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

Good afternoon, everyone. So next up, we have with us Nu Skin. And with this, we have Ryan Napierski, the CEO of Nu Skin, and James Thomas, the CFO of Nu Skin. So thanks for joining us here today, both of you.

I guess maybe to start off, Ryan, when you came to a Nu Skin as CEO, you outlined a detailed strategy that included 3 main areas. Maybe if you could talk about that a little bit and how you see that playing out over the next several years.

Yes, you bet. And great to be here at ICR. Thanks for hosting the panel. No. For us, we play in the integrated beauty and wellness space. When we say integrated, what we really mean by that is holistic beauty and wellness. Consumers are very much -- are very well adapted to the idea that the inside/outside approach to wellness is certainly the most effective approach. We're in the right categories of play. But I think one of the critical parts of that journey is helping consumers find what it is that they want in their journey and that what they need to find is something that's personalized. And so we came about one of our strategic pillars was around what we call EmpowerMe you see up here, EmpowerMe beauty and wellness, which is all about how do we help consumers find what they want on their personal beauty and wellness journey. EmpowerMe has some multiple key initiatives, one of which is around iO connected devices. According to Euromonitor, Nu Skin is the world's #1 beauty device systems brand for the sixth year running. I think it is now fifth or sixth. I think Scott always gets upset when I forget, but it's 5 or 6 years running, but we now are taking those devices and we're connecting those using iO or input output technology that helps us gain greater insight into the consumer journey. So that is well underway. In fact, we just launched our second iO device, WellSpa iO in many of our markets around the globe and continue to expand the devices that will launch. It previewed in the U.S. In fact, we just got medical device clearance in December, did a quick preview there, did well, and then we'll be launching it in Q1 in the U.S. and then we'll take it to Mainland China as well. We're in 48 markets, by the way. So WellSpa is part of this EmpowerMe journey personalization. Another pillar of that is around getting into brain health and mental wellness which we're entering in 2024. So we'll continue to migrate that way. But that's first strategic pillar is EmpowerMe. Second strategic pillar is around how we go to market and Nu Skin is traditionally a direct selling company. So relying on word-of-mouth marketing. However, we're now applying affiliate marketing and influencer marketing like tactics to our sales channel to empower them through social media platforms. And that migration continues is now in our -- it's multiple years in, but we continue to push forward there. And then the third one is powered through our digital ecosystem, which consists of a consumer app and an affiliate app, we utilize an army of affiliates around the globe in those 48 markets to promote our products on social media. So we leverage these apps to connect the affiliate and the consumer to our e-commerce platform. Today, 97% or so of all of our revenue is done through our digital platform.

Great. That's great. Maybe if you could just talk a little bit about the social commerce portion and how that's working with the direct selling versus EC too.

Yes. So -- and for those who are familiar, direct selling think -- I always use the example of think Avon, right, which was the original direct sales companies established back in the 1890s or so, door-to-door, word-of-mouth type selling. So Nu Skin was born with that model in the '80s, but that has evolved and even traditional advertising is now different. But what is consistent is people continue the #1 recommendation or approach to purchase today, path to purchases through personal recommendation from a friend or a family. So we continue to rely on that fundamental tenet of direct selling, which is personal, marketing, leverage -- leveraging the power of social media. So our apps integrate with social media platforms, whether it's Tencent or Snap or WeChat or Instagram, Facebook, et cetera. But we're really trying to employ that word-of-mouth marketing model through a social lens or social commerce and then that's how we do business.

Great. And then maybe if you could talk about your portfolio optimization plan, which you announced, I think you're going to rationalize some SKUs there. Maybe if you could talk about what percent and what those SKUs will look like.

You bet. And James might be able to talk a little bit more about the operational benefits of that as well. But as part of this EmpowerMe strategy, we're curating our portfolio. So you can imagine over the course of 40 years, we've amassed a fairly large portfolio of products. We -- in some markets, we have as many as 400 different SKUs. Well, that's great on one hand because it really allows for optimal personalization across the portfolio. I don't know many beauty companies or wellness companies that have such a broad array of products in both sectors, beauty and wellness. So that's a unique competitive advantage. At the same time, it's a pretty heavy burden to take across 48 markets. And so as part of EmpowerMe, we're really looking at our portfolio to focus in on Hero brands that really are most important in the customer journey itself and on beauty and wellness, and we're then streamlining the portfolio. So we put the target out there of 20% to 30% of SKUs out over the next 12 to 18 months. And that will really put some operational benefits that you can talk about, James.

Yes. And so one of the main projects that I've been working on since I came into the CFO role in February of last year is really gross margin and looking at how do we improve that. And that's when we really started to take a hard look at our SKUs and trying to figure out what's the right footprint as we move forward. And 60% of our SKUs -- or 60% of our revenue come from these 10 Hero brands. So when we started focusing in on that, we started to look at how much waste we were putting into promoting products that have lower gross margins. And so our approach is going after that surgically as we go throughout the year. It's going to -- it's probably going to -- one of the questions that we've been getting all conferences, do you expect to realize that immediately, those gains? And it's something that we're going to tactically go after over a period of time. So we're thinking about a 2-year time frame as we surgically work through our inventory base that we have currently, while we focus on those Hero brands and move forward.

Okay. Great. And then you mentioned getting into mental wellness. Maybe if you could talk about time line there, what you're thinking in terms of products? Or how should we think about that?

Yes. So we all know it because we're all experiencing life today. And we -- if any of us have children, I have 3. We know that stress, anxiety is only growing in the consumer demand sector. Nu Skin, we have a fairly evenly split business between beauty and wellness today. When I say wellness, I'm referring to nutrition predominantly. But our view is that the mental -- brain health or mental wellness is very much a burgeoning need by consumers around the globe. Not only do we believe it, but it's reported through Mintel and a lot of different sources. We see a very integrated approach as we look to personalize solutions for consumers, it's really important that we offer a comprehensive approach. So they're in enter, we call it Project Ocean, but our mental wellness division. We will see that rolling out in 2024, beginning here in the U.S. and then we'll take it across 48 markets. But you can anticipate products that are really priced well for consumers that address everything from stress and sleep to mental acuity along the way, and we see that integrated into our consumer app and our affiliate app Vera and Stela, we call them, the names don't really matter. But that integration into the app will enable us to really help consumers access these important products for their overall well-being.

Okay. Great. And then maybe if we could shift gears to China a little bit. That used to be a big part of your revenues. It's come down quite a bit. So it's not as big as what it used to be. It's been a pretty tough market. I guess maybe talk about just what the macro impact has had on your business and your expectations there longer term?

Yes. China has been such an interesting effect, it's probably the #1 question we've had at ICR. And in fact, I think back to -- we've been in China now for 23, 24 years. I worked on the original team that built the business model to go into that market. In 2018, we really identified it as a company that China was a high-risk environment, and we knew that geopolitically speaking, but also there began to be reports around the economy. And I think that's largely played out, not exactly as we expected it. At the time, it was roughly 45% of our total business. It was a big business for us. Obviously, over the course of the last 4 or 5 years with COVID 0-case lockdowns and some of the economic challenges in China. Our business is compressed there. Today, it's about 15%. In 2018, we established a goal to say that we wanted to diversify with no market being more than 20% -- maximum 25% of revenue. We got there a different way. But I think with the resetting of China to where it is today, it's probably at a more manageable and risk-appropriated level given the macros and where they are. I still -- I would say, we still believe China is a strong opportunity for the mid- to long term. 1 billion consumers. The middle class is still strong. James and I -- James has been there 3 or 4 times in the last few months. I've been there a couple of times myself. I think what we continue to hear about China from the mouths of our management team and our sales force throughout Beijing, Shanghai, Guangzhou is really that the consumer is under pretty severe pressure, a lot of saving right now related to the compressed housing market and kind of net worth being unrealized there. People are saving more, which puts pressure on premium goods, which is predominantly where we play a majority of our portfolio. We do see the economy stabilizing over time. Obviously, we're not fortune tellers. But I think I continue to go back to saying there's 1 billion people in China. All of them want to look, feel and live better. That is our offering, and we need to find, as a management team, how to reach them in a better way moving forward.

Yes. Okay. Great. And then I guess moving on to your Rhyz segment, which grew double digits in the third quarter. Maybe if you could talk about that segment, what's driving that growth and how you see that longer term?

Yes. I'll speak to it strategically and maybe James can speak operationally as well. So back in 2018 as well as part of our enterprise diversification strategy. We established Rhyz, R-H-Y-Z. It's a portfolio of investments in companies that synergize with our core business but have the capability of performing for other businesses as well. So we include manufacturing in that. We have technology in the form of a company called Mavely, which is an affiliate marketing platform similar to LTK and doing very well. And then we have our recent acquisition in Q3 of BeautyBio, which is an omnichannel beauty brand as well. So this Rhyz platform is growing quite well, both through acquisition and core growth. We believe long term, as Nu Skin continues to lean into our beauty, wellness and lifestyle platform vision that it's important for us to grow capabilities that will power the overall enterprise, whether those capabilities, again, are in manufacturing, certain technologies or even brands as we go to market to deliver innovation around the globe. We see this as an important sector. James, maybe you should talk about performance.