Good day, and thank you for standing by. Welcome to the Nu Skin Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand your conference over to your first speaker today, Scott Pond, VP of Investor Relations. Scott, you have the floor.

Thanks, Stacy, 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 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 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 call over to Ryan.

Thanks, Scott. Good afternoon, everybody, and thanks for joining us on the call today. It's been an interesting year to date to say the least as we initiated a global strategic transformation at Investor Day earlier in the year, just prior to the economic turmoil that we're now facing. The third quarter proved more challenging than anticipated due to an increasingly difficult global environment and geopolitical complexities. We finished the third quarter at $538 million with a non-GAAP EPS of $0.47. Four primary factors accounted for most of the shortfall versus our guidance. First, continued declines in Mainland China due to the prolonged COVID-related disruptions, including expanded lockdowns throughout the country; second, increasing weaknesses in South Korea related to economic pressures and company price increases; third, persistent global inflationary pressures; and fourth, the strengthening of the U.S. dollar above expectations, placing pressure across our supply chain. Despite the current environment, we continue to execute on plans as we progress towards Nu Vision 2025 and becoming the world's leading integrated beauty and wellness company that's powered by our dynamic affiliate opportunity platform. In the third quarter, we began introducing LumiSpa iO, our new connected cleanse and treat device system. This input-output device introduction marks a major milestone for Nu Skin and the prime preliminary rollout of our EmpowerMe personalized beauty and wellness strategy as we gain greater data and insights about our customers' individual beauty and wellness journeys. The launch of LumiSpa iO, which is continuing into the fourth quarter, together with continued adoption of ageLOC Meta and Beauty focused Collagen+ helped drive constant currency growth in 4 of our reporting segments, led by double-digit gains in Southeast Asia Pacific as well as more modest growth in the Americas, Japan and our Taiwan, Hong Kong segments. Our affiliate powered social commerce…

Thank you so much, Ryan. While the macroeconomic factors Ryan discussed had a widespread impact across our reporting segments, we are happy to grow revenue in constant currency in 4 of our segments highlighted by a tenth consecutive quarter of growth in the U.S. and continuing momentum in Taiwan and Southeast Asia. In the Americas, the U.S. market grew with revenue up 7% year-over-year driven by social selling momentum. Overall, the Americas segment grew 3% in constant currency, with the success in the U.S. offset by macroeconomic issues impacting Latin America, leading to a decline in customers, paid affiliates and sales leaders for the segment. We're looking forward to the consumer launch of LumiSpa iO throughout this region in the fourth quarter. We continue to look to the U.S. market as validation of our social selling strategy and as a model for expanding best practices globally. Although the U.S. has become our largest market, we are seeing some growing economic headwinds and more challenging comparisons. As Ryan noted, our Mainland China business has been disrupted due to several macro factors. We also made some modifications to the compensation plan during the quarter. Given the impact of extended macro environmental factors in China, we implemented a more flexible structure designed to promote customer acquisition and build sales leaders long term. This did have a negative impact on sales leader productivity when it was introduced, but it also helped generate modest sequential growth in sales leaders. We anticipate the environment to remain challenging, but we are working closely with our local team to find ways to regain momentum. Strong performance in Taiwan led to 6% constant currency revenue growth in our Hong Kong and Taiwan segment. While Hong Kong faces the impact of COVID lockdowns similar to Mainland China, our Taiwan market…

Thank you, Connie, and thanks to all of you for joining today. I will give a Q3 financial review and then give initial Q4 projections and update full year 2022 guidance. For additional detail, please visit our Investor Relations website. . For the third quarter, we posted revenue of $537.8 million with a negative foreign currency impact of 7% or $47 million. The U.S. dollar continues to strengthen ahead of expectations, which negatively impacted Q3 and will likely remain a headwind for the balance of the year. Reported earnings per share for the quarter was a negative $0.51 or $0.47, excluding restructuring and impairment charges associated with the previously announced company's strategic resource reallocation. Our reported gross margin was 67.7% or 72.7% excluding the aforementioned charges. Gross margin was impacted by the geographic revenue mix, foreign currency exchange rates and global inflationary pressure. Gross margin for the core Nu Skin business was 73% on a reported basis or 76.7% excluding the restructuring and impairment charges. Selling expense as a percent of revenue was 40.3%, 30 basis points below the prior year period. For the core Nu Skin business, selling expense was 43.5% even with the prior year. General and administrative expense declined $18.5 million year-over-year as we remain focused on cost control. As a percent of revenue, G&A was 25.7% compared to 24.4% in the prior year. Operating margin for the quarter was a negative 3.8% or 6.8% excluding previously mentioned charges. This compares to 10.2% in the prior year period driven by the lower revenue this year. The other income expense line reflects an $8.7 million expense or an adjusted $5.4 million expense compared to $2.8 million income in the prior year period. The adjustment in this line item reflects a $3.3 million unrealized investment loss related to our…

[Operator Instructions] Our first call -- our first question comes from Jason Bender [ph] with Citi. Jason, go ahead with your question.

Great. I'd like to start on guidance. Just as I look at the 4Q guidance, the range is pretty wide there. And I imagine that reflects all of the uncertainty that still exists, but perhaps you can speak to the width of the range and kind of unpack some of the assumptions that are leading to the guidance at an other end.

Yes, Jason. So I'll chat for a sec, and Mark can give some thoughts on that. So certainly, the -- as you mentioned, the range is wide relative to the environment. We typically do give a bit wider of a range anyways. We're obviously watching the global uncertainties right now and trying to understand exactly what will be impacted with consumer sentiment with the holiday seasons coming around, which traditionally Q4 tends to be better, but there is a lot of uncertainty out there. Mark, maybe anything you...

Yes. I think Ryan said it exactly as I would, Jason. In today's uncertain economic geopolitical environment, we felt it important to still give a guidance range, and we thought it was important maybe to give a little bit wider range just given the uncertainty that exists.

Got you. Fair enough. And in terms of gross margin, I think you had previously said you were expecting 2H to be kind of similar to 2Q. Any update or color on expectations for the remainder of the year on that front? .

Yes, Mark?

Yes. Gross margin was really impacted this last quarter based on where revenue came in. China and South Korea were the two markets that came in below our expectations, are two of our highest gross margin markets for us. And those were replaced by the US, which is a little bit lower gross margin business for us. I think we're seeing similar expectations for the fourth quarter based on that geographic mix of our business.

Got you. That's helpful. And then just on the LumiSpa iO rollout, glad here, it's coming along. But can you just spend some time talking about the adoption rate of Vera for those markets where it's launched and how that's trending relative to expectations?

No. And in fact, just as a reminder for everyone, LumiSpa iO, so we have a LumiSpa 1.0 nonconnected device, and so the iO was really an expansion of an existing franchise, which is really important. It's our first iO connected device. It's very important. The integration, as you pointed out, Jason, to Vera is also critical. And Vera and Stella are both in early-stage downloads and utilization. So right now, we're seeing some good uptick with iO. We see a lot of consumers still as I'm sure you do as well. Take time to connect those devices over time. I think we're seeing around a 30% connection right now of those who buy, and then that upticks as use goes on. But it's still very early. As I mentioned, we're really still in the launch stage. A lot of our larger launches are happening in Q4. So we'll see how that progresses. I think on Vera specifically, we're really encouraged by these apps. They're important to the future of the business. And as I mentioned, we're really focusing now around where we have it in every market, we have now in the key languages, but -- as we've added language over the last few quarters. And really, it's all about features and product availability on those apps. So still in an expansion mode for both of those, but we're pleased so far with the adoption of them.

Great. That's super color. And then sorry, not to be greedy but just one more. In the last couple of quarters, one of the things you've been doing is clearing that LumiSpa, that 1.0 product, I'm just curious now that iO is out, have you discontinued sales of that? And if so, is there any lingering LumiSpa 1.0, if you will, that has yet to be cleaned up?

Yes. No, it's actually mixed. In some of our markets, where we've completely transitioned to the Nu iO, but we see a space, at least for a time, for the non-iO device. There still seems to be demand for that product. And in markets that have both, we're seeing sales in both. And so at least for the near term, we anticipate having both options, at least while inventories last. But the process of managing those mark and together with our global product and value stream team have done a good job of managing the transition. But I think there's room for both, at least in the near to midterm.

And our next question is coming from Ashley Helgans of Jefferies.

It's Blake [ph] on for Ashley. Wanted to ask about China. It looks like the comp from the prior year is pretty similar in Q3 versus Q4. So in this upcoming Q4, can you talk about maybe what kind of growth you're expecting there? Should we think of something similar to what you just posted in Q3?

The -- so are you referring specifically the sequential, the year-over-year sequential change? .

Yes, constant currency mainland China.

Yes. I think we would -- in the near term, it's probably similar to what you saw last year.

Yes. That's really what I'm rolling up in the forecast, is that Mainland China is flat to slightly down sequentially, which would put it in a similar range to the way it performed year-over-year Q3 versus Q3, Q4 versus Q4.

Okay. That's super helpful. And on -- it sounds like Taiwan was off to a relatively stronger start with the launch of LumiSpa and the social selling benefit. Could you just talk about how that market performed versus your expectations in the quarter?

Yes. I'll say just a couple of things, and Connie can provide more context. We're really actually impressed with Taiwan. It's really one of our longest running markets out there. And they, several years ago, began to lean into social practices, and they've continued to do a good job of kind of leading out at least in that part of the world, and so we're pleased. But Connie, maybe any color you'd add to Taiwan.

The adoption of social commerce in Taiwan has continued to progress really very nicely. Really, fundamentally, their acquisition of customers has remained strong throughout the year. And in fact, for the segment between Hong Kong and Taiwan led primarily with the Taiwan growth and customer acquisition, they are actually up 12% in year-over-year customer base count. We've also seen initiatives that were targeted for retention and second purchases and subscriptions conversions for those customer bases to also take shape over the year with some really encouraging results that we expect will continue throughout next year.

That's super helpful. And then last one for me. I was wondering if we could talk about the U.S. I know that Americas was up about 3% constant currency. Can you talk about broadly what you're seeing for the health of the U.S. consumer? And maybe any commentary on trends throughout the quarter by month and then maybe what you're seeing in October?

Yes. No. As we mentioned, the U.S. had its tenth consecutive quarter of growth, and we've been really pleased with that. I think our guide reflects the growing consumer sentiment in the market is getting tough, inflationary pressures. We've seen the holiday reports coming out, et cetera. So we're really trying to guide in relative form to what the market is and that rolls up to Q4. Mark, anything you or Connie would add?

No, I think you've captured it.

Our next question comes from Tristan Chao of Stifel.

This is Tristan on for Mark. You had mentioned promotions targeting the -- some improvements in sales leader productivity. Are there any other specific measures being taken in real time to help improve performance?

Yes. I think a couple of things, and Connie may have some additions to add. You noticed and we've begun to report affiliate data as part of our social commerce transition, which are generally trending more closely to revenue. There's a lot of focus right now around affiliate productivity as well as the sales leader productivity as we're focused. So there are various promotions that we're engaging around the world, including some of those flexibility modifications that we mentioned in China specifically. Connie, is there anything you'd highlight there?

So we continue to focus on the entire channel, right, starting with consumer fundamental consumer strength and purchasing behavior that ensures that our affiliates also are realizing some success and productivity which in turn leads to sales leader retention as well as sales leader productivity.

I'd only add one thing. If you remember a few years back, we introduced our Velocity compensation program. And remember, when we talked about the launch. We talked about it being fast and flexible. The fast being that we could offer daily pay, weekly pay and monthly pay, something that we're first in the industry or at least I believe we were first in the industry to be able to operate that quickly. But the flexible is really important. And we've been able to make adjustments to our compensation programs around promotions, things that are more interesting to affiliates and customers and sales leaders as we see the world and the market changing. And I think that's just an important part to our compensation plan we've had just for the last couple of years, and we take advantage of that as the world changes.

Okay. Got it. That's helpful. And how do you -- like I know you're working on different enhancements for Vera and Stella and introducing Lumi iO and Body iO soon. Is there just any change to innovation cadence given the current market conditions?

Yes. No, great question. There is, and I'll speak more on the innovation release side. So to your point, we've really intentionally tried to focus very much upon fewer digital experiences that are much deeper. So these Vera and Stella apps are really critical in terms of global consolidation of digital properties down to really focusing our efforts there, which will allow us to and has in 2022, allowed us to put more features more deeply into those apps. And so those sprints are pretty quick. Like a traditional app, every two to three weeks, there's a Nu sprint. Lumi iO, of course, as you noted, being able to do firmware updates and even have updates quickly, is a new dimension that Nu Skin historically has been slower to operate in. So I feel that, that really marks the digital-first company transition that we're pleased with. I think with respect to products and other products we're looking at, we talked about Meta, we talked about Collagen+. We have other products we put into the pipeline, Nu Biome. We've had multiple other product releases that have been meaningful, and that's in part due to the fact that we have our Rhyz partners that can move quickly. It's also in part, because of the social model, we're able to release products more effectively. So I think you'll continue to see more rather than less. And of course, we'll cadence that according to resources given the macro environment.

The only thing I would add is if you remember on our last earnings call, we talked about entering into this restructuring and strategic resource reallocation. We knew the economic environment was going to be challenging. I don't think anyone anticipated it would be as challenging as it is and as it looks to be. But the reason that we started this was really to make sure that we have the funds available to invest in technology. We believe that's our future. We believe connectivity is our future, and we believe that we have the resources available to see that through.

Okay. Great. And one last one. What's the optimal leverage for the business just given the increase in debt in 2Q and I'm seeing reduced cash balance in 3Q.

It's a great question. We were really fortunate to finish a refinance in the second quarter of this year that put us in a really strong financial position. Our balance sheet continues to be strong. We continue to produce cash on a quarterly basis. I think we're well positioned. I think we'll continue to be opportunistic in our share buybacks, and we'll continue to balance those trade-offs as preserving cash ahead of tough economic times as well as buying back shares as the opportunities present themselves. We're about $100 million off from cash-to-debt neutrality. I think we tend to be conservative, and we tend to operate not too far from that range.

Okay. I think that's probably the end of the question set here. So I just want to thank everybody for joining the call. In times of uncertainty, it is imperative for companies to ensure operational excellence while adapting to emerging factors that can either act as headwinds or tailwinds for the future. At Nu Skin, we remain acutely focused on Nu Vision 2025 as we evolve our operations to the changing environment. Our company's mission of being a force for good by empowering people to look, feel and live better is as needed today as it ever has been. So with that, we'll end the call and again, thanks for joining us. Have a good day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.