Q4 2023 NU Skin Enterprises Inc Earnings Call
Participants
Scott Pond; VP of IR; Nu Skin Enterprises Inc
Ryan Napierski; President and CEO; Nu Skin Enterprises Inc
James Thomas; EVP and CFO; Nu Skin Enterprises Inc
Doug Lane; Analyst; Water Tower Research LLC
Presentation
Operator
Thank you for standing by, and welcome to Nu Skin Enterprises Q4 2023 earnings conference call. At this time, all participants are on a listen only. The speakers' presentation there will be a question and answer. We ask a question. At that time, please press star one on your telephone. Please be advised today's call is being recorded. I will now turn the conference over to your host, Mr. Scott Pond, Vice President of Investor Relations. Please go ahead.
Scott Pond
Valerie, 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 with that, I'll turn the call over to Ryan.
Ryan Napierski
Thank Scott.
Hello, everyone.
Thanks for joining our call today. We have a lot to cover in today's call.
So let's jump into business performance and then onto expanded enterprise vision and strategy. We are pleased to deliver fourth quarter at quarter revenue above our latest guidance range, driven by the continued rollout of ageLOC Welspun IO in many markets, seasonal promotion in China and the continued strong performance of our RISE businesses this quarter further demonstrated that while we continue to make progress towards our long-term vision. Much of our headway was concealed by the persistent macroeconomic pressures, impacting consumer spending and customer acquisition around the globe as well as disruptions associated with the ongoing transformation of our core business. This was particularly evident in the fourth quarter results, which were down in our Americas, South Korea and Europe and Africa segments. This was offset by seasonal promotions in Mainland China, stabilization in Japan and modest growth in our Hong Kong Taiwan segment. In addition, we actually achieved over 100% growth in our rice businesses, which accounted for 13% of our revenue in the fourth quarter and continued to become a more meaningful part of our and end users are achieving their desired results with this more personalized approach. Whilst Bio has been a strong addition to our number one beauty device systems brand and is generating consumer interest with the demonstrable results, Welspun IO is scheduled to launch in Mainland China in Q2, and we'll be launching a similar device renew spot IO in the U.S. later this quarter.
Moving into 2024, we are preparing to enter, enter the rapidly growing $10 billion brain health market stress, sleep and mental acuity are all growing concerns for consumers around the world and our unique approach to holistic wellness positions us to provide integrated solutions to help our consumers find better balance in their lives. We will be introducing this new division and brand at our live events in Q3 we also continue to focus on deepening connectivity with customers and affiliates through enhanced capabilities and feature sets in the Vera and Stella apps, which we believe will enable deeper connections with our customers to meet their personalized needs. Geographically, we continue to see near term pressures on consumer spending related to extended hyperinflationary conditions around the globe. The Americas, South Korea, Europe and Southeast Asia all experienced a more difficult year as consumers shifted purchasing habits towards lower-priced goods and services. In the meantime, we will be introducing new affordable luxury products targeting the mass each customer segments, including a series of new product regimens being rolled out in the U.S. and South Korea this quarter, together with well SPAR renew spot and our TRET. line, we anticipate leveling trends in the business moving into the second half of 2024 for Mainland China experienced stabilization in our business in the fourth quarter, which was associated with seasonal promotions. While we continue to believe in the potential of this great market, we anticipate ongoing challenges as the economy works to recover over the coming year. We are introducing a new go-to market model, partnering with dosing in a systemic app of TikTok, which will begin being tested and refined in the first half of '24, Japan, Hong Kong and Taiwan each showed favorable outcomes in 2023, and we anticipate these trends to continue moving into 2024.
Next, let me discuss our expanded enterprise ecosystem, vision and strategy. Including RISE, which is becoming a more substantial part of our business as consumers discovery and purchasing behavior shift further from traditional media into social media, influencer and affiliate marketing continues to grow at an accelerating pace. A recent statistics study estimates influencer marketing in the US to grow from $6 billion to around $69 billion by 2029. We believe that we are well positioned to capitalize upon this shift as we expand our enterprise vision towards becoming the world's leading integrated beauty, wellness and lifestyle ecosystem. This implies an even broader opportunity in the mid to long term as we further build out our RISE business segments and seek synergistic opportunities across our business units. By applying our nearly 40 years of learnings in affiliate marketing from our core business with new capabilities and learnings from our RISE businesses, we see greater potential for driving enterprise value over time via this expansive beauty, wellness and lifestyle ecosystem. In order to further enable this expanded vision, we have been reviewing all aspects of our business and reassessing our approach to capital allocation to invest in long-term growth and business evolution. This includes rebalancing our dividend payout ratio to be more in line with or better than our industry peers. This move will provide increased financial flexibility, enabling us to effectively seize forthcoming opportunities. This was a difficult decision for our management team and the Board and one that we don't take lightly. However, after extensive analysis and careful deliberation, we believe this move is in the best interest of all stakeholders as we pursue our long-term enterprise system vision for growth. This capital reallocation will free up approximately $65 million annually. That will be directed towards high-potential growth investments, which in the near term, will be relatively evenly spread across the following three areas. Number one, accelerate accelerating the growth opportunities in our RISE ecosystem which grew 41% last year and is becoming a more substantial portion of the overall enterprise.
Number two, facilitating a progressive new market expansion model for our core Nu Skin business beginning with India anticipated in 2025 and number three, furthering the build-out of our Digital First affiliate opportunity platform with an extended technology partnership with emphasis given the importance of the up of our updates to strategy and capital allocation. I want to spend a few minutes diving deeper into the areas we are now targeting for stepping up investment. I'll start with RISE, which was established back in 2018 as part of our enterprise diversification strategy raises a synergistic ecosystem of consumer technology and manufacturing companies focused on innovation within the beauty, wellness and lifestyle space. These companies synergistically support our core business and or have capabilities that provide greater growth potential to our expanding ecosystem. Vision rises, experienced healthy organic and acquisition-led growth and most of the businesses are still very early in their life cycles. In the fourth quarter, RISE revenues were up over 100% or 87%, excluding last year's beauty bio acquisition, right segments accounted for 13% of total enterprise revenue in the fourth quarter, and we anticipate this growing to 20% to 25% by 2025 with an increased investment in RISE, we plan to increase manufacturing capabilities and capacity to service Nu Skin as well as additional consumer goods and indie brands, expand technology capabilities for Maple Leaf, which is rapidly becoming a leading affiliate brand marketplace and technology provider for our other businesses and develop a creator led indie beauty brand incubator, including new and acquired brands for the incubator, we will be able to leverage the beauty bio integration and acceleration framework that we developed last year. For the past several years, we've been building the infrastructure necessary to incubate launch and support creator brands with an array of services, including product R&D, manufacturing and packaging, technology, logistics and internationalization. These additional rise investments will enable us to delve further into the influencer creator economy and has far-reaching opportunities in the beauty, wellness and lifestyle space. We are well positioned to service the creator economy and indie brand markets by leveraging our vast array of resources on our way to becoming the world's leading integrated beauty, wellness and lifestyle ecosystem.
Next, new market expansion beginning with India. This vibrant country is rapidly becoming the world's fastest growing economy with 1.4 billion people, a growing middle class and the highest per capita digital and mobile adoption. We see India as a market holding great potential for us. Nu Skin has a rich history of international expansion that has fueled our growth into nearly 50 markets around the globe. We plan to reinvent the way we go to market with a progressive digital-first model, which will enable us to expand our global footprint more quickly and cost, effectively accelerating our ability to bring Nu Skin to people around the world who are seeking to look feel and live better. We will be aligning with our global sales leaders around an anticipated 2025 entry into this strategically important market at our annual team lead trip this April and third, our third area of focus is further investment in our digital first affiliate opportunity platform. We aim to provide our brand affiliates with a simpler, faster and easier way to engage in our businesses around the globe. Through our expanded partnership with emphasis, we plan to enhance our digital ecosystem, accelerate our global Equinox rollout and streamline the affiliate journey to minimize friction and accelerate growth.
So in summary, 2024 will be another year filled with transformation of our core Nu Skin business to win in the future and further our build-out of the RISE ecosystem.
Our initial outlook for 2024 reflects further macro challenges in the core lessening throughout the year, partially offset by continued double digit growth from the right segments throughout these challenging times. We remain optimistic in our future growth potential as we continue to reposition the enterprise towards becoming the world's leading integrated beauty, wellness and lifestyle ecosystem.
And with that, I'll turn the call over to James to dive deeper into our guidance and the financials games.
James Thomas
Thank you, Ryan, and thanks to all of you for joining today. I'll provide a brief Q4 and 2023 full year financial review and then give Q1 and 2024 projections. For additional details. Please visit our Investor Relations website.
For 2023, we generated revenue of $1.97 billion with a negative foreign currency impact of 3% or $60 million and earnings per share for the year were $0.17 or $1.85, excluding restructuring and other charges compared to $2.7 or $2.90, excluding restructuring and impairment charges. For the fourth quarter, we posted revenue of $488.6 million, which was ahead of our previous guidance range and included a negative foreign currency impact of 1% or $7.2 million. Reported earnings, which also came in slightly ahead of previous guidance, were $0.15 or $0.37, excluding restructuring and other charges compared to $1.15 or $0.89, excluding restructuring impairment charges and a favorable tax rate in Q4 2022, our gross margin was 72.1% compared to 71.7% fourth quarter. Gross margin for the core Nu Skin business was 77.4% compared to 74.9% in the prior year quarter. The 250 basis point improvement in our core business was primarily driven by the strategic decision to rebalance our product portfolio, reduced product promotions and the intentional focus on higher margin products.
Selling expenses as a percentage of revenue decreased to 37.1% compared to 38.5% in the prior year quarter. The lower selling expenses due in large part to growth in our RISE manufacturing segment, which carries a lower selling expense for the new core Nu Skin business, selling expense was 40.8% compared to 40.5% in line with expectations. General and administrative expenses as a percentage of revenue were 29.7% compared to 24.4%. The increase percentage can largely be attributed to lower quarterly revenue levels and increased promotional campaigns set in the quarter. As previously discussed, during the fourth quarter we made the decision to street strategically reevaluate our Nu Skin core business and align our operating costs to be in line with revenue. In the fourth quarter, we incurred an initial $10 million charge in severance and made the determination to extend our restructuring and cost efficiency program through to Q2 of 2024 with an anticipated additional $15 million of restructuring charges, we expect the cost efficiency program to deliver annual savings of between $40,000 and $65 million before taxes in the core Nu Skin operating plan, excluding investments in right. We will continue to seek business efficiencies in all areas and believe these actions will help us maximize cash flows, Target, improved margins and enhanced earnings per share going forward.
Our operating margin for the quarter was 3.3% or 6.4%, excluding restructuring and other charges compared to 5.3% or 8.8% excluding restructuring and impairment charges in the prior year. The other income expense line reflects a $6.7 million expense compared to a $3.1 million expense in the prior year quarter.
We generated strong cash from operations for the fourth quarter of $54 million compared to $26 million in the prior year period. This was mainly driven by focused efforts in improving existing inventory levels and tightening our supply chain. We paid $19.3 million in dividends and did not repurchase any stock. We have $162.4 million remaining on the current authorization.
Our tax rate for the quarter was 21.9% or 24.9%, excluding restructuring and impairment charges compared to negative 134.9% or negative 3.7%, excluding restructuring impairment charges in the prior year period. For the first quarter, we anticipate an elevated tax rate in the range of 60% to 70% due to rate impacts from stock awards 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, as Ryan mentioned and as part of our long-term transformational goals today, we announced an update to our capital allocation strategy, rebalancing the quarterly dividend of $0.06 per share. We remain in a strong financial position and will continue to generate healthy cash flow. This dividend change puts our overall payout ratio more in line more in line with or better than our industry peers and will provide approximately $65 million in capital that can be used to fund growth opportunities. This action also enables us to prioritize responsible debt management, actively pursue inorganic growth opportunities and enhance shareholder value through opportunistic share repurchases.
Shifting focus now to guidance, taking into account the aforementioned economic conditions and challenges associated with transforming our business, we are projecting 2024 revenue in the $1.73 million to 1.87 billion range. We anticipate earnings per share of $0.75 to $1.15 or adjusted earnings of $0.95 to $1.35. Our guidance assumes a negative foreign currency impact of approximately 1% and assumes a higher effective tax rate of 25% to 35%, primarily due to the expected geographic mix of earnings during the year. We are projecting first quarter revenue of $400 million to $435 million, assuming a foreign currency headwind of approximately 3%, with reported earnings per share of negative $0.07 to $0.03, which is $0 to $0.1 excluding restructuring charges.
In closing, as we realign the Company for success by transforming our core Nu Skin business and expand our RISE ecosystem, we are structuring ourselves to increase investments in promising high-growth opportunities that will benefit all stakeholders as we implement our comprehensive enterprise vision and strategy. Our dedication to generating lasting value for the enterprise remains steadfast as we position ourselves for future growth.
And with that, operator, we'll now open the call up for questions.
Question and Answer Session
Operator
Thank you again, ladies and gentlemen, I'd like to ask a question please press star one on your telephone. Again, to ask a question, please press star one moment first. Our first question comes from the line of Doug Lane of Water Tower Research. Your line is open.
Doug Lane
Yes, hi. Good afternoon, everybody. What going on here at Orion, but let's focus on the capital allocation. It seems to be the big news here on I don't have a cash flow yet, but what was capital spending in 2023.
Ryan Napierski
Yes, Doug, thanks for. Thanks for the question yet. So capital allocation and overall capital spend, James is in 2023, we're looking at?
James Thomas
$58 million.
Ryan Napierski
Yeah, $58 million.
James Thomas
CapEx.
Doug Lane
And what kind of directionally where you think that's going in 2024 for the same ROE to our gas operations.
Ryan Napierski
No, the capital allocation is actually in our forward plan. We're estimating between $50 million and $60 million in our capital spend.
Doug Lane
Okay. Okay. That's help sell them with the freed up $65 million from the dividends, we should probably be modeling in free cash positive in 2024 for correct?
Ryan Napierski
Yes.
Yes, that's the plan going forward.
Doug Lane
And then just to wrap it up, what would be the priorities for use of free cash flow under the new policy?
Ryan Napierski
Yes.
So I think Doug, the way, as I said in my in my remarks, we're really seeking for opportunities, are those investment opportunities? I mentioned around the rise investments, looking at India growth prospects, ad affiliate opportunity platform build out technology wise.
Doug Lane
So reinvestment in the business is really priority one at this point and even to the point of not even paying down debt, just really focused on those investment opportunities in your business?
James Thomas
Yes, Doug, as we as we look at the landscape of our cash position, we typically in Q1 have tighter pressures coming through Q1. But yes, as Ryan outlined, that's the capital allocation strategy and we're going after those growth opportunities, which you see significant growth in Q4 and debt. Our management of debt will go after that as well in terms of how do we manage that while we look for opportunities both inside our business and outside to grow in the future.
Doug Lane
Okay, that makes sense. Thanks for the clarification. And just shifting gears, you report on your customers and affiliates and sales leaders, which is very helpful because your business is evolving and getting more complex, if you will, but it seems that customers are really consumers and affiliates are social media influencers to oversimplify and sales leaders are your traditional entrepreneurs, micro entrepreneurs and business builders and yet each was down 10% to 15%. Is it that those numbers tend to run in tandem or could they diverge at some point depending upon what's going on at the Company?
Ryan Napierski
Yes.
I mean there, they're interrelated. I mean that the important thing to note, we've pointed this out before with affiliates, you can consider our affiliates is kind of the yes, there partially socially driven, but they're more kind of the early in early out type of more flexible, engaged people. We're in a in a process of reclassifying affiliates that we do segment by segment. So each year, we've done a few of the segments. And so that's where that number flexes a little bit differently than the consumers in the US and the sales leaders, but there are relationships. And we see, for example, customers being down further than the channel over this past year in Q4 as we saw is more related to pricing pressure in the broader economy and just affordability where consumers are buying and how the sales leads or leaders are selling, whether they're selling to registered customers or more to retail customers. And so there's always going to be some mix shift between that because of how the affiliates and the sales leaders actually are selling the products. Again, if they go direct to customer through a retail model versus registered customers with us and we do both. So there's a correlation, but there's not there's not a perfect correlation.
Doug Lane
Okay. That helps me understand that it makes sense for those numbers to be directionally close.
Ryan Napierski
Yes, that's right.
Yes, generally.
Doug Lane
That's helpful. Thanks, Ray.
Ryan Napierski
Thanks, Doug.
Operator
Thank you again, ladies and gentlemen, if you like to ask a question, please press star one on your telephone. Again to ask a question, please press star one moment. I'm showing no further questions at this time.
Ladies and gentlemen, this does conclude today's call. You are participating. You may now disconnect.
