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

Good day, everyone, and welcome to our virtual Nantucket conference. Joining me on the screen are the senior leadership team from Nu Skin. Mark Lawrence and Ryan Napierski are in their office. And Scott is also in the office, but I think in a different space. So thank you, gentlemen, for joining us today. Nu Skin is actually one of the most intriguing companies that we follow and probably one of the most misplaced companies, I think, in the public market. A company that has truly gone through a very distinct transformation and has become a real DTC business in the beauty and personal care and the wellness industries. And so I want to first start off by giving Ryan a chance to kind of talk a little bit about that journey, level set us, and then we'll get into some more detailed questions about the business operations. So Ryan, over to you.

Absolutely, Steph. We're getting an echo here. I'm not sure where it's coming. Are we okay?

Yes.

Thanks. I wish we were there and in Nantucket with you. It looks beautiful, but we are in Utah here, and it's a sunny day. I'm so glad you set it up the way that you did, Steph. Over the course of the past few months as I've been preparing for this role, Mark and I have spent a lot of time on the market positioning of Nu Skin Enterprises given the transformation that you mentioned that we've been going through over the last few years. We really see ourselves as an innovative beauty and wellness company that's powered by a dynamic affiliate marketing platform. As we know, affiliate marketing is really disrupting, or social commerce as we call it, is really disrupting retail, e-commerce through influencer and paid affiliate marketing. And it's becoming a norm for most consumer brands today. They're all trying to figure out how to do this. This is something we've actually done in some way, shape or form for over 36 years. But with the implementation of social into the equation of e-commerce, this new model of social commerce has just enabled us to accelerate the degree of adoption of our innovative beauty and wellness companies -- products around the globe in over 50 countries. And so that transformation that you're talking about, it has been very deliberate, very intentional and is driving accelerated results, particularly in our Western markets. It's something that I believe is undervalued today, when maybe it's just a lack of understanding. So calls like this are perfect for us to be able to talk in more depth about the strength of this unique model and why we believe that the future is much brighter for Nu Skin.

Yes, Ryan, I want to give you a chance to it, and Mark, this really is a question that is targeted towards you because you, alongside a number of other leaders have joined the firm from maybe what we would think about as more unconventional backgrounds relative to the history of direct selling. You are not direct selling people. You were coming from a tech and enterprise-driven background. So Ryan and Mark together, maybe talk a little bit about how human capital and investment in the leadership structure in the backgrounds and capabilities of the talent that you've brought in has really helped to usher in the scalability and the sustainability behind the change that you've implemented.

Yes. I think Mark can speak through the technology aspects of this, but Mark joined us a few years ago, right at the beginning of the transformation. We acknowledge, to your point, that direct selling was going through its own disruptive state, and we needed a leadership team that really have the capability to see the world to be where we were heading. As you know, we're really the world's -- Euromonitor acknowledges as the world's leading innovative beauty and wellness device systems brand. And that's something that is critical for our future as we invest more and more in innovation. So Mark joining us over from his background in Amazon in their innovation arena as well as others. Connie Tang, who has joined us as our Chief Growth Officer, very good partner and long-time associate of mine. We've had Steve Hatchett join our global product team. Steve specialized in manufacturing of various products over his lifetime. So a lot of new capability coming in. Mark, maybe you can talk about the differences and how we apply those capabilities.

For me, what I really, really appreciate is the balance. So what I like about our leadership team today is we have a balance of expertise in direct selling. I think we've seen -- we've all seen the examples of people coming in from the outside and taking over the company in direct selling space. The next thing you know the company doesn't exist because they managed to mess it up. Is an appropriate balance the way we're structured today, enough? New people, new ideas, challenging the norm. And then those people like Ryan, who really understand deeply having been in Japan, Korea, Europe and 20-plus years in the company, understanding what are those land mines that the rest of us are about to step on that he helps us off of, and then we can push in the other arenas. I spent my entire career in Silicon Valley, working for some very well-known tech names. And so I bring a different perspective sometimes, but that different perspective is not always the right perspective. And so it's great that we can cash out these ideas and challenge each other and help. And again, I think that's what's going to help -- one of the things that's going to help our company really propel itself forward.

That's great. So we've essentially established philosophy, infrastructure and leadership. Now I want to jump into some of the more tactical areas. And Ryan, you are taking over the company and the CEO position at a really pivotal moment. You're coming off of a major global pandemic. Let's hope, cross our fingers that we're through the worst of it. There has been a cycle of pretty intense regulatory scrutiny around the China market, not on your business specifically, but just broadly around the wellness industry. So as you think about the next few years, again, cross our fingers and hope the waters are a bit smoother and less choppy, how do you think about the opportunities set? With those things in your rearview, looking forward, what are the -- what are you most excited about in terms of taking on the CEO position now?

Yes. No, I feel over the last 3 years, we've really been preparing for this moment. On the notes to us, we would deal with a global pandemic, and that's certainly the -- tragedies that occurred around that are top of mind for us, for our people, for just the population globally. But what ushered in together with this pandemic was a shift in consumer behaviors, yes, in on multiple fronts that we don't see going away. For instance, beauty and wellness consumption has really shifted to online purchasing out of department stores. We don't see that transition going back. We see people moving further and further into that direct approach. We see brands leaning further and further into direct-to-consumer tactics, to grow their business, again, an area where we shine. We see an emergence of a gig economy that we know is in vast debate with minimum wage rules and the like. While we are not a gig, we do provide empowerment opportunities for our affiliates through affiliate marketing, which is a very well-known, as we know, a lot of large platforms leveraging at Amazon, Alibaba, Shopify, all leveraging affiliate marketing to do it. So those consumer trends were amplified over the course of the last 18 months. And we don't see them retrenching. Now your question about China and where we see the world going, our business is clearly shifting to a social commerce business. We have over 90% of our customer transactions online already. The affiliation of our products through social medium enables a greater scale. And we've seen that scale play out, as you saw in our results in Europe, Middle East, Africa being up, I think, for the Q1 in triple digits. We saw our Americas results being the high 90% year-on-year. And we're seeing now, where the other half of our business resides in Asia, elements of these trends picking up there. So we're seeing improved results in Japan. And we're seeing it carry into Southeast Asia, Korea. And then the big question around China is when will that transition. As I think everyone knows, we run a different business model in China from a regulatory perspective. So it takes a little bit longer for the pivot there. But as we announced some significant technology investments that are going into place in the second half of this year, with our technology partners in China, building out our digital platform there, we expect to see those trends improving and the adoption of social commerce accelerating into early 2022 and beyond. And so we're really optimistic that this model, the social commerce model, will continue to proliferate around the globe. And by the way, we should mention that China is, from a social commerce perspective, it's 5x the size of the U.S. market, which is the next largest social commerce market. So very big upside potential there. We just need to ensure that our systems, our technology and our affiliate model is then synchronized up, and that's what we're working on now.

So the question for both of you related to something you mentioned, Ryan, which is that as your Western markets have strengthened, it's actually created more of a global balance within your business, which I think is the first time, at least since I've been covering the company for several years, that we've seen this equalization effect. Kind of you've mentioned at 50-50 almost, East to West. So Mark, talk about that through the lens of the CFO's position and how that creates stronger foundation and stability as you think about kind of launching up into the next wave of growth. And then, Ryan, from a strategic perspective, how do you think about the balance across the world? Does that influence how you map -- roll out programs or innovation, or just really the idea that beauty and wellness are truly globalizing and some of the trends from the East and the West are starting to converge?

Yes. So as you can imagine as a CFO, I'm always looking at balancing risk and opportunity. I think for the first time in our company's history, we are beholding to a single market to deliver the results. For our first decade of existence, it was the U.S., then maybe in the next decade was Japan, Korea. And then the last decade, certainly, we've been viewed as a China direct-selling play, with maybe more than 35% of our revenue and 50% of our profits coming from a single market. And you can imagine the risk that, that creates. It creates opportunity as well if that market happens to be performing well. But now we sit and we have 2 25% markets in the Americas, Pacific and China. And then we've got several 10% markets in Japan, Korea, Southeast Asia. The growth in EMEA now has them at a 10% market. And our growing manufacturing segment, which is completely diversified from the rest of our business, is at about 7%. And so we're sitting in a place where we're not beholden to any single market. We think many of our markets are important that we need them to all perform well, but we're not beholden to any one government regulation in a certain market, then really just devastates our overall business. So I love our risk profile and then I love the opportunity that's in front of us in those markets as well.

Yes. And I think in terms of the strategic advantage of that footprint now, which I completely agree with Mark. I mean, this is really the first time in the company's history that we've been as globally diversified as we are. We see that as a huge strength. For us as a beauty and wellness company, our unique strategy in research and development, as I mentioned, really is focused on device and device systems, which are very broadly sweeping product -- very strong growth and very directly applicable in both the East and the West. I should mention, Steph, the other side that I'm really excited about at the global level is when you think about the connection through digital mobile and social technologies, we're really connecting the blow. And so while the company is only at 48, 49 markets today, we're able to leverage that global scalability at a much more effective pace moving forward to get our beauty and wellness solutions out there. So I think the diversification is good from an investor standpoint. And from an opportunity standpoint, it enables a more balanced approach to growth in our existing markets as well as in future markets.

That's really helpful. I want to pivot a little bit now to talk about technology in 2 areas. The first is in the tools and the programs that you're activating to really drive the velocity within your affiliate network. And then on the other side, you mentioned this, Ryan, that you are the #1 beauty device system in the world. And so how does technology and innovation play into the product pipeline as you start thinking about connected devices and personalization and customization. So maybe talk about tech from an activation perspective, and then tech from a development perspective.

Yes. I think on both sides of the equation, to your point, we're leveraging -- we started out leveraging our technology and technology partners much more extensively back in 2016, '17 -- it was really '17 to '18 in migrating to the cloud, leveraging our partnerships with AWS and Alibaba to do that around the globe. And that enabled us to access micro services that are much more extensive to stand up new digital tools for our affiliate network. And so we have tools like Vera, which is a predictive, so AI-driven predictive product recommendation tool that we leverage. It's in beta form around -- in many markets around the globe, which is really teaching us about consumer trends and how to build predictive models to delight our consumers with more personalized product approaches. We've built tools like MySite and NU TOWN in China that really enable our affiliates to own their own beauty and wellness online business. So you could think about a Shopify-like constructive tools for our affiliates to build their own businesses on our platform. And then on the back end -- or excuse me, on the product side, to your point, and this really goes into Mark's history of device systems, the more that we lean into these beauty devices and Euromonitor continues to recognize us in this as a leader in a category that's estimated at about $7 billion today, growing at around 20% CAGR between now and 2030. So we see extreme growth there. We have a dominant position there. But what's more exciting to me is that we will be connecting those devices through IoT in early part of next year. And from that side of it, we're going to have the preference data of the Vera and the tools, and we're going to combine that with usage data to be able to truly meet the needs of consumers like no other company. I always like to say, we're looking to really become the [ Teleton ] in beauty and wellness because we really do, with our device systems, we have that connected capability to know our consumers, in some ways better than they know themselves in terms of what they need and what they want.

Yes. It's a really fascinating concept to think about because we know that the at-home skin and self-care trend, it seems like the routes have just deepened over the course of the last 12 to 18 months. So there's been a permissioning effect, frankly, I think, on the part of the consumer to actually devote time and capital to self-care, including skin care. And devices is a big piece of that. But now adding a feature set that might allow that device to actually assess what your needs are and then to product-personalize a portfolio of items to actually make your skin health improve, that seems to be an element that's really forward-thinking, progressive. So I want to just give you a chance, Ryan, to talk about that and what that means in terms of the level of trust as a brand -- from a brand perspective that you step into when that becomes possible, not only for your affiliates, trusting you as a corporate partner, but also the end consumer, which now you're spending more time thinking about as you go more direct to consumer, how builds brand trust and maybe even permission to expand your brand in bigger ways.

Yes. I do agree with the question. And for us, paramount is the data privacy and security of our customers. And that's, first and foremost. We've done a lot of investing in this area. We'll continue to invest to ensure that the data is protected. But that needs to be used -- utilized correctly in a manner that truly benefits the customer. We all utilize Google Maps, for example, and give permission to data in order to give us a better user experience. Similarly, we look at the data that we do gather through our data lake and our smart data lake to really assess the value proposition we can offer back to customers for giving us permission to have that data and to use that data for their benefit. What I think is especially smart about our approach is we really are relying upon their preferences and their selected -- their selection of products to determine what's right for them. And so we are a facilitator of that experience, but we're not necessarily trying to direct them in any single way. We have well over 600 different product SKUs, and we service just about every need on the beauty and wellness front. And so it's really around helping the consumer know her needs better than she knew them before she interacted with us and then finding the right products. And to your point about the at-home experience through -- as we know through AI and ML, we're able to get much more reliable results consistently over time across 48 countries than any sort of on-premise service provider could do. And so we believe it's a real value-add to our consumers. Mark, do you have anything to add to that?

No, I think the key to AI and connected devices is twofold. The customer needs to see a benefit that they're willing to pay for, either in the purchase of the product or otherwise. And then the company needs to do something with the data. And you can imagine me coming from Amazon, maybe the most data-driven company on the face of the earth that, that's deeply ingrained in my soul as well as the delighting the customer part of that journey. And so it will be a twofold approach for us, where we'll use the information to facilitate our development of the next product, but the customer has to have a benefit right away, or else they just won't buy into the process and won't give us that permission required that we need to move forward.

That's really good. That's really helpful clarification. And I wanted to just give you a chance to talk too about Velocity. And as you move more towards an affiliate model in combination with the business builder model, how that might create different tiers of commission as you think forward? Some of those affiliates that might be just driving traffic to your website, what their affiliate tier might look like versus those that are actually building businesses on the back of your platform.

Yes, this is part of the original transformation that we began several years ago. We recognized that as we were transitioning from a traditional direct-selling model into this future state affiliate marketing model, we acknowledge that the types of micro entrepreneurs or micro influencers that we were beginning to attract had different needs than more of a franchise type of independent business owner of the past. And so with that, we evolved our business model to be much more flexible in the way that it provides opportunity. So for an individual who simply wants to share products that they love on social media networks or as an affiliate, affiliate marketing, traditional affiliate marketing, our Velocity compensation program that you mentioned really enables that sort of behavior in a very traditional way like any other affiliate marketing program that Amazon runs or any of the others. If they choose to build a deeper business, like a franchise owner, then the model is flexible enough to allow them to build other micro entrepreneurial opportunities and own multiple franchises, so to speak, if you were to compare it to a young brands or anything like that. With the gig economy, and this is a really important part of our equation, with millennials and Gen Z seeing greater flexibility, we all read the reports of the great migration out of the workspace. We're seeing it in our own data. There's certainly a migration to more flexible forms of income. And our model really is perfectly suited to offer a broad array of opportunities for those micro influencers to franchise owner-type business owners. And we view ourselves as the platform that gives them the tools, the products and what -- everything that they need to build that business in their way.

That's great. All right. I want to jump into the next topic area, which is something that we've been studying a lot, which is beauty from within. And you sit at a really unique position because you have both a skin business but also a wellness business. So talk a little bit about some of the opportunities to leverage the center of the Venn diagram, where they overlap? And are there anything -- are there any insights that you've gleaned from your nutrition and your wellness business that you could be lateralized into your beauty business?

Yes. And to answer that question, Steph, I mean, I would step all the way back to 1998 when Nu Skin acquired Pharmanex. And that was really our foray into the inside/outside equation. We realized that we were going to be a wellness company. We needed to acquire that capability on both sides of the wellness equation because it is an inside-outside value proposition when you're talking about true wellness. We acquired Pharmanex, that really brought a pharmaceutical grade nutraceutical approach to nutrition. Dr. Joe Chang, who is our Chief Science Officer, as you know, came with that acquisition, continues to be our CSO, leading our scientific advisory board as well, then really specializes on this duality of opportunities. We do have a relatively equal split or evenly split portfolio. It weighs a little bit heavier today on the skin care side or the beauty side, but it fluctuates based upon consumer behavior, interest and trends. And so we do see this -- the nutrition side being a real opportunity. To your specific question about ingestible beauty or beauty from within, we do see ourselves as being a very unique player there because of that -- the deep roots in research and development on both sides. Some of the manifestations that come out in this next product that we're launching in Collagen+, this actually has been a product that has been in research and development for quite some time. We all know that the adjustable beauty is a very large and growing category. And some would ask, well, why are we entering now? We have a commitment to doing things differently and really providing a unique approach, best of science and nature coming together. And we really wanted to find a unique approach to ingestible beauty as well. So our Collagen+ product is very much a unique approach in ready-to-drink for -- multiple formats, but including ready-to-drink. And the formula is just a very -- it's a very interesting blend that hasn't been seen before. And so we see a very bright future as these 2, as you said, the Venn diagram, as these 2 disciplines on wellness come together. We will continue to invest in both sides of the equation for true wellness.

Mark, really quickly, can you just give us a trend line on the wellness business, just so the audience understands a little bit about what you've been seeing in that business as well?

Yes, for sure. Ryan mentioned that we've been relatively even split over the last several years for -- over the last couple of years, we have trended more heavily towards personal care and beauty, as our beauty device business has grown. So we're sitting at about 65%, or about 60% personal care, 35% nutrition and about 5% to 7% of our manufacturing entities. And also plus or minus 5 points, depending on product launches and introduction. So there is a pretty even balance. And we are excited about some of our new Pharmanex products coming out. We also have a new Pharmanex product called Meta that will be launched later this year. And then one thing I'd add to Ryan's comment about beauty from within, what's great is the clinical studies that will come out about on our Collagen+ product. But what gets me super excited is the fact that we have great clinical studies on our LumiSpa. When you use the 2 together, you get a boosted result on both. And so this idea of beauty from within and beauty -- ingestible beauty and then the topical beauty, and when used in combination, which I think is unique to what we offer is going to really, really excite the customer.

That's great. Well, we only have a couple of minutes left, but I want to give you a chance to really just kind of long throw here. And that's looking out 5-plus years. Because there's been so much change in the business, it does feel like we're entering a phase of more continuity but also more opportunity. So I want to just have you share a little bit about 5 years from today, when we're hopefully sitting in Nantucket, talking about Nantucket. What do you think you'll be most proud of looking back on over the last 5 years?

As I think about it, Steph, we really see ourselves, 5 years from now, I hope we'll be standing at your conference, saying, we did accomplish what we said we would what we set out to do, which has become the world's leading innovative beauty and wellness company. We believe that the best path to consumers is directly through trusted transactions. And so that direct-to-consumer, bringing the best of that model, but powered by our affiliate marketing engine, people that really love the products and love to share the products at a micro-influencer level, that scalability of that model will enable us to bring those product innovations to market in mass at a much more scalable model than historically what we've been able to do absent the technology and what most other beauty and wellness brands today do not have. And I can't tell you the number of conversations and industry forums that we sit in, where we see traditional consumer brands talking about, well, we have 2% direct-to-consumer or we have 10% direct-to-consumer businesses. I mean, we have over 90% of our business direct to consumer. We have it on digital-first platform. And so we really have an advantage. I think what's necessary for us is we need to be able to tell our story through forums like this and we appreciate this opportunity, Steph, because we have such a story to tell. And as we do our analysis, we are so undervalued relative to what other beauty and wellness companies are striving to learn how to do through affiliate marketing. We know that world. We're now applying the technology to scale it faster. And I hope 5 years from now, we'll have accomplished our goal.

That's a great note to finish on. I have a pretty high degree of confidence you will. So hopefully, the market starts to come to appreciate that as well. We're betting on that. So I want to thank you both. Thank you for coming in from Salt Lake. Scott, thank you as well for coordinating. Always very, very helpful. If you didn't get a chance to speak with Nu Skin today, and you would like to, please reach out to me or someone from Jefferies, and we will get you in touch with the IR team at Nu Skin. Everyone, thank you so much for joining. Ryan and Mark, thank you, have a great afternoon as well.

Thank you, Steph.