如新 (NUS) 2002 Q1 法說會逐字稿

This is an unedited realtime transcript. An edited version with proper case and full speaker names will be available shortly.

Good morning. I will be your conference facile Taylor today. At this time, I would like to welcome everyone to the Nu Skin enterprises first quarter conference call.

All lines placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star and number 1 on the telephone key pad. If you would like to withdraw your question, press star and 2 on the key pad.

Thank you. Mr. Charlie Allen, you may begin your problem fence.

Good morning. Thank you for joining us today. With us on this call this morning, Steven Lund, President, Chief Executive Officer and Corey Lindley, Chief Financial Officer. Following the discussion of company's operations, call open for questions.

As a reminder, during this call, comments maybe made including forward-looking statements. These statements involve risks and uncertainties and actual results may differ materially from those discussed. We encourage you refer to copy of 10-k on most recent 10-q and the earnings release for complete discussion of risks.

I'll turn the time over to Steven Lund.

Good morning, everyone. Thank you for joining us today. We're pleased to report a 10% increase in revenue and a 20% increase in earnings per share in the first quarter in constant currency. On a reported basis, the 12% devaluation of the Japanese yen negatively affected our revenue up 3% on the reported basis to 216 million dollars and earn per share 16 cents. The weakened yen masked positive results in Japan where local currency revenue up 8%. This growth was driven by the 14% increase if our executive distributor count during the quarter compared to last year. In Japan, we have found success by differentiating our business opportunity through application of exceptional internet-based tools, these tools coupled with strong product introductions in the Japan convention in November helped to generate a long leadership increase there in Japan. Additionally, automated orders which create a more consistent revenue stream continue to be a growing part of the business. Today, about half of all orders processed in Japan come through the automatic delivery product or over the internet. We continue to be very encouraged by results in South Korea where revenue up more than 80%. This growth tracks a 78% increase in the executive distributor count from the first quarter of the prior year. Contributing the strong gains in South Korea was the strength of company's product introductions during the quarter from both Nu Skin and Pharmanex divisions. We believe that South Korea can become an even stronger market for us over time. Our distributor leaders very enthusiastic and the size and demographics of the market lead us to believe that there is still plenty of room to grow revenue in this market. The company reported solid revenue growth in Singapore and Malaysia. Malaysia opened in the fourth quarter of 2001, and Singapore opened in the fourth quarter of 2000. Generally, see sequentially revenue decline in most Asian markets between the fourth and first quarters. The combined revenue from Singapore and Malaysia not only up significantly over the first quarter of 2001, which was shortly after Singapore opened, but was also up 7% sequentially from the fourth quarter of 2001.

Indicating continued strength in these markets. Of particular note in the first quarter is the local currency revenue growth the company achieved in Taiwan. This growth marks the first year over year local currency revenue growth in several quarters. In the first quarter, we had 10% more executives in Taiwan than in the prior year. In part, we credit this gain to a change in our regional management where Robert Connelly based in the U.S. worked with Japan and South Korea added Taiwan to his responsibilities in the third quarter of this year. Robert has brought increased focus on direct selling fundamentals to the Taiwan business. Europe revenue up 11% on a local currency basis with the executive distributor count up more than 40% over the first quarter of 2001. We also recognized a few hundred thousand dollars of revenue from the new venture in Poland. We assumed control of the company we acquired on January 1st, and are aggressively working to meld the positive aspects of this business with our global strengths. As we said, we're hopeful this acquisition gives a base to which into lesser developed countries in central Europe on the long term. The exception to the strong global operations is the United States' market excluding $5 million of revenue attributed to the international distributor convention held in the U.S. in the first quarter of 2001, revenue was down 9%.

Executive distributor count in the U.S. was off 8% from last year.

However, our core business was largely flat sequentially from the fourth quarter although we have not grown this market, we did make operational improvements in domestic business in the first quarter we reduced our U.S. employee force by 3%. Increased our internet-based ordering by 12% and improved service levels to distributors.

Our big planet business had significant challenges sustaining its re knew levels. We continue to lose internet and telecommunications subscribers due to executive competitive factors in the marketplace and attrition to the i-link distributors of 1999.

These services are not like -- are not key to our big planet strategy going forward. We're taking steps to improve margins in our isp and long distance product offerings. In addition, I believe that initiatives I will discuss in a few minutes will grow the U.S. business during the second half of the year. On a product division basis, revenue from both Nu Skin and Pharmanex were up during the quarter. Nu Skin up 10% in constant currency and up 4% on a reported basis to 104 million dollars. Pharmanex revenue up 13% in constant currency, and up 4% in U.S. dollar terms to 98 million dollars. Both divisions enjoyed strong sales, following new product introductions. Nu Skin enjoyed new evidence revenue from the opening of Malaysia. Big planet revenue down to 14.8 million dollars.

With that introduction, Corey Lindley will provide more detail to our financial results.

Thanks, Steve. Steve outlined the revenue detail. Let me provide the local currency sales figures. Japan revenue first quarter 15.5 billion yen versus 14.4 billion yen last year. South Korea 18.7 billion won versus 13 billion won last year. Maybe interested to learn South Korea's monthly revenue on track to overlay Taiwan during the second quarter this year. Southeast Asia, revenue 587 million dollars NT dollars versus last year and Hong Kong revenue rose to $39 million Hong Kong dollars versus 38 million Hong Kong dollars last year. Also, as mentioned in release, the combined U.S. dollar revenue from melee that and Singapore 15.6 million dollars versus 14.6 million in the fourth quarter and 4.7 million from Singapore alone just a year ago. Thailand, Australia and Nu Skin and china all showed very positive growth trends in the quarter and the Philippines had another disappointing revenue decline leading to a management change in that market during the quarter. An U.S. market generated 33.2 million dollars of revenue in the first quarter which was well off the 41.8 million generated last year in the quarter. We recognized 5 million in revenue last year due to global convention revenue and experienced a 2 million drop in revenue from big planet in the United States. Our Canadian business slightly ahead of last year's pace. First quarter revenue in Europe 6.9 million Euros versus last year. This includes modest revenue from Poland, growth rate in Europe slowed to a more sustainable level. Latin American markets struggle and implementing new business modeling or scaling back operations in each markets giving the economic challenges that direct sellers facing in that region. Our gross margin basically unchanged in the first quarter 79.6% compared to 79.8 percent of revenue last year. The core margin improvement in existing product lines offset the drop in margins caused by weaker foreign currencies. Incentives improved 60 basis to 38.8% of revenue. The reduction of distributor incentives is a result of efforts to focus our compensation planned dollars on programs benefiting the distributors and leaders who are most active in generating revenue for the company. Made small changes to compensation plan around the world, continued to focus on keeping our overall payout at reasonable and historic levels. First quarter SA&G percent of revenue 31.8% compared to 34.7% last year at 290 basis point improvement. With the change in amortization of goodwill first quarter SA&G as a percent of revenue for 2001, would have been 33.4%.

During the first quarter, of 2001, last year, the company incurred additional expenses about 5 million dollars associated with international convention. However, 2 1/2 million dollars of expenses related to sponsorship of the Olympic winter games in Salt Lake City part of this quarter's results. After eliminating the expenses from the Olympics and international convention, and the reduction of SA&G for the amortization of goodwill, the company was able to improve core SA&G expenses as a percent of revenue by 50 basis points during the quarter even as currencies worked against us. Contributing this improvement is steady reduction of labor as a percent of revenue and the increased efficiency gained through the high levels of orders processed automatically. Improved incentives and the lower SA&G expenses resulted in 9.5% operating margin compared to 6.2% in the first quarter of 2001.

This is -- puts us close to goal of being at 10% for the year, and we think to continue to have margin improvement. Our interest expenses is slightly mar than interest income and small foreign currency gains offset the losses to return essentially 0 other income.

In the prior year, we had extensive hedging gains which were not experienced in the current year. The tax rate continues at 37%, and so earnings per share 16 cents slightly ahead of earnings estimates. Our balance sheet and cash flow continue to be strong. We increased inventory levels in Japan to support growth in the market as well as hedging against some minor product regulatory change ins this market. Long term debt was down slightly as well and since we don't begin to repay this loan for several year and yen based, the account is related to fluctuations in the Japanese yen. In the first quarter, repurchased 1 hadn't 4 million stocks and paid dividends. Plan to repurchase stocks in the second quarter, similar to what we've done in the past. As we look to the second quarter, we expect revenue to be up in the mid single digits on a reported basis, and in the high single digits on a constant currency basis. With the improved efficiencies and without expenses of convention or the Olympics, and further, without the 2.7 million of quarterly amortization expect 40% earnings per share growth up sequentially.

Let me add the recent strength of yen is a positive. We haven't adjusted the models and continue to model towards a year end average exchange of 130 yen to the dollar. Yen averaged 132.5 for the first quarter and currently at 128 yen to the dollar. Now return the time to Steve.

Thanks. I'd like to spend a few minutes looking forward to the future. We just returned from our annual incentive trip for top distributor leaders. They have had to meet certain goals remained unchanged over the past ten years.

A year ago, we had 90 of our top distributors in attendance at the conference. Well, this year, we had 121 top leaders qualify which is an increase of 33%. Clearly, our distributor leadership ranks are increasing. As indicated in the recently filed 8-k, two important announcements were made to the leaders, both of which enthusiastically received. The most significant is expansion plans for china and our plan to involve distributor leaders in the training process for this expansion. Although expanding in china is full of regulatory hurdles, we are confident that we're developing the right relationships and working with the government in launching a strategy that will build long-term success in this enormous market. Developments in china will be motivating to our existing distributor force in the balance of this year and expect operations in china to begin generate meaningful new revenue beginning in early 2003. Our strategy calls for hiring additional 2,000 employees in china, and opening 80 to 100 new retail stores. This is aggressive plan which will cost additional 5 to $10 million in capital expenditures over the next 12 months as well as a few million dollars of additional overhead by the fourth quarter. All of which is factored into earnings outlook. Direct selling in our business model currently banned in china and required to pursue a modified business model there. Instead of selling through independent distributors, utilized an employed sales work force working from fixed locations.

We are continuing to refine a business model allows us to pay a minimum base salary and volume based incentives to employees. Our top distributors throughout the world are planned to be involved in the hiring, training, and motivating of these employees.

Another important initiative we talked about with our top distributors is a business that we acquired last week called nourish the world. This company has historically manufactured simple to prepare, nutritious meals for use in nursing homes and other health care environments. What attracted us to the company, however, is most recent development of supplying the food products to relief organizations around the world such as the American red cross. Or feed the children. We are developing a model whereby customers and distributors can purchase the products for retail to customers, or they can purchase the products and donate them to highly respected agencies who are anxious to receive nutritious, ready to prepare meals.

A purchaser can donate 60 meals, enough to feed a child two meals a day for a month. As you know, the corporate mission statement includes being a force for good in the world.

We're very excited about the prospect of utilizing the power of world class marketing organization to feed starving children. Every day, something in the order of 27,000 children die of malnutrition, starvation, or other diseases related to malnutrition.

Our distributors very enthused to help in the battle and plan to begin the program in June as an affiliate offering in big planet e-commerce mall. In this way, our global distributor force can contribute to this effort personally through purchasing food and char it bring donating it toward the benefit of starving children. When distributors or customers purchase nourish the world, they receive volume compensation. They're thus motivated to solicit contributions of food for relief effort.

We believe that this free market solution to the enormous problem of global hunger will make a meaningful difference. We intend to save a lot of lives.

Question is, obviously, what will it do to the U.S. business and financial results going forward? Frankly, we're not sure. We firmly believe that this program has potential but how many of our distributors get aboard with this cause and incrementally add to their business is not yet known. From a financial perspective, the program will generate operating margins similar to Nu Skin and Pharmanex business, and the total acquisition price not significant. Though we haven't increased revenue or expense projections for this program yet, however, we believe that it will be one initiative that will lead to increased revenue growth for U.S. operations by the second half of the year.

Finally, I want to briefly talk about another initiative expected to begin in U.S. business next year. We invested several million dollars to acquire rights to a new diagnostic technology that we believe is unique in the marketplace. While development is still underway in this technology, it is our desire to be able to demonstrate results from daily nutritional supplementation. One of the challenges in the business is to demonstrate to customer that is our products make a difference.

Simple blood tests often do not demonstrate whether body tissue benefiting from the supplemenation. Patented technology acquired will enable distributor to easily and quickly demonstrate the difference our products make on body tissue after 30 days of use. We plan to introduce the technology and initiative later this year.

Saying this much now so you know we're not waiting for the U.S. business to improve. We're aggressively addressing the issues fundamental to our business and believe they'll bear fruit in the second half of this year and next year.

Those of you who followed us know that we are by nature unrelenting optimists. But still, we couldn't be more optimistic about the future. We have lots of ammunition at our disposal to grow. China, nourish the world, and product innovations will be our growth drivers.

With these weapons at our disposal, the biggest challenge is executing effectively. We had a good first quarter and look to have an even better second quarter and we firmly believe we have strategies in place to achieve our five-year goal to more than double the size of our business as outlined in annual report and our last conference call.

With that, let me open the call to questions you may have.

At this time, I would like to remind everyone, in order to ask a question, please press star then the number 1 on the telephone key pad. Again, in order to ask a question, please press star and number 1 on the telephone key pad. We'll pause for just a moment to compile the q and a roster.

Again, if you would like to ask a question, please press star then the number 1 on the telephone key pad.

At this time, there are no questions.

I want to clarify one issue. I think I indicated and my comments repurchased 1.4 million shares. 1 hadn't 4 million shares of the stock and less than purchased in the past but we plan to resume it back at the 3 to 4 million level in the second quarter and wanted to clarify that point.

Let me say we're focused on the fundamentals of our business. In last several years, innovating to grow your channel. These exercises taught us a lot. While we'll continue to innovate, going to do with the benefit of corporate earnings. So while we are deploying new innovations, doing so with the understanding gained from what has worked and what has not. Enthusiastic about the future because we're getting back to the very basics of the business and bringing innovations to the marketplace in a context of what we've learned about how far to stretch the channel. Very much appreciate your joining us this morning and are excited about our next quarter. Thanks so much.

This concludes today's Nu Skin enterprises conference call. You may now disconnect.