveraged this model to align our sales force around the globe. We found it to be a very effective mechanism for getting our sales force trained and educated as well as motivated to take new innovations to market. So obviously, our most recent execution of that was LumiSpa in, what, 2017 and through into '18, where we did a global preview in the fourth quarter of 2017, we did something in excess of $100 million in that launch. And then -- we then, of course, rolled the -- that's a global preview. And then we use the subsequent 2 quarters to roll the product out globally, market-by-market according to opportunities in the market. That's the model that we're going to leverage for the Boost product coming up this fourth quarter. We're really excited about that one as well.

There's a lot of power in this model, and I think you can look back to history to understand that power. In 2017, we'd come off of 4 years of declining revenue. And 2017, with the launch of LumiSpa and the excitement that it created, you saw -- our sales leaders, these numbers climb throughout the course of 2017. And ultimately, we grew 2017 roughly 3%. And but what's more important is what happened in 2018. That momentum followed on, and we grew 2018 by 18%. There were some other things inside of that number, but even the core business itself grew 14%. A lot of that driven by the momentum that came from the LumiSpa launch and the sales leaders that were developed during that process.

Yes. Stephanie, I think that's a really important part that Mark described because I mean we get asked that question quite a bit of what is the relationship between our sales leaders and our customers. Obviously, because we deploy this group of leaders to advocate for our product, to create awareness, to drive effectively trial and even repeat, although the company can do more on repeat because of the direct-to-customer connections we have, it's critical that we get those sales leaders aligned first. So this proprietary launch process is really dedicated and primarily leveraged to align our leadership force around the globe so that we can take that new innovation to market more quickly and effectively.

So let's talk then about -- because I think you had great momentum coming through '18, 2019 was a particularly peculiar year, particularly in China. So let's go back and just chronologically walk through what happened in the China market in terms of the 100-day review. And for folks that aren't familiar, Ryan, maybe just a quick, brief snapshot of what that was, how it originated, how it seems to be and then what you were forced to navigate through during the first half of last year?

No. Absolutely, Stephanie. It was -- yes, it was -- 2019 was a difficult year. In fact, we just completed our test process. Again -- and you have the political, economic, social and technology, it seems like they all converged at once. We had pretty significant disruption from a regulatory perspective in China as an industry and specifically the nutrition industry, not direct selling. There were some local events there, very unfortunate events that had occurred. Regulation at the government level was not set up to effectively monitor many companies there. There were a lot of local companies creating challenges. And so the government really put the direct -- well -- and I should say, over 80% of the nutrition industry is controlled by direct selling. So the government put the nutrition industry on hold effectively, which for our business and direct sales businesses, we also put on hold or they put on hold a meeting ban where they did not allow for meetings of large groups of people. And as you know, in China, that's a relatively common practice by the government to do it at different times at the national congresses. They do that once a year in the fall. They'll do it from time to time, but this was unique in the sense that of the period of over -- or the period of running that meeting ban, and of course, for a direct selling business, at the time in-person meetings or trainings were a very important part of our strategy. Now I will say, in 2019, we quickly pivoted to a digital-first approach, and we went really to a virtual meeting and training structure and launched a platform -- tested a platform last year and then launched it officially in this first quarter that -- where we now do all of that, all of this work digitally first. Nevertheless, for the first half of the year, we had -- well, for the first 90 days of the year, we had a complete meeting ban on direct selling. And then the government began to slowly ease those restrictions. However, they have not -- they did not completely remove them. And they have not because of COVID hitting of course. And then in Q1, they did not fully remove that. And so there's been a hesitancy. Again, for us, as we mentioned in our Q1 release, we've been leaning in and utilizing this opportunity to really go digital first, not just on the transaction elements, but also on the training and education, which has been a big benefit for us. But 2019 was painful and reset our China business pretty significantly. But I believe we grew some internal capabilities very quickly that will help us in 2020 and beyond.

I would say the biggest impact you see in our numbers is really around sales leaders. And sales leaders are the true economic engine of our business. This inability for us to hold meetings really didn't allow us to develop the sales leaders that would have normally been developed during that period of time. And that's when Ryan mentions the reset of the China business. We're now reset entering 2020 with a lower sales leader base from which to build. And just at the end of 2019, where meetings were approved in most every province around the world -- around China, sorry, I should say, is when COVID hit and those meetings, of course, got put on hold again. But we learned so much in 2019 that I think is going to help the long-term health of our business. The digitization of our business was accelerated because of this, which I think is why you saw such great results from us in Q1, where we exceeded our expectations was because we took that learning of not being able to hold group meetings in China, and we took that around the world. And we're able to use our digital tools and the fact that all of our infrastructure was now up in the AWS cloud and pivot very quickly to enable our sales leaders who are already used to working remote and helping them be even more effective than they would have been otherwise.

Mark, I want to give you a bit more space to talk about this. Just given your background in tech, I think it's especially poignant that we're moving into what could be a decade where digitization, independence, remote work, there's a much stronger fluidity and fluency around how to function. Even, I would say, all of us could agree in the last 90 to 100 days, we've figured out how to fluently work from home. So maybe talk a little bit about the power that gives back to your sales leaders, but also the connection it gives you directly to your customer. And back to this notion of a platform, when you launch a new platform like Boost, the ability to directly connect with that customer to sell the consumable element to keep that customer afoot on program or on regimen, how important the digitization is not only of the connection to your sales leaders but the connection to your customer.

Yes. So I'll start. And this is an area where Ryan is really passionate, and so I'll let him -- I'll give him ample time to answer this one as well. If you're a believer in the gig economy, and I'm a huge believer in the gig economy, more and more people are going to want to side gig and a side opportunity. And guess what? Over the last 90 days, some of those side gigs that were really, really popular aren't quite so popular anymore or not quite so attractive. We offer a unique side gig where someone can operate from the safety of their own home. And by the way, those people who want to do that part-time in addition to their regular job, which they're working from home, now aren't commuting. So they're not spending time in the car or on the subway or in transit. They're also already in front of their laptop. They have more free time and maybe more need than ever to really take advantage of the opportunity, which is now in front of them, which we're presenting through the digitization of our business. So I think there's a number of tailwinds that are going to help us -- or help those companies that have really grasped this idea and this need of digitizing your business. If we hadn't gone through 2019, if we hadn't developed the tools, if we haven't created the connections to be able to link directly to our customers, I would not be as excited as I am about the opportunity. Ryan can chime in here.

Yes. Just adding -- building on what Mark already said. I mean the power of our channel and our specific business model, applying digital to it, and you, Stephanie, I'm sure you know as we go on Instagram or Facebook, these social platforms, as they're attempting to monetize, are getting so crowded right now that in the social commerce space, it's almost impossible to capture eyeballs. And so you see companies, again, big companies, Alibaba just announced their affiliate program, Amazon has an affiliate program, they're all trying to find how to create eyeball attraction to your brands. This is, again, our business model. Our affiliates around the globe are really compensated to attract eyeballs. The company can transact. And unlike the old historic model, we called them distributors because they actually bought the product and distributed them door to door. In today's world, they're really attractors, they're affiliates. And so they're really driving eyeballs to the site. And the beautiful part about this is they can do it from anywhere, any time. Our sales force works remote, they have forever. And this just gives them the ability to do more and more of what they already know. But the power, and I think that's one of the unique elements that -- about a direct sales business and specifically one like ours that we're really leaning into the digital-first platform approach is the power that comes with that affiliate army that is actually driving the eyeballs to our brands, and that's just a very powerful complement to the model.

Yes. I would say, even just following some of your sales leaders on social, they are incredible content creators. So over and above the sales mechanism, the demonstrability of the products, their own narratives around the efficacy and the improvements they've seen, it is quite compelling. If you start thinking about them as micro influencers of their networks.

Yes. It really is. I mean there's all the stats around micro influencers. And we hear 56% of micro influencers are never paid to do the work that they do, and people are just passionate about the brand. And our affiliates are very similar. They're highly passionate about sharing these products. It's a benefit, obviously, that there is a gig and more type of opportunity connected to it. So that's exciting.

And Mark, could you just extrapolate a bit further on that? Because I know the company has been making some investments around, not only digitization as the theme, but the tools and you talked a little bit about the platform and the program. So maybe talk a little bit about where the investment dollars live within the P&L. So as we look back over the course of the next 3 years, what are the measures of returns that we should look at on some of those digital investments, whether they're in CapEx or whether they're on the P&L?

Yes. That's a great question, Steph. So fortunately, most of our investment, and we started this process really 3 years ago when the new leadership team came in, the first thing we needed to do was get off of our historical legacy platform, and so we moved everything to the cloud. So we are now operating all of the world's operations in AWS, with the exception of China, which we operate in the AliCloud with Alibaba and Aliyun. This has really created a huge opportunity for us, a high level of nimbleness and ability and agility to adapt to the world around us. The expense for that is largely capitalized, and we'll be paying for that over the course of the next several years, but the investment doesn't stop there. And we talk all the time about being customer first and digital first, right, and global, thinking globally. Those kind of 3 tenets that we really structure all of our internal meetings around, are we being customer focused? Are we being digital focused? And are we thinking globally? And all 3 of those have to work together, the better we can digitize the business, the easier it is going to be for our sales leaders to connect to customers and for the company to connect to customers. And then we operate in 48 countries around the world, and so it's critical for us to really have that focus. Our investment level is not going to go down over a period of time. It may not all manifest itself in an IT budget line inside of the P&L, but it will manifest in every function. Running the CFO organization, I need to digitize my tax team, my treasury team, the accounting teams around the world in order to free up money that it can be spent elsewhere.

And I think just adding to that step, if you think about the benefit of being in the cloud, I mean, I'm asked all the time -- I'm the Chairman of our Direct Selling Association in the U.S., and I'm asked all the time, well, are you happy with going to the cloud? Why did you choose the providers that you did? And what people don't really realize is the service ecosystem that comes with the cloud that you choose, whether it's Azure, whether it's Google or whether it's Amazon or the like. What I love about our selection and our prioritization through the AWS partnership and the Ali partnerships, we get access to these services that allow us to spin up new digital tools like the one that we announced in -- that's coming out in Q4 that we call Vera, and this is a personal recommendation app that will enable our affiliates to actually provide links to personalized regimen recommendations. You can imagine when you have over 400 product SKUs, it's difficult for a consumer to go out and identify what products they need to choose. And so this Vera app enables them to take a picture of their face and using algorithms and AI -- or excuse me, AWS-based technology, artificial intelligence and machine learning, we can actually build personalized recommendations on the fly or on the spot for that consumer's preference. And so getting access to those services are really, really important. So to Mark's point, to get to the cloud, lift and shift, now we refactor but it's -- the upside's really in the future now, leveraging those services. And we're doing it across -- we could talk for 4 hours about our value stream and how they're applying it and our IoT in future devices that we can leverage services for. So that's a benefit as well that's coming with this.

So let's talk about 2020 a bit. Clearly, with COVID, there's been some disruption in the first half. But Mark, maybe just remind us goals for the year financially, what you've observed during COVID, your wellness business certainly is positioned from an immunity product perspective. And then, Ryan, I want to come back to you and just see if you will walk us through a little bit about your launch plans for the fourth quarter, the virtualization of some of your big rallies, your big conventions and what we should anticipate as the year progresses, just in terms of mile markers throughout 2020.

Sure. So I'll be real quick to make sure we leave enough time for Ryan to talk about the Boost launch because that's critical to the success of this year. As we mentioned earlier, we had a really good Q1. We guided $480 million to $510 million, and we came in at $518 million. We came in $0.03 above the guidance range from an EPS perspective. So we felt really good about Q1 and that we're able to perform well. As Ryan mentioned earlier, it was a reset for China. So China is down pretty significantly. So we guided China to be down about 20% for the year, and we guided our overall business to be down slightly for the year, but returning to growth in the fourth quarter, really driven by the Boost launch. One of the things I'm may be most proud about is that we were able to give annual guidance when we gave our Q1 guidance. And then after we gave our Q1 results, we're able to keep that annual guidance. And so many companies have been forced to pull their guidance. Now we did give a wider range because we are dealing in the same strange and uncertain world as everybody else. But I do think it was important, based on the visibility that we had, to at least signal a range of where we thought we could operate. And of course, depending on the environment, we could do better or worse than that, but we wanted to get -- set some goalposts out there for the market to be able to deal with. And so I feel pretty good about the annual guidance that we were able to give. The fact that we are able to give annual guidance, I think, is what I feel good about. And then with that, Ryan, I'll let you talk about the launch process.

Yes. Our focus, as Mark said, is really that return to growth in the fourth quarter, and we're pushing hard to get our leaders aligned in preparation for that Q4 event. And so you will see -- we're in the process now, and we -- obviously, given the size of that 50,000 number of sales leaders, we need to -- we start aligning with our top-tier leaders. That process has been going on for quite some time with the virtual broadcast in Q1. We've done additional training. We're now deploying in -- we will be in Q3, getting them access to limited access to the product for their own trial and usage. And then we'll expand that education process leading up to the fourth quarter where Boost will be then, what we call, globally previewed at that time. With the exception of just a couple of our markets that still have registration requirement delays, it will be globally previewed at that time. It will also be complemented in the markets that don't have that Boost registered in time with a product line called Nutricentials bioadaptives. So Nutricentials is an existing brand that we have in our portfolio today, but it's been rejuvenated with a new science by Joe Chang, our research and development team around bioadaptives, which is very exciting technology and what we call worry-free, clean ingredient labels. Nu Skin has always been a company about all of the good, none of the bad, obviously, consumer expectations and what we define as worry in safe ingredients is a top of mind for us. And so we'll be launching that product as a complement in those markets that don't have Boost. And then those will be locally market -- rolled out market-by-market in Q1 and Q2. And so to Mark's earlier point about the LumiSpa launch and the global preview in the fourth quarter, followed by Q1, Q2 and providing that growth back in 2018, we're excited with Boost of deploying that similar type of cadence to the model. So we're feeling good about that. And then the pipeline of innovations that will sit beyond that for the rest of '21 and '22.

And Steph, let me clarify a statement that I made just a minute ago. When I say I'm feeling good about annual guidance, what I meant to say was I felt good that we were able to give annual guidance. Obviously, we're in a quiet period, and we haven't announced our Q2 or any updated annual guidance. I don't want to give the impression that we feel great about what we put out there. I feel very good and pleased that we have the mechanisms in place to provide guidance for the quarter and for the year.

Important clarification. Thank you. We are up on our time. So I'm going to leave it there. But Ryan, I'm going to hold you to a couple of comments you made. I would love to come back and unpack more about this idea of affiliate networks because I think it's something really interesting, particularly in the beauty space, we've seen it be just absolutely blockbuster in terms of how it's launched new brands. So I'm super curious about that with you. And gentlemen, I want to just say thank you. Scott, we didn't get to hear from you, but thank you very much for being there in the background and a supporter. And then Mark and Ryan, thank you very much for the time. Please be safe, and thanks also for a peak at the mountains. We're not in Nantucket, at least we get a little sneak peek of the mountains. So thank you, everybody, for joining. And if you have any questions for the Nu Skin team, just reach out to us, we're happy to get you in touch with them. Thanks everybody.

Thanks, Steph.

Appreciate it.