如新 (NUS) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2008 Nu Skin earnings conference call. My name is Lauren, and I'll be your operator for today. (OPERATOR INSTRUCTIONS.) As a reminder, this conference is being recorded for replay purposes.

I'd now like to turn the presentation over to your host for today's call, Mr. Scott Pond, Director of Investor Relations.

Great. We appreciate you joining us on the call this morning, and joining us today are Truman Hunt, President and Chief Executive Officer, Ritch Wood, Chief Financial Officer, Dan Chard, Executive Vice President Distributor Success, Joe Chang, Chief Scientific Officer, and Scott Schwerdt, President Americas, Europe, and South Pacific.

During this call, comments may be made that include some forward-looking statements. These statements include risks and uncertainties, and actual results may differ materially from those discussed or anticipated. We encourage you to refer to today's earnings release and our SEC filing for a complete discussion of these risks.

In addition, certain financial numbers may be discussed today that differ from comparable numbers contained in our financial statements. We believe that these non-GAAP financial numbers assist management and investors in evaluating and comparing period-to-period results of operations in a more meaningful and consistent manner.

Please refer to our Investor portion of the Company's website for a reconciliation of these non-GAAP numbers.

And, with that, I'll turn the time over to Truman.

Thanks, Scott. Good morning, everyone, and thank you for joining us today. We are very pleased to report our first quarter results and to provide some insight into what we believe will be a banner year for Nu Skin Enterprises.

Based on results to date, we're well on track to achieve the 2008 revenue, EPS, and operating margin targets that were outlined in our Annual Investor meeting last fall. As a reminder, we had guided to 4% revenue growth, 35% to 45% EPS growth on an operating margin of 10.5%.

As our press release indicates this morning, our first quarter revenue was $298.1 million, a 9% improvement over 2007, and a record first quarter revenue level. First quarter EPS were $0.21 compared to $0.16 in the prior year, representing a 31% improvement over the prior year.

EPS were negatively impacted by approximately $0.05 due to the translation of yen denominated debt to U.S. dollars, as is reflected in the other income section of our income statement. Ritch will give more color on this in a minute. But if we were to net out the impact of foreign currency fluctuations during the quarter, our bottom line would obviously have been significantly higher.

So we're very pleased to see the impact of our restructuring efforts over the past two years. Those efforts are reflected in our improving operating margin, the 9.2% operating margin in the first quarter will continue to improve during the year to get us to our 10.5% margin target for the year. We're very pleased with that progress.

I would note that in the fourth quarter of 2005 we generated about $60,000 of revenue per fulltime employee, and in the first quarter of 2008 that number has increased 50% to $91,000 of revenue per employee. And as we move through 2008 our earnings will better reflect the impact of restructuring because we don't expect to face the same level of debt translation expense going forward and, in fact, we may even be able to recapture some of that negative impact in Q1.

Our strong revenue results came from steady sales growth in all of our regions, and in most of our individual markets. The United States, South Korea, and Europe led the charge with roughly 20% revenue gains, and it's encouraging to see steady progress in Southeast Asia and to also see good results in some of our newer and smaller markets, including Russia, Israel, South Africa, and Venezuela. We actually just opened South Africa and Venezuela in the first quarter, and are off to very good starts in both of those markets.

We're also very encouraged with continued strong sales in our personal care brand. In the first quarter Nu Skin sales were up 21% over the prior year, due largely to the success of our Galvanic Spa System which contributed $25 million of revenue in the quarter. Now, that compares to about $8 million of revenue in the prior year, and it makes the Galvanic Spa System our largest selling item under our Nu Skin brand by quite a wide margin.

Some of you may have seen the Galvanic Spa featured on the Today Show a few weeks ago. This Galvanic Spa System is a small device that emits a very low level galvanic current that increases the penetration of charged ingredients into skin tissue, which enhances product effectiveness and provides a spa quality skin treatment at home. The product has been extremely successful in Europe, South Korea, and the U.S. In fact, Nu Skin sales in the U.S. were up over 80% YOY in the quarter, and continue very strong.

The Galvanic Spa System is just beginning to gain traction in some markets, in particular, Japan, where we hope we will have a very positive impact. And so we expect the Galvanic sales will continue strong for the foreseeable future.

Our Tru Face Essence Ultra product is also having a very positive impact on our personal care business. This is a very potent high-end skin treatment that complements the Galvanic Spa System to maximize the effectiveness of product ingredients. The product promotes elasticity and firmness in the skin, and it is a reformulation of our original Tru Face Essence product. It's currently sold only in the United States, but will be rolling out globally beginning in the second quarter. Based on results over the last few months in the United States, this product really has the potential to be a runaway success for us.

On the nutrition side, Pharmanex continues steady. We have several product initiatives that are keeping distributors engaged in this side of the business. LifePak which, as you know, is our core supplement, as well as our weight management offering, are both doing well.

Next month in Japan, actually this month now, inasmuch as we're in May, we're launching our biggest selling SKU in the United States, which is LifePak Nano. This is an enhanced version of the base LifePak formulation, and has quickly become the leading supplement in the United States, so we expect it to have a very positive impact in Japan, as well.

Now, let me point out here, that our product positioning continues to set us apart in the direct selling industry. We are uniquely capable of offering substantive products in the two most critical anti-aging categories, skincare and nutrition, and with more and more signs highlighting how these product categories are interrelated, we feel we're in a great place to cross sell these brands in order to maximize the share of wallet we capture from each consumer.

Our product development efforts are around the [Rnof] concept that we presented to the investor community at our Investor Day last fall, remains on track, and will be introduced more formally to our sales force this coming fall.

Now, while we're seeing strong results in a majority of our markets, we had a tough quarter in Japan. This market remains our highest priority and, frankly, we were frustrated by some environmental issues that muted the impact of our growth initiatives in Japan, and that interrupted the progress that we were making in the second half of last year.

I want to note that we were also dealing with a difficult comparison in the first quarter, due to a first quarter 2007 distributor convention that we held in Japan. But the primary challenge during Q1 was regulatory and media hostility directed at a couple of direct selling competitors that disrupted our business, and that we suspect had a negative impact on the direct selling industry, generally.

During the first quarter Japan regulators imposed a sanction on one of the larger companies in Japan that suspended their ability to recruit new distributors for a three-month period of time. The public announcement of that cited inappropriate product claims as the primary reason for this sanction, but the publicity associated with it had a chilling affect on the environment for us and prompted us to focus some additional resources on ensuring full regulatory compliance, and helping distributors understand the, and comply with our own strict code of conduct.

So it's difficult to project how long this disruption will continue to impact our business, but we feel that the timing of our May convention is good, and we have some great ammunition to put to use in the market with the launch of LifePak Nano and Tru Face Essence Ultra, both top performing products globally.

I also want to make just a brief comment on China. I just spent last week in China meeting with our Management Team, our sales leaders, and government officials, and we continue to believe that China presents a huge opportunity. If you'll recall, that we closed about half of our stores just in December of 2007 and trimmed our headcount significantly. Yet the sequential decline in our business was relatively small in comparison, so we're really very pleased with the work [Andrew Fanin] and his team are doing there.

In 2007 China was also a very costly market, representing about a $13 million investment, and we're now operating much more efficiently, which will have a very positive impact to earnings this year.

We're also looking forward to Greater China's convention, coming up in just a couple of weeks, which will be held in Hong Kong.

So we enjoy significant potential up side in China, and we feel that we're operating in a much more manageable investment level at this point.

Geographically, we are doing extremely well in the United States, Europe, South Korea, and Southeast Asia. We see accelerating growth rates in each of these markets. Just a few weeks ago we held our annual incentive trip for our top sales leaders, and I can tell you that their spirits are very high. In fact, we had more trip qualifiers this year than we've ever had in the past. It's particularly helpful for our sales leaders around the world to get together and to share best practices and to share good news, so we were pleased to see an up tick in activity, immediately following the incentive trip, that we'll work to continue throughout Q2 and throughout the remainder of the year. So, overall, I'm confident that our sales leaders share our vision and are on board to make 2008 a record year.

In addition to our own efforts and initiatives, we're also benefitting from a few socioeconomic factors. We've stated in the past that economic uncertainty can be beneficial to our business as people are looking for supplemental sources of income. We believe that some of our success in the United States can be attributed to this factor.

Now, I know that some of our peers are citing economic weakness, having a negative impact on the U.S. results. But, frankly, this just hasn't been the case with us, so far, as the need for opportunity has outweighed household budget pressure. And, frankly, I would add to that that our Management Team, here in this market, Scott Schwerdt, and Justin Rose, are doing a great job of executing a focused strategy that has been embraced by our sales leaders.

The weak dollar is obviously also working in our favor. This should continue to positively impact revenue in 2008 and, hopefully, the negative impact of our debt translation is behind us. So add these environmental factors to our improving revenue and operational efficiencies, and we're on track for a great 2008.

Finally, you'll notice in our release that we raised revenue guidance for the year. We, as a Management Team, are committed to the plans that are in place, and we're working to deliver on the business targets we outlined. We now target revenue growth of about 5% for the year, and have also moved up the lower end of our EPS guidance for 2008.

So, with that, I'll turn the time over to Ritch.

Thank you, Truman. Good morning, everyone. I'll quickly give the local currency revenue figures in our major markets, and remind you again that these can be found on the Investor section of our Corporate website.

In North Asia region, first quarter revenue in Japan was 11.4 billion yen, compared to 12.7 billion yen in that same quarter of 2007. And quarterly revenue in South Korea was 38.7 billion won, and that's versus 31.2 billion won in the prior year.

In our Greater China region, Mainland China revenue was 119.6 million renminbi during the quarter versus 136.1 renminbi in the prior year. Quarterly revenue from Taiwan was 678 million NT, compared against 689 million NT last year.

In Hong Kong revenue was 90.6 million Hong Kong dollars, compared to 81.8 million Hong Kong dollars during the first quarter of 2007.

In the Americas the U.S. posted $44.4 million in revenue, compared against $37.7 million in the prior year. Canada reported 3.3 million Canadian dollars in the quarter, compared to 2.8 million in the prior year. And Latin America revenue was $2.7 million compared to $2.2 million in the prior year quarter.

And, finally, in the Europe region, first quarter revenue was $22.8 million versus $18.5 million in the same period of 2007.

Our initial guidance for the first quarter, you'll recall, included achieving revenue of $281 million to $286 million, based on a yen rate of 112 to the dollar. The actual average exchange rate for the yen during the quarter was about 105 and, therefore, we gained about $6.8 million due to the strengthening of the yen during the quarter.

Our gross margin for the quarter was 81.8%. That's approximately 30 basis points better than the prior year period. The improvement was due mainly to a reduction in airfreight expense during this quarter. And our selling expenses as a percent of revenue were 42.9%, that's approximately 30 basis points higher than the prior year, but essentially even sequentially.

General and administrative expenses for the quarter were $88.6 million or 29.7% of sales compared to $89 million or 32.5% of sales for the same quarter in 2007. This is a 280 basis point improvement and ties directly to the Company's restructuring efforts.

General and administrative expenses were negatively impacted about $3.8 million by the strengthening of foreign currency during the quarter, reflecting a reduction of approximately $4.2 million on kind of a constant currency basis, and this is in line with our commitment to reduce G&A expenses for the year by $15 million.

The Company's operating margin was 9.2% for the first quarter, and represents a 44% improvement over the prior year, and puts us on track to achieve our 2008 operating margin range in the 10.3% to 10.9% range. Our target is right around 10.5%.

We incurred a $5.8 million expense in our other income expense line, on the income statement, and that's primarily related to foreign currency exchange losses and interest expense. As we've discussed in the past, about one-half of our total long-term debt is denominated in Japanese yen. We use this to hedge against our revenue.

At December 31st, 2007 this yen denominated debt was converted to U.S. dollars at the yearend exchange rate of 111.45. On March 31st, 2008 the yen closed at 99.69, and so all the yen denominated debt was converted to U.S. dollars at this rate. This significant strengthening of the yen created a foreign currency loss associated with this debt of approximately $5.5 million during the quarter or approximately $0.054 per share.

Again, we utilized the ability to borrow in Japanese yen at low interest rates. Our average coupon rate there is just about 2%, just a little over 2%, and it acts as a hedge against our Japanese revenue stream. Just as a side note, the yen closed yesterday, which was the last day of April, at approximately 104, and this movement from 99.69 on March 31st to 104 on April 30th will create a foreign currency translation gain of about $2.3 million in our April financial statements.

Since we can't predict where the yen will finish on June 30th, the close of our second quarter, we have not estimated any gain or loss attributed to the movement of the yen and the translation of our yen denominated debt into our second quarter EPS forecast.

Our tax rate for the quarter was 37.5%, and that's in line with our historical rate, and during the quarter we paid $7 million of dividends, and received an additional settlement of 202,000 shares from the accelerated stock repurchase executed in the fourth quarter of 2007. Our share repurchase authorization remains at $89 million.

In our press release you will note that we increased our revenue guidance for 2008 by $20 million, actually $30 million on the bottom end, and $20 million on the top side, to put our annual target at $1.21 billion to $1.22 billion. This revenue guidance assumes a yen rate of 107 to the dollar for the balance of the year.

We estimate our 2008 EPS to be in the $1.17, $1.17 to $1.22 range. Now, for the second quarter of 2008, again, with the yen of 107, we're projecting revenue of $303 million to $308 million, with EPS of $0.26 to $0.28. Again, I have not modeled any translation gain or loss on the yen denominated debt into these second quarter numbers.

So we look forward to a very strong quarter, and like the direction of our business right now. And, with that, we'll open the call up to questions.

(OPERATOR INSTRUCTIONS.)

And your first question comes from the line of Olivia Tong with Merrill Lynch.

Hi, good afternoon. Just want to talk a little bit about your expectations for Japan going forward. Previously, I think you guys had said sort of declines would decelerate as the year progressed. First, are you still expecting that? And then, also, relative to earlier this year with all the negative media attention, do you think that that attention has gotten worse as the quarter has progressed, or is it easing, or just it's still just present, and that's about that, that's about it?

Right. Well, Olivia, we obviously, as we indicated, were frustrated with our Japan results, after making some really good progress in the third and fourth quarters of last year.

With this start for the year, it's obviously going to be very difficult for us to get to the point that we originally anticipated Japan being during 2008. We, frankly, in our modeling and in our guidance have not baked in much of an improvement, at all, in Japan for the remainder of the year. We're modeling, it essentially consistent with first quarter results. Now, hopefully, we can do better than that, but we wanted to model conservatively in that regard. It's just hard to know how long this factor is going to continue to impact our business.

You know, with respect to the current level of media attention, I don't believe that the media attention is increasing, but we have heard privately through internal sources that the government continues to scrutinize our industry carefully, and it could very well be that additional press might come out related to other competitors. And so we're just modeling the remainder of the year conservatively in Japan.

Got it. Any -- no uplift expected from the convention exporter?

We do think there will be an uplift from the convention. We would expect the second quarter to be better than the first quarter for that reason.

Okay.

But, again, in our modeling we have not modeled an improvement.

Oh, okay. Turning to China, I know it's difficult to predict, and there's a lot of moving parts to the distributor model changes, but it seemed like last quarter your comments made it sound like things were sort of coming up, improving a little bit, and with another double-digit decline this quarter, just wondering if there's anything that's changed relative to your expectations in that market?

We felt that way, too, and actually got off to a very good start in the first quarter. Interestingly enough, the snow storm that hit China in the beginning of February had a negative impact on results, and then we add that on top of the Chinese New Year, and things just slowed in China in the second month of the quarter.

But in retrospect, when we consider the fact that we closed half of our stores and really cut-back on our operations significantly, to be down 12% for the quarter doesn't seem that bad. So, you know, I just spent a week there, met with a lot of our sales leaders, and there's continued enthusiasm in the market, and we continue to believe that there's a lot of up side.

How -- if you could sort of quantify how big of a downturn did you see in the markets, where you closed stores, relative to your bigger cities?

[Dan], did we measure that?

No, we haven't necessarily measured the impact. What I'd say, though, is that we've found that the closure of the stores had a far smaller impact than we would have anticipated. Our sales representatives have continued to do business there, and we've found different ways to support them, so closing stores has not been a factor in the business slow-down.

Okay. And so if closing stores hasn't been a factor, then what sort of increased the acceleration? I mean I understand that the New Year happened, but the New Year happens every year, so on a YOY impact, you're down 12 in Q1 versus down 10 in Q4, and just wondering if you could sort of give me an idea if there's anything that got worse?

The ones, the significant changes we made in the first quarter were, was basically an adjustment to our -- the way we link our sales, employee program, to the direct selling program. We transitioned the way the parttime employees and the fulltime employees interact, and so consider that a change to our compensation model, so there's been some basic training in the evolution of that plan, so that's certainly part of it.

Okay. Got it. Thank you.

And your next question comes from the line of Tim Ramey with D.A. Davidson.

Good morning. Truman, earlier you mentioned that the level of investment in China was at a more manageable level, and I think you compared it to an investment level of about $13 million a year ago. Would you care to give us any more precision on what type of number would seem more manageable?

Yes, we estimate currently based on Q1 results and what we forecasted for the remainder of the year that we're going to take that investment down about $10 million, so the $3 million to $4 million range.

Okay. So it's still likely to be in the next year before we see that as a positive contributor?

Yes, I mean, frankly, we're -- we made a lot of headway in the first quarter, but we think there still will be a small investment in China this year.

Okay. And then in your release you mentioned FX caused a $3.8 million increase in G&A, is that just simply your overhead structure becoming more expensive in U.S. dollars, or is there anything else there, asset based, that we need to think about?

Yes, that's exactly what it is, Tim, as we translate back all our foreign currency expenses into U.S. dollars, with a weaker U.S. dollar it shows to be more, a higher U.S. dollar amount. So there's nothing related to the structure of the business that's changed. And really to be able to show a sort of a decrease on an apples-to-apples basis of about $4 million on a nicely increasing revenue base is really, really encouraging for us, and we believe that'll continue throughout the year.

Okay. And just a question on the revenue growth in the Americas, of 19%, after years of relatively unenlightening results in the U.S. that was a pretty nice performance. If you had to kind of disaggregate that into product excitement or distributor counts or the economy, maybe or any other basket that you were trying to segregate it in, how would you attribute the cause of that nice lift?

You know, Tim, let me have Scott Schwerdt take a whack at that question, because he's the one really managing the growth, not only in the Americas, but Europe, and doing a terrific job of doing it. So, Scott?

Hi, Tim. Yes, it is quite encouraging to see our leaders as energized as they are really across the region, which would be North and South America, Europe, and obviously some of the new markets, South Africa.

Really the key is that we've focused, the leaders have really focused around a very compelling product story, and that's with the Galvanic Spa and the Tru Face Essence Ultra has really come together in a unified anti-aging presentation that our distributors are doing, and it's really hit critical mass in the region, where everybody is really saying the same thing. And the leaders are as energized as I've ever seen them about the business, about the Company, about the product lineup.

And, certainly, as Truman indicated, the economic factors in the United States have certainly added some wind behind our sails, as people are looking for additional sources of income and looking to our Company as one of those sources.

So really it's -- it really falls into those three categories, and that's one of the things we've really focused on in the region, is to really get people united behind one story and make sure that our leaders feel that great sense of appreciation and partnership with the Company.

Thank you.

(OPERATOR INSTRUCTIONS.)

And your next question comes from the line of Scott Van Winkle with Canaccord Adams.

Hi, thanks. A couple of questions. If we could dig a little further into the [new wave] issues in Japan, I would assume at some point the pool of potential distributors is going to be larger, as that business deteriorates. Is that prohibited by the media attention? Have you begun to see it? Is there a timeframe where that may be the case?

I think theoretically, Scott, yes, we might see people involved with that Company looking for alternatives, but so far what we're seeing and really the feedback that we're getting from our sales leaders there and from our Management Team, as well, is that the attention given to that Company has just negatively impacted the sponsoring environment. And, frankly, has caused us and others to make sure that we're really reinforcing our own strict code of compliance. And so I don't think, you know, I really don't think, Scott, that the decline perhaps in their business is going to positively impact us or anyone else.

Okay. And moving on on the product side, and I joined the call a couple of minutes late, so I apologize if you mentioned this. You know, there's been some weakness in direct selling of some of the antioxidant juices. I'm wondering what your outlook is on your own product and, again, I missed this, if you talked about its performance during the quarter or if we're seeing a life cycle start to play out with those products and G3, in general?

Yes, our own juice, G3, as you mentioned, was really, frankly, a little bit of a surprising success to us because it was by far our most successful product launch in a long time, it quickly ramped up to be about $100 million a year business. Our G -- that product and that business remained steady through Q1.

I believe, Scott, that to the extent we see perhaps any softening on the Pharmanex side of our business, and in Q3, in particular, it's going to be a result of just distributor enthusiasm for what's going on in Nu Skin as opposed to any particular trend related to juice or nutrition, specifically.

Great. Thank you very much.

Thank you, Scott.

And your next question comes from the line of Mimi Noel with Sidoti & Company.

Hi, it's Mimi. How are you?

I'm good.

Just one question, in looking at South Asia Pacific you had the high single growth -- high single-digit growth in terms of revenue, and yet looking at the active sales force, that's down about 10%. How are you able to get that better productivity, and why is that sales force declining?

It's been largely a change of focus on product. One of the key drivers to our business is our average order size, and one of the folks in Southeast Asia has been on our [wave] management product. So essentially it's a slight change in the recruiting model, which as you pointed out, resulted in some of the declines of active distributors. But on the flip side there's been a higher spend per distributor, so that's what accounts for the up side in the revenue. That will start to change also about third quarter, so part of it's the comparison of when we started shifting that focus, and you'll see in about third quarter those numbers turning the other way.

Which numbers, [eset]?

The active numbers.

Okay. All right. That's helpful. Thank you.

And there are no further questions in the queue.

Thank you, all, for joining us this morning. We appreciate your time and attention. We have our Annual Shareholder Meeting scheduled for June 25th, and we'll be out on the road prior to that time. Look forward to meeting with any of you who may want to chat further about what's going on around the world. Thanks very much.

And thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Good day.