Good day. Thank you for standing by. Welcome to the Nu Skin Enterprises' Second Quarter 2024 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 the conference over to your speaker today, Scott Pond, VP of Investor Relations. Please go ahead.

Thanks Shannon 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'd like to turn the call over to Ryan.

Thanks Scott. Hello everyone. Thanks for joining us today. I'll start by providing a performance summary of Q2 and then share progress update on our ongoing enterprise transformation vision, strategy, and plan as we continue to evolve our core Nu Skin business from a traditional direct selling model towards a more expansive integrated beauty, wellness, and lifestyle company, including our Rhyz ecosystem. The second quarter played out similar to the first with revenue slightly above the midpoint of our guidance despite a stronger-than-anticipated FX headwind of over 4%. Non-GAAP earnings per share were near the top end of the range, reflecting continued progress to plan for our business transformation, while managing costs and driving efficiencies. Overall, the operating environment remains challenging for our core Nu Skin business, due in large part to macroeconomic factors and pressures on the direct selling industry itself. Despite these challenges, we were encouraged by sequential gains in several of our markets, including the U.S., South Korea, and parts of Southeast Asia-Pacific. Most notably, we experienced year-over-year improving trends and paid brand affiliates globally, which translated into improving new sales leaders. China remained challenging due to macro trends in the market. Our Rhyz business continued to perform well with revenue up 32% to nearly $68 million, accounting for over 15% of our second quarter total. Growth at Rhyz was led by our Mavely affiliate platform and our Wasatch Manufacturing business. Rhyz plays a critical role in our enterprise transformation that I'll speak to in a moment, and we expect revenue from Rhyz to continue to grow at a faster pace, reaching 20% to 25% of overall revenue mix by 2025. Let's dive deeper into both our Nu Skin Core and Rhyz businesses. In our core Nu Skin business, new products, including Ageloc, Wellspa IO and RenewspA…

Thank you, Ryan. Thanks to all of you for joining today. I'll provide a brief Q2 update and then speak to Q3 and 2024 guidance. For additional details, please visit our Investor Relations' website. For the second quarter, we posted revenue of $439.1 million, which was at the midpoint of our previous guidance range and included a slightly larger-than-expected negative foreign currency headwind of 4.2% or $21 million. Reported earnings were negative $2.38 or $0.21 excluding restructuring and impairment charges. Our gross margin was 70% compared to 72.9% in the prior year quarter. Our overall gross margin continues to be impacted by growth in our Rhyz business, which carries a lower gross margin. Gross margin for the Nu Skin core business was 76.1% compared to 77.2% in the prior year quarter. This decline in margin can largely be attributed to the geographic shift of revenue in the core and fixed overhead costs on lower volume. We are accelerating our SKU rationalization project and expect to see sequential improvements in gross margin with an approximate 20% reduction in our overall SKU count by the end of 2024. Selling expense as a percentage of revenue was 37.7% compared to 37% in the prior year quarter. For the Nu Skin core business, selling expense was 42.2% compared to 40.2% in the prior year period. Our core Nu Skin selling expense typically ranges between 40% to 42% with a slight increase, mainly attributed to enhancements made to the compensation plan targeting customer and affiliate acquisition. General and administrative expense declined nearly $20 million due to the continued execution of our cost efficiency program, related restructuring activities in the quarter, and bringing overall operating costs more in line with current revenue levels. As a percent of revenue, G&A for the quarter was 26.9% compared to…

Thank you. [Operator Instructions] Our first question comes from the line of Chasen Bender with Citi. Your line is now open.

Great. Thanks. Afternoon guys. I wanted to first ask if you could give a little bit more detail about this Nu Skin Mavely app and explain how it will work specifically from the perspective of a sales leader. Once I have it in hand, how do I operate it? What does it mean? And how do I interface with it? But then at a higher level, obviously, you are launching products like Mind 360, you have more affordable luxury. You have this new app coming online. It seems like there's a lot coming at sales leaders really one at a time, they need to get back to basic blocking and tackling. So, just generally, how do you think about balancing all of these launches with competing attention versus stabilizing the core of the business?

Yes, Chase, good questions. We'll kind of walk through a couple of those things quickly. Yes. So the Mavely app, if you go to the app store today, you can download a Mavely app and walk through how it works in terms of curating brands as an individual every day affiliate stands up. So, as we're looking towards Nu Skin, the Nu Skin Mavely instance of that Nu Skin affiliates as we build this out and put it into the market, they'll be able to download the app and go through a very similar experience, curating the brands that work for them, then they'll be able to -- it's a simple post and share technology that works with link that -- and it's pretty smooth, pretty easy to share. So, that's kind of how -- it's a simpler way to basically share those brands and then get access to other beauty wellness lifestyle brands on the Mavely app. So, pretty straightforward that way. As far as the focus of the field and we totally agree with you, that's a lot of our discussion in houses, how do we ensure that we continue to innovate while enabling our sales force to focus on those back to the basic principles. In fact, a big part of our live events theme and discussions were around back to basics, which is really sharing products you love with people and getting them to do the same. That's really the basic fundamentals. So, as we look to new products into the market, whether it is affordable luxury, whether it's Mind 360, these are additional products for them to share with people that they love and get them to do the same. So, it's not as much about adding new products in for them to focus on typically people-orient, especially in the affiliate marketing world, they oriented products that they relate to most. So, they're not all moving the same thing. And you can even see that with some of our new product launches in the last five or six years. It's the world has kind of changed quite a bit, where historically, we would launch a new product and nearly the entire sales force would focus on that one new product. That's really not how the affiliate world works any longer. It's more of identifying products that relate to you and relate to your target customer as a social influencer and micro influencer. And so having those optionalities or the optionality of additional products to select from, it then enables them to build their business their way, so to speak. So, we are mindful of the balance and the back to the basics. Again, I go back to basics simply means sharing products you love with people and getting them to do the same. That is the basics regardless of the product we put in front of them. We're targeting products that enable them to reach broader demographics and broader target markets. If that makes sense.

Got it. No, that's good detail. And then just mechanically, if a sales leader uses the Mavely app shares a product and generates the sale, how is that booked? Is that booked as core Nu Skin sale? Is that booked as Rhyz sale?

Yes, James, go ahead.

Yes. So, I mean we're still working through the mechanics of how that will come through. But a sell that runs through the Mavely app that we will be recording revenue in Mavely, but it will all come to the same parent company in Nu Skin.

Okay. Okay, got it. And then I wanted to ask about the revised operating model in Lat Am and those Southeast Asian markets. Could you just expand on that? What the key changes are in your mind? And frame how quickly you think you could see positive activity and productivity changes and then ultimately, translating that into a time line for those changes to hit the P&L?

Yes. Yes, absolutely. So, really from -- as we look out at these -- what we call developing markets are these markets where Nu Skin present has a presence. We have well over half of our markets that sit in that LatAm, Southeast Asia, East Europe, even parts of China, frankly, that are just different than the major urban cities. And as we look at that and the opportunities there, certainly, there are three key components of our operation there that we are reconsidering or evaluating. The first is the product portfolio and ensuring that we have the right products at the right prices. Second one then is the business model to enable the right behaviors for selling those products. And then the third one is the operational infrastructure that in various geographies is a little bit different. For instance, in Latin America, quotas or installment payments are the predominant form of payment versus, say, credit cards or the like elsewhere. So, as we're looking at these developing markets, and we've already begun work in Latin America, in Argentina, for instance, where we've reduced the product portfolio of the existing and are evaluating local manufacturing opportunities for new products to get price points at the right place for the demographic -- the target demographic that we're going after, evaluating the business model. We're already in a test model down in Latin America on a revision to the business model or the compensation system that rewards for that and then scaling the operations. So, we've already begun those tests in LatAm. We will continue to expand those tests throughout the end of this year and evaluating a couple of markets in Southeast Asia, like the Philippines, in Thailand, Vietnam, these parts of the world where just the socioeconomic status is just different and much different than the more developed markets we operate on. So, as far as how we see it in the P&L, we haven't really worked that through the remainder of this year. I think we're very much in a continued testing and refining process. And then we'll be talking with you more in our 2025 guide and probably further detail about that.

Got it, that's helpful. And I'm sorry, I don't mean to hog the entire call here. So, apologies. But just one more, if I may. I wanted to ask about the updated 2024 guidance. It looks like the implied second half net sales guidance went from down about 4.3% at the midpoint to down about 7.5%, but the implied second half EPS guide went from down $0.91 a to $0.55, if my math is right. And so James, I was hoping maybe you could spend a little time framing the difference there just in context of the expense management efforts you're calling out, are you investing more? If so, where are those dollars going? Just some additional color on that side, unpacking the change and any investment posturing would be helpful? Thanks.

Absolutely. And that's a great question. It's something that we've looked at in terms of how we saw the first half come through as we perform the guidance towards the midpoint of our revenue guidance. You're right on top line, we have narrowed that range for where we performed under the high guide in Q1 and Q2. And then the big discussion point that we didn't anticipate when we gave guidance was a foreign currency headwind of 4% plus that we've built through our models. And so when you run that foreign currency through on top line, we've brought down the top for that rationale. We've been able to hold the bottom with what we see coming through in Q3 and Q4. The pressure comes on gross margin when you see -- if you see how we performed in the quarter compared to the prior year, when you roll FX through on gross margin and then even some geographic shift that we've noticed within the Nu Skin segments of where we performed to our expectations, we're getting more revenue from some of our less profitable regions, less revenue from some of our more profitable regions. So, it created a little bit of mix shift and pressure in gross margin as well as just a slight uptick in selling expense as we've invested in areas to go after performance within the plan. G&A, we continue to be hyper focused. I will continue to go in and drive those cost efficiency savings that we set out to do, looking to be on pace with the original savings goal that we set out of $65 million coming out of G&A in 2024 compared to our prior year. So, that's a little bit of a bit color of why there's pressure. And then with that pressure on profitability comes an impact to our tax rate. If you noticed the higher tax rate that we have modeled out or we gave in our script there, we are seeing pressure on our tax rate due to the profitability by geographic segment around the world. So, just flushing that through trying to get clarity on where we think we'll land from an earnings perspective.

Got it. That's really helpful color. I appreciate it. I'll pass it on from here.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Sydney Wagner with Jefferies LLC. Your line is now open.

Hi, this is Sydney on for Ashley Helgans. Thanks for taking our question. Just three from us. So, any update that you can give on some of the affordable luxury launches you discussed last quarter and how those have been received by the market? And then second one was last quarter, you mentioned while you did see some pressure from the consumer side, demand for higher-priced items was still resilient. Just curious if that was a trend you still saw play out this quarter? And then just any additional color you can give on China and what you're seeing there? Thank you.

Yes. Sure. No, Sydney, it's great. Thanks for joining the call. Yes. So, affordable luxury as we mentioned, we're doing quite a bit of research and development on that right now with more products to come. One product that we put out in the last quarter was a product called Peptide Pout which is a lip application that literally does that touch the lips. James might be wearing it right now, I can't tell. But the Peptide Pout, and it was a great social seller. In fact, sold out very quickly sold out of stock and will be a very good promotional product around the world. So, that was one that we brought to market very, very quickly, and we have several more that are planned just like that over the coming quarters. They generally -- they're interesting because they -- these types of affordable luxury products are a little bit more promotional in nature, meaning that they kind of run in really quick turns and they're sold almost like in a sellout fashion. You can almost imagine some of these influencer brands that hit Nelcella [ph], a full production run through and then they reload. So, we're seeing similar dynamics to that with Peptide Pout as we put it out there and then with the others, we're kind of forecasting similar models. So, you'll be seeing a few of those, but that's just one example of one that's moved forward. You were asking about kind of higher-priced product resiliency. I mean I think generally, our -- we've noticed that our devices hold up reasonably well in this kind of hyperinflationary market, while some of our other higher-end consumables tend to struggle a little bit more. So, I would say that it's a little bit more mixed from a consumer…

Thank you.

Thanks, Sydney.

I think that's all of the questions we had for the call today. I appreciate all of you dialing in. We acknowledge you're kind of juggling between other calls across the board. So, we appreciate the time you're able to give us. We look forward to giving you more updates in the quarters to come as we continue to evolve our business towards our vision of becoming the world's leading beauty, wellness, and lifestyle ecosystem. So, with that, we'll speak with you next quarter. Thanks a lot.

This concludes today's conference call. Thank you for your participation. You may now disconnect.