Good day and thank you for standing by. Welcome to the Third Quarter 2021 Nu Skin Enterprises Earnings Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your first speaker today, Scott Pond. Thank you. Please go ahead.

Thanks, Ana, and good afternoon, everyone. Today on the call with me are Ryan Napierski, President and CEO; Connie Tang, Chief Global Growth Officer; and Mark Lawrence, CFO. On today's call, comments will be made that includes 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 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 time over to Ryan.

Thanks Scott. Good afternoon, everyone. We really appreciate you joining the call today. This is my first earnings call as Nu Skin's CEO, so I'd like to take a few minutes to share my perspectives on our business both historically and for the future. As we work to further transform our business towards our vision of becoming the world's leading innovative beauty and wellness company powered by our dynamic affiliate opportunity platform. Nu Skin has a rich heritage of building innovative beauty and wellness products for nearly four decades including billion dollar brands like Nu Skin, personal care, Pharmanex and ageLOC. However, the value of our business has often been defined through the narrow lens of our historic direct selling distribution channel. But when you examine our business for what it is becoming, we are better described as a beauty and wellness company that connects consumers to innovative products that help them look feel and live better through our trusted brand affiliates, via our socially enabled digital platform, affiliate powered direct to customer social commerce. Nu Skin is fundamentally a beauty and wellness company, based on our global reputation for high quality, innovative products and deep consumer connections. We provide a holistic inside outside approach backed by robust R&D and scientific rigor, which very few companies provide. And we are a category leader for beauty device systems, according to Euro monitor for four years running, which provides a very unique opportunity for us as we expand our device ecosystem moving forward. We're now engaged in transforming our business from a traditional direct selling company to becoming the world's leading beauty and wellness company powered by our dynamic affiliate opportunity platform. There are three key strategic imperatives that will enable our next era of growth. First, we will launch Empower Me,…

Thank you so much, Ryan. I'm excited to speak and share my perspective with you today. Choosing to join Nu Skin in April was an easy decision for me as I believe the company is on the brink of something truly remarkable. There are a couple of key things that drew me to Nu Skin. First, I'm working in the beauty and wellness space most of my career, I have known Nu Skin for having exceptional products. The second is the opportunity to draw upon the unique strengths of our affiliate community to better attract, engage and retain millions of customers and maximize that power of influence through our digital first approach and customer obsession commitment to deliver community building interaction. In addition, the expanding sharing economy, another macro trends Ryan mentioned are lining up in our favor. You'll be hearing more details about our specific plans at an upcoming investor day. But rest assured, we are focused on providing high quality customer experiences for those who are curious and just starting to explore Nu Skin products to our most loyal fans who count on receiving their subscription of Nu Skin products each month. As we do this, we are confident that we will drive customer attraction, loyalty, longevity and lifetime value. So let me now provide a little more insight into each of our market segments. At the highest level, the challenges in China have been offset by accelerated growth of the business in the West, up 35% year-to-date over a very strong 2020. This improves the geographic balance in our business with less reliance upon any given market. In the Americas region, the successful introduction of beauty focus Collagen+ in the US led to 14% revenue growth in the quarter on top of 67% growth in Q3 of…

Thanks, Connie. And thanks to all of you for joining our call. today. I'll provide a financial overview and then give Q4 and full year 2021 guidance. For additional detail, please visit our Investor Relations website. For the third quarter, our revenue was $641.2 million and benefited 2% due to foreign currency. While this represents an 8.8% decline versus Q3 2020, it is growth of 8.7% on a two-year look back versus Q3 2019. Earnings per share for the quarter were $0.97 down 10% year-over-year, but up 22.8% versus the same period in 2019. Gross margin for the quarter improved 130 basis points to 75.2%. Gross margin for the core Nu Skin business was 78.6% compared to 76.3% driven by product mix, product cost reductions and supply chain efficiencies. Selling expense as a percent of revenue remained consistent with the prior year at 39.9%. For the Nu Skin core business selling expense was 42.7% compared to 42.4%. General and administrative expenses as a percent of revenue were 25.1% compared to 23.5% in the prior year. For the quarter G&A declined $3.9 million year-over-year, as we remain focused on carefully managing expenses. Operating margin for the quarter was 10.2% compared to 10.6% in the prior year period, largely impacted by revenue. We still anticipate an approximate 50 basis points year-over-year improvement in operating margin for 2021. On our way to our stated midterm goal of 13%. The other income expense line reflects a $2.8 million gain, compared to a $0.5 million gain in the prior year. The benefit this quarter largely stems from unrealized gains and our rise investment holdings. As our investments and rise increase, you can expect more variability in our other income expense line item. Cash from operations was $30.2 million for the quarter, and was impacted by…

Thank you. Good afternoon, everyone. Ryan, my first question is for you. Just listening to your opening remarks, it sounded very much like an invitation to the industry community. They're looking at you differently as a partner. So I wanted to just have you talk a little bit more about the power of the platform, the affiliate powered opportunity platform that you talk about and what that could look like, as you use your own brand as proof of concept. Is there an opportunity to start partnering with emerging brands, disruptive brands, maybe some of those that are in your manufacturing segment to launch through a new channel to consumers?

Yes, Steph. Thanks for the question. Yes, it's - we really are excited about the future. And we've been talking about our business as a platform now for quite some time. Obviously, you're distributing our own brands, as you describe that, through that we see so much runway in the 50 markets where we are as we continue to evolve our traditional direct selling model into this new social commerce, kind of hybrid model between a typical influencer marketing type approach and a traditional direct sales taking the best of both worlds. So there's a lot more potential that we need to really focus on and get right for our core brands, a lot of room and devices, obviously, and connected devices to make that happen. What we do longer term with the platform and additional brands and partner brands I think is an intriguing idea and we'll continue to explore that. I do think it's important as we talked about the [indiscernible] acquisition as well, ensuring that we have the right technology to do it. So I'd say in the near term of the transformation, we're very focused on getting it right for our Nu Skin core and core brands and mid to longer term the opportunities expand from there.

Very helpful. And then Mark, I have a couple of just tactical, more tedious questions, I apologize. But I wanted to just break down the gross margin, you can see the gross margin expand with actually quite surprising just given what we're seeing out there in terms of supply chain constraints, so can you talk a little bit about your commentary, supply chain efficiencies, cost reductions? I know there's some mix in there too. But to hold the gross margins, stronger year-over-year, on the core business, if you could talk a little bit about that, that'd be helpful?

Sure. Thanks, Steph. And thanks for the question. Gross margin is an area where we've been focused on for quite some time. And as you know, we have built up inventory in our channel. Some of that buildup in inventory was intended to get ahead of the supply chain constructions, which we saw coming. So that would be the first thing that we did is we got ahead of some of the inflation that we're seeing, we got ahead of some of the supply chain construction that we're seeing. The second benefit is we have our own manufacturing entities. And as we saw demand ramp up and as we saw some supply chain constrict, we were able to shift those resources to our own manufacturing entities and the more product that we produce for ourselves, the more gross margin benefits that we get. I do think there's still opportunity in gross margin. And the last thing I would say is FX did move in our favor this year, which did provide some additional benefit.

Okay, very helpful. And then the last one is just on the G&A. I recognize that it declined a bit year-over-year in raw dollars, but it was still higher as a percentage of sales, maybe just help us think through the flexibility in the cost structure as we look ahead, looking at the quarters going forward, how much flex is there to drive variable leverage relative to some of the fix deleverage?

Thank you, Steph. G&A really was a revenue story in this quarter, we did bring down spending about $4 million year-over-year. And that was really through our focus on making sure we're spending money on the most important things, we continue to invest in emerging markets, we continue to invest in technology. We continue to invest in areas where we think our business needs to go as far as transforming. So we are investing in our business, but mostly a shifting of resources of that investment. I guided the original the year at about 24.5% to 25% G&A as a percent of revenue, and I think will be about there at the end of the year.

Alright, very helpful as always, thank you.

Thanks, Steph.

Thank you. Our next question comes from the line of Doug Lane from Lane research. Your line is now open.

Hi. Good afternoon, everybody. Just a couple things. First, thinking about the new model - the move towards the social model. Do you think that your current compensation plan is properly tuned for that shift? Or should we expect some sort of modifications to your compensation plan?

Yes, hi Doug. I'll take that one. You'll recall a few years ago that we did evolve the model towards what we call velocity, which is a more flexible business model that allows for people to build in diverse ways really sharing products predominantly on a social basis and at a greater scale and or building a team of shares. And, and so the framework itself has really been put in place that enables that to happen. We do continue to evaluate the model to ensure that we're optimizing it for - the rapidly evolving social commerce world. But I think the framework generally is right. But we will continue to look at that model.

Okay, I remember that. And then the other thing I wanted to probe here is, is China is getting worse. And this is across the channel it's not just Nu Skin and I know you're making shifts, others are making shifts, but the channel is just under a lot of pressure. I mean, your business is basically half what it was three years ago. So why is China still a good market for a US based direct selling company?

That's a great question. I'll provide my perspective. I'd love to have Connie as well, she spends a lot of time with our China team remotely, unfortunately in the current environment. But you're absolutely right. The direct selling industry as a whole in China has been challenged really since 2019 and continues to be challenged from that time. I think our view of direct selling in China is that it will continue to be challenging as long as regulations are less clear. And the macro environment evolves, which is why we are so focused on innovating in that world. Connie talked a little bit about our Tencent WeChat partnership we're looking at, at opportunities to get our products to consumers in China that are obviously over a billion consumers. And from a broader perspective, Doug, and this is something I think that's really important. We're viewing ourselves more as a beauty and wellness company. So how do we get those products to market more effectively leveraging the capabilities of our channel, in terms of affiliate and social commerce type models, although it's very different in China, how do we leverage the unique ecosystem, the we ecosystem there, and those emerging trends there to bring these amazing products because for beauty and wellness, as you know, a lot of companies that they lot or L'Oreal are getting a lot of big China boom, from the consumer action, at our access. And so we need to find a better way to do that. But Connie, what any thoughts you.

Sure, thank you. Just to add a little bit of my insight, China remains a strong and growing market segment for beauty and wellness product consumption. And for us, the opportunity still really lays very much so in the area of accessing the wider customer and consumer base, which is why social commerce lends itself as the right platform for us to maximize our access, bringing access to our products to a wider consumer base reaching a more diverse geographic mix than where we currently have. And at the same time, it is statistically still the fastest growing largest market share of social commerce today, and is projected, in fact, into more than $3 trillion through 2028. So the marketplace opportunity still is relevant for us, as we move lean into being a leading beauty and wellness company and brand.

Hey, Doug, let me add one comment there that I think might be important for the audience. And our balance geographically, is probably better than it ever has been. Mainland China's making up about 20% of our business where you know better than most that's a very low number for us. We now have a 20% market in the Americas, a 20% market in China, and then several 10% markets. And so the geographic balance provides much more stability and consistency for us than being relying on a single market to generate all of our growth.

Point. That's good color. Thank you.

Thanks, Doug.

Thank you.

Thank you. Our next question comes from the line of Mark Astrachan from Stifel, your line is now open.

Hey, everyone, this is Chris Armes on for Mark.

Hey, Chris.

To start off with maybe you could provide some color kind of on the cadence of sales and sales leaders and customer levels, kind of maybe through the quarter, I guess more in Asia, just kind of given the disruptions in China as we've kind of seen was more in July, August. And then maybe there's kind of a rebound in September. So maybe if you could kind of speak through that that would be okay?

Yes, I think Chris, my observation, Connie may have some as well. Clearly the China and when we look at sales leader trends, in particular in China and Southeast Asia are were pretty heavily disrupted. I think, you know, as a critical part of our model, continues to be the motivation and incentivization of our sales force and one of the COVID effects of the Delta variant that hit us that we were hoping to roll out of in 2021 frankly, especially the back half was around our incentive trips and promotional activities tied to motivating those groups. And so we had to make adjustments to those incentive trips, the location, the venue, the times the dates, and it really causes some level of demotivation in the Salesforce. So that's really the disruption you're seeing there is around those events in particular from a sales leader perspective. But Connie any give some thoughts.

Additional thoughts on that is this also informs the reason why our focus and a revisiting of the focus of customer acquisition is so critically important. Having direct access to customers, having purposeful and targeted campaigns to drive customer engagement. When we are struggling with governmental regulations or macro environmental challenges that is challenging to keeping an Independent salesforce motivated. That's where we can look for opportunities to buffer that, and to stem those challenges that we see. And last add one thing is our September preliminary rollout of that Tencent digital program did help us see some modest improvement in the customer number, which we're looking to continue to leverage and also to create long-term value from those new customers that have been acquired.

I think forward looking, Chris, if we think about where the world is, with regard to COVID, and vacation or patterns, obviously, airlines are clearly filling back up, hotels are filling back up. Our hope is that the COVID effects on travel will over time less than and enable us to resume some of those important incentive and promotional activities that will and even in a social commerce world continue to be important to motivating our salesforce so we don't see this being a long term lag as the world kind of continues to adjust back.

Got it. That's helpful. And then if I could just follow up on kind of the gross margin piece, seems like it's in pretty good shape relative to what a lot of other companies are seeing. Is there any need or kind of plans to take price in the future in terms in reaction to any of these pressure there?

Yes, price. So I think the way I would define it, Mark talked about the strategic investments and inventory that we made in advance, which has been good, and I think helping us to not suffer as much from supply chain constraints, as many companies around the globe, that there are there are costs associated that we really view ourselves as a customer obsessed company. We are a premium goods company and so we want to be careful in setting prices that are realistic to market. So we'll continue to evaluate that over time, we do apply a relatively consistent pricing, our approach to pricing around the globe, we had a moderate price increase earlier this year. We'll continue to evaluate based on inflation and the like, as we see the world change. Mark, anything you to add?

No, I think we have a standard process where we look in every market around the world, and we understand the inflationary environment, how our products are priced in those markets. And we make adjustments every year, accordingly. And I think that practice will continue in addition to our efforts in our supply chain, to bring down cost of products so that we don't have to be as influenced by inflation going forward.

Got it. Thank you.

Thanks, Chris. We appreciate it. It doesn't look like there are any more questions in the queue. So let me just wrap it up by thanking you all for attending our call today. I hope that what you've taken from the call is that Nu Skin is well underway in our transformation towards a significantly brighter future as we lean into our vision of becoming the world's leading innovative beauty and wellness company that's powered by this dynamic affiliate opportunity platform. This vision will be enabled through our introduction of Empower Me personalized beauty and wellness through connected devices, and our unique affiliate powered social commerce business model evolution beginning in 2022. While our aspirations are great, our track records of product and device innovation and business model evolution give me confidence that our best years are yet to come. You'll learn more about our strategy and plans at an upcoming investor day in early Q1 as I mentioned, so we look forward to seeing you all hopefully in person, or at least remotely very soon. Thanks. Good bye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.