如新 (NUS) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you very much for your patience, and welcome to the first-quarter 2009 Nu Skin earnings conference call. My name is Bill and I will be your conference coordinator for today. At this time, all participants are in a listen-only mode. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. (Operator Instructions). I would now like turn the presentation over to your host for today's conference, Scott Pond, Director of Investor Relations.

We appreciate you joining us today. With us are Truman Hunt, President and Chief Executive Officer; Ritch Wood, Chief Financial Officer; Dan Chard, Executive Vice President of Distributor Success; and Joe Chang, Chief Scientific Officer.

During this call, comments may 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. We encourage you to refer to today's earnings release and our SEC filings for a complete discussion of these risks.

In addition during this call, certain financial numbers may be discussed 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 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. With that, I'll turn the time over to Truman.

Good morning, everyone. We appreciate you joining us on the call this morning.

We are pleased to report better-than-expected first-quarter results and provide some insight on what we see shaping up as another record year for Nu Skin Enterprises. Based on our first-quarter results, we are well on track to achieve our 2009 revenue and earnings targets. These targets include increasing revenue 3% to 5% in local currency, and growing earnings in the 10% to 18% range, excluding restructuring charges.

As our release indicates, our first-quarter revenue was $296.2 million, compared to $298.1 million in the first quarter of 2008. Reported revenue was negatively impacted 5% by foreign currency fluctuations, so that results in a 4% revenue increase in constant currency.

First-quarter earnings were $0.19 per share, or $0.28 when excluding $9.4 million in planned restructuring charges, primarily in Japan. This compares to $0.21 cents in the prior-year quarter and exceeds our guidance of $0.22 to $0.24.

We are very pleased to begin our 25th-anniversary year with good momentum. Our compelling anti-aging product portfolio and business opportunity continue to attract people to our business.

Given the current economic environment, we are seeing increasing numbers of people looking to Nu Skin as a vehicle to supplement or replace income. I am continually impressed with the quality of people we are seeing join our business, which is a reflection of the strength of our Company and the appeal of what we are offering.

Our anti-aging platform continues to provide a competitive advantage, as evidenced by a 19% revenue increase in our personal care brand in the quarter. Much of this growth comes from the success we continue to generate with the Nu Skin Galvanic Spa System.

Adding to the Galvanic Spa momentum is the recently introduced Galvanic Spa gels with ageLOC, which was introduced at our North America convention last fall, and we plan to introduce the reformulated ageLOC gels into nearly all of our markets in 2009.

The new ageLOC Galvanic Spa gels are just the first chapter in the ageLOC story. This fall, at our 25th-anniversary convention, we'll unveil the comprehensive ageLOC anti-aging strategy. This is a truly differentiating platform that goes beyond addressing the superficial signs of aging by addressing aging at its source.

Combine this with our proven scientific expertise in both skin care and nutrition, and Nu Skin is really in an ideal position to take the lead in the growing anti-aging category. Our philosophy for many years has been to build a scientific engine that we can leverage to really differentiate our products. And we are very proud of our history of innovation.

But as proud as we are about innovations such as the BioPhotonic Scanner, Lifepak Nano, the Galvanic Spa, I believe that ageLOC will be our most compelling product platform and product innovation ever.

In addition to our strong product line-up, we are very pleased with the programs that we have implemented to help increase profitability. Our gross margin has stabilized, we are reducing the spend on ineffective selling incentives, and we've taken another significant step forward during the quarter with our restructuring in Japan.

You will recall that we put a new management team in place in Japan in August of last year, and that team immediately went to work on a plan to drive growth, by implementing in Japan the same mechanisms that are working effectively elsewhere in the world. And they also immediately set out to re-organize the Company to contain costs.

Those efforts resulted in a Q1 headcount reduction of about 35%. We are also working our way out of sub-optimal leases on walk-in centers in Japan, which will take place during the remainder of 2009. So these restructuring efforts are already yielding a significant benefit by reducing our costs there by about $400,000 a month currently, and that level of savings is going to double by the fourth quarter of 2009.

More important than the cost savings, however, is the work that this team is doing to stabilize the topline. While second- and third-quarter results will be more indicative of improving trends, we are very pleased with preliminary indicators of increased sponsoring and increased qualifiers for our executive distributor positions.

So our work there is definitely augmenting the bottom line, and we are also optimistic about topline impact as well. And obviously, as the topline in Japan levels out, the growth in our business elsewhere in the world will become much more evident.

Our first quarter -- our healthy first-quarter revenue results came from continued local currency sales growth in most of our other individual markets. North America, Latin America, South Korea, and Europe led the way once again, with double-digit local currency revenue gains, while steady improvements in the South Asia and Pacific region also contributed to solid quarterly results.

As mentioned in our release, we continue to diversify geographically, and we'll begin initial marketing efforts in Turkey and in Colombia during the second quarter.

Our revenue growth in the quarter was obviously masked by some FX issues that were significant in a few instances, such as in South Korea, for example. Ritch will address the specifics of currency impact in just a moment.

Overall, in a world of economic uncertainty, we are very pleased with the direction of our business and the results of our work to improve profitability over the past three years. Our product and sales initiatives enjoyed good momentum and we are generating growth in nearly all of our markets. We're also positioned to capture the benefits of the restructuring we've undertaken, and now continue and finalize, in Japan, in particular.

So with that, let me turn the time over to Ritch to go through the financial details for the quarter.

Good morning, everyone. I'll quickly give the local currency sales figures, and then a bit more detail on our financial results.

In the North Asia region, first-quarter revenue in Japan was JPY10.3 billion, compared to JPY11.4 billion in the same quarter of 2008. Quarterly revenue in South Korea was KRW42.5 billion, versus KRW38.7 billion in the prior year.

In the Americas, the U.S. posted $49.2 million in revenue, compared against $44.4 million in the prior year. Canada reported CAD5.8 million in the quarter, compared to CAD3.3 million in the prior year; and Latin America revenue was $4.5 million, compared to $2.7 million in the prior-year quarter.

Then in greater China, mainland China revenue was CNY112.5 million during the quarter, versus CNY119.6 million in the prior year. Quarterly revenue from Hong Kong was HKD91.0 million, compared to HKD90.6 million in the same quarter last year. And Taiwan revenue was TWD656 million, compared against TWD678 million in 2008.

Our gross margin for the quarter was 81.8%. That's even with the prior year. Selling expenses for the quarter were 41.6%, compared to 42.9% in the first quarter of 2008.

This improvement can be attributed to distributor compensation plan modifications in many of our markets during 2008. And we are currently rolling out the Wealth Maximizer compensation plan enhancement to Japan and Southeast Asia here in April. We believe this plan incents behaviors which will drive growth into the business, while increasing executive retention rates.

However, modeling our payout, our distributor incentive payout as a percentage of sales, is a little bit difficult since the exact payout percentage depends upon our field leader's success in achieving qualification requirements.

Our forecast for the balance of 2009 has distributor incentives holding in the 41.4% to 42.0% range.

General and administrative expenses for the quarter were $89.7 million, or 30.3% of sales, compared to 29.7% of sales in the prior-year period. This slight increase in G&A expense was associated primarily with additional promotion and event spending during the first quarter, particularly in Japan, where we are beginning to hold distributor recognition and training events similar to what we do in other markets. That accounted for approximately $1 million, a little over $1 million.

All other major general and administrative expense categories, such as labor, occupancy, travel costs, were all lower than the prior year.

We are very pleased with the successful execution of our restructuring efforts, discussed by Truman here, in Japan. Our 35% staff reduction will begin improving profitability here in the second quarter and continue throughout the year.

We incurred a restructuring charge of $9.4 million in the first quarter, again that's primarily related to changes in Japan. Of the $9.4 million, approximately $6.8 million related to severance payments, the rest being associated with facility relocation or closing costs.

At the beginning of the year, we guided that our restructuring costs for 2009 would be approximately $14 million during the year, and we are on track with this guidance. I would expect that the remaining restructuring costs of approximately $5 million will fall mostly into Q2 and Q3, and be pretty much done by Q3 of this year.

The Company's operating margin for the quarter was 10.0% for the first quarter. That's an 80 basis-point improvement over the prior year. And again, that excludes restructuring charges from this quarter.

We are off to a good start, and the first-quarter results increase our confidence level in delivering on our 2009 target.

During the quarter, we sustained a net expense of $1.2 million in other income expense line of our income statement. Foreign currency translation gains of about $600,000 offset interest expense in the quarter. Although currencies continue to move around and are difficult to project, the gains associated with the translation of our JPY debt and liabilities during the first quarter offset losses on other foreign currency intercompany receivables.

And just to note, the JPY finished the quarter at 98.95. So that's where we translated our debt and so forth back.

Our tax rate for the quarter was 37.4%. During the quarter, we paid $7.3 million in dividends, purchased $2 million of Company stock.

We want to reiterate our 2009 guidance. This guidance includes local currency revenue growth of 3% to 5%, with a projected negative currency impact of 3% to 5% for the year. That puts our 2009 revenue at approximately S1.24 billion to $1.27 billion.

We project 2009 earnings per-share to improve approximately 10% to 18% over 2008, or be in the $1.12 to $1.20 range, excluding 2009 restructuring charges of approximately $0.14.

Also, for modeling purposes, we remind you of our planned global convention, which will be held in October of this year at a projected cost of approximately $6 million to $7 million.

For the second quarter here, we project revenue to be in the $303 million to $310 million range, with earnings per-share in the $0.29 cents to $0.31 range, excluding approximately $0.03 of restructuring charges.

We expect constant currency sales growth to be very near what it was in the first quarter, still in that 3% to 5% range. And again, offset by even a bit more dramatic currency impact in the second quarter, we would project that to be in the 5% to 8% range in the second quarter.

Again, for the year, it will be 3% to 5%, but as we go towards the fourth quarter, currency -- the negative currency impact should be a little bit smaller. So with that detail, we'll go ahead now and open up the call for questions.

(Operator Instructions). Olivia Tong, BAS-ML.

Good morning. I just want to talk a little bit about the personal care business because, despite the fact that you are now coming up on tougher comps, you're still growing that business pretty strong. Is that just continued Galvanic Spa benefit from launches as you go to other countries?

Galvanic Spa is definitely the driver right now of our personal care business. And continues to enjoy just a huge amount of enthusiasm among our sales force, as well as among consumers who are using it.

But the ageLOC story, and the ageLOC augmentation to the Galvanic Spa mechanism, is also now contributing meaningfully to enthusiasm for the category, and will continue to do so as we prepare product launches for the fourth quarter.

You will recall from our investor day last fall that we talked about launching a daily-use skin care system, as well as a very compelling -- what we call mother of all serums at our convention in October. Those launches are lining up well and the story associated with these products is going to be very, very compelling.

So we continue to expect the comparative focus between personal care and nutrition to remain on personal care for the time being.

I also want to talk a little bit about Korea, because in local currency terms, you're still growing, but it's a huge deceleration versus Q4. Maybe you could go a little bit into what's going there -- excluding the currency.

Korea for Q1 was actually up against a tough comp in Q1 of '08. Last year, the market launched our product -- our nutrition product line called Estera very successfully. And they didn't have a comparable launch of the same magnitude in Q1 of this year.

So there is a little deceleration there. Our management team is concerned about economic influences slowing down business growth there. But it was a tough comparable year over year.

Korea has some solid products to launch for the remainder of this year in a new hair care line, as well as the launch of Lifepak Nano later in the year. So this market over the last decade has been as solid and steady a growth market as we've had anywhere in the year -- anywhere in the world. And we think that we'll be able to continue to grow the business there in line with first-quarter results.

So, more or less, sort of at the low double-digit range for the rest of the year is what you're thinking.

Correct.

And then, just lastly, you mentioned a little bit of share repurchase this quarter. Cash still looks good, and looks like -- as far as what you were expecting, that things came in in line with your expectations, despite a little bit more currency hit. So I wanted to hear a little bit about what your thoughts are as far as the use of cash. Maybe any potential for incremental share repurchase as the year progresses?

Just a quick summary. As we kind of came into the year, we sat down with our Board and set out the direction that we'd planned to go. Right now, as you mentioned, our business continues to perform just about exactly as we had forecasted. It was maybe a little better profitability than we had assumed, so cash flow continues to be approximately where we estimated, or a little bit ahead of that.

We do pay down about $32 million in debt during the year, according to our standard amortization schedule going forward.

According to the Board, we'd continue to be in the market buying back shares throughout the year, but not at an aggressive level. And then, allow our cash balances to build up just a little bit from where they have been in the past.

So we will be in the market. We'll consistently discuss this with our Board, but at the current time, plan to kind of carry forward as we put plans in place at the beginning of the year.

If you look at a year-over-year basis, our debt is down $30 million, our cash is up $20 million. We've been able to really strengthen our balance sheet and believe we can continue to do that, which puts us in a great position to create value. However, it seems to make the most sense to do that going forward.

Thanks very much.

Tim Ramey, D.A. Davidson & Co..

Just wondered if -- I didn't hear you actually say the size of Galvanic Spa right now. And if, without Galvanic Spa, there wouldn't have been the growth in the personal care business.

Galvanic Spa and associated products represented in the first quarter about $55 million in sales. And that's up almost 10-fold over where it was three years before that. So it's definitely the growth driver.

Would we be up without the growth if -- that growth of Galvanic Spa? Probably not, in the personal care category.

And is there more geographic rollout or new markets being considered there that we are not aware of already? What should we be -- what should we be thinking about for --

The only markets that have launched the new Galvanic Spa gels with ageLOC are North America and Europe. And so, you'll begin to see geographic rollout of ageLOC and Galvanic Spa gels as the year goes on, and really mostly toward the end of the year in the fourth quarter.

The Galvanic Spa itself is available in most of our markets now, but it's still relatively new -- a new area of focus in most of Southeast Asia and in greater China, where, over the past five years, most of the focus has been on Pharmanex initiatives. So the focus on the Spa really is just beginning in most of the Asian markets, with ageLOC technology to roll out by the fourth quarter of this year.

Do you have any experience or data on kind of the stickiness of the repeat purchase of the consumables with Galvanic Spa, or is it just too new?

We are very enthusiastic about the repeat-purchase mechanism associated with the gels on a monthly basis. It really is a razor and a blade approach, and so far, consumption -- follow-on consumption of the gels is very high. And we are very enthusiastic about that.

I want to also mention one thing that's often lost, even internally here, is that Galvanic treatments have a positive impact, a significant positive impact, on the effectiveness of other skin care products as well. So you don't have to just benefit from a Galvanic treatment itself. A galvanized face, basically, makes our other skin care products significantly more effective.

So it's a very, very compelling mechanism from both an initial sell perspective, as well as a follow-on perspective.

Terrific. Thanks.

Rommel Dionisio, Wedbush Morgan Securities Inc..

Can you just update us on the geographic penetration of ageLOC at this point? I know you launched in the U.S. last fall. Is it in Europe at this point? And just the pace of the rollout you expect for 2009 for ageLOC.

Yes. AgeLOC in Galvanic gels is available in Europe and North America. And as I just mentioned to Tim, it will be available in the fourth quarter in most of our other markets. Actually, the fourth and the first quarter of next year, when ageLOC really launches officially at our October convention here in the U.S..

I know you talked about also at some point putting that in an ingestable form. Is that something you'd have ready by convention, maybe, or is that more of a 2010 (multiple speakers)

We are really going to keep the spotlight focused on skin care for the time being. We just -- we love the growth and the momentum we're seeing there. And we have such a compelling array of products in this category that we are launching in the fall of this year that it would really be a distraction to throw a nutrition story into the middle of that.

So ageLOC infused into nutrition is a 2010, 2011 story.

Fair enough. Thank you.

[Per Osland], Jeffries & Company.

A question on China. I don't want to make a mountain out of 5% of the business, but we know that the Galvanic had the initial rollout late in the fourth quarter. I just wanted to get an update as to the status of the rollout there now, if we are out with the full distributor base. And whether or not we've got supply constraints there at this point, or if that's all worked through.

You are right. We introduced Galvanic to sales leaders in China in December. And China, as you may recall, in the fourth quarter of last year was down 1%. So it will be down 6% in Q1.

Seems like a deceleration, but what's going on there is continued transition from our historical business model to a new go-forward business model. And in particular, this is a market where the business environment for what we do in direct selling can become overheated. And our management team there is in the process of weeding out people who, frankly, we don't welcome in our world. And that, more than anything, is reflected in the 6% down for Q1.

So you would attribute the decline more to that than -- Galvanic maybe cannibalizing other sales into the market.

Yes. We knew, in developing our '09 business plan with our China management team, that we were going to start to weed out people from our salesforce who, frankly, keep us from being able to be all we need to be and want to be in that market.

So our general manager there, Andrew Fan, warned that, as we got serious about doing that in the first quarter and in the second quarter this year, it would negatively impact sales. And he was right. That's exactly what happened, as we've really focused over the last couple of months on what I would characterize as salesforce management.

So that would probably answer the question as to why the executives in the region was down then as well.

That's right.

Thank you.

(Operator Instructions). Scott Van Winkle, Canaccord Adams.

A couple of questions. First -- or a couple, actually, on the economy. I'm wondering -- is there any consistencies across your markets from kind of the current economic world, and what are the inconsistencies across your geographic regions?

That's actually a really interesting question, because as we evaluate the business, I think that the economic situation really is impacting us a little bit differently in many of our markets. I think that the depth of the decline, and the fact that South Korea, for example, has been under economic pressure a little bit longer than other markets around the world, leads us to believe that the economy there is a little bit more of a factor on our business results in Q1 than perhaps it is in other markets.

So we are all -- the world is just really new to this level of economic stress, so we are learning as we go, too. Has the economy been a net positive or a net negative? For us, right now, I think it's about a wash.

It is true that increasing numbers of people are looking for opportunities. It's also true that pressure on consumer spending is negatively impacting consumption. But for us, if you look at it from a global perspective and on the whole, I think it's about a wash.

Truman, you're very involved in the Direct Selling Association, kind of the broader channel. Are there different types of models out there that are faring better or faring worse? Or maybe more inside Nu Skin, are there distributors coming to you, saying, this is working in this environment, this isn't working in this environment? I'm wondering if there's kind of a way to navigate to a different selling model, tool, meetings, etc., etc., that you're kind of seeing happen in this environment.

That's a complicated question. And of course, data on the industry from a global perspective really isn't available yet. But clearly, there are direct sellers who are being significantly negatively impacted in this economy.

And I think that for the companies, in particular, that really are kind of low octane on the business opportunity side of the equation and are really largely, largely just mass sellers of personal care and cosmetics products, are probably more likely to be hurt than companies who have a more robust opportunity to offset the contraction in consumer spending.

But I wanted to just note that I think one of the things that's enabling us to get through this better than most of our competitors is the fact that we went into it with, A, decent business momentum in the first place, and, B, already having really restructured most of our business over the last three years. So we got an early start on having to deal with the economic pressures, and we also had great momentum going into this headwind.

And I guess one product-related question. As we talk about the success of the Galvanic Spa, and you have these series of blockbuster products that come out and one kind of cannibalizes the other or complements another, I should say, as well. When you launch [MOAS] broadly, what should we expect from the rest of the portfolio?

We're going to do our best to minimize cannibalization. But there always is some. It's just inevitable. We -- actually, in our modeling on that product in particular -- are not worried about cannibalization because of the margins on MOAS. But there inevitably is some cannibalization.

But to tell you the truth, if we were really doing a good job of selling what's coming down the pike for us, I would be standing on the table, jumping up and down, and making lots of noise because this is really, really good stuff. And I've been doing this now for 13 years, and I can tell you that we've never had a better story than what is going to be embodied in the ageLOC story this fall.

And our salesforce is just going to light up over this. So we are very excited about it.

Given that you have something you're so excited about on the product side, does it kind of pique your interest in spending some more traditional marketing dollars, and try to grow recruiting and drive interest in the product? Some of your competitors, obviously, use sponsorships. I'm just -- you sound excited about the product. I'm wondering if you go broader than normal.

That's always a dilemma, isn't it, within the constraints of our business model. Right now, to tell you the truth, attracting people to the business is not really the problem. Our salesforce is doing a great job of attracting people to the business. And that's kind of what a traditional advertising spend would do.

I'm very confident that when the salesforce gets ahold of this story, they're going to light up. And I'm just excited to get after it this fall, and going into 2010 outside of the U.S..

One quick question, just so I understand. Your forecasts are based on -- what was the currency, again, for the JPY? And you don't assume any of the debt revaluations or intercompany receivable revaluations in your forecasting?

That is correct. I haven't built in any gains in the other income line -- other income expense line from foreign currency movement. But I have the JPY for the rest of the year being just slightly ahead of 100, so around 102 for the year. And overall, estimate a negative impact of about 3% to 5% currency.

So we are negative 5% in the first quarter. It will be a little higher than that in the second quarter, and then should taper off by the fourth quarter of this year.

Thank you much.

That concludes our Q&A session for today. I'd like to throw it back to our presenters for any closing remarks that they may have.

We appreciate you being on the call, and let me just point out here, in conclusion, that while some markets may decelerate, other markets are accelerating. And on the whole, and net net, we are still very comfortable with 3% to 5% local currency growth.

We continue to find that it's a great time to be a direct seller. The world needs what we offer, both from an opportunity perspective and a product perspective, now really more than ever. And we continue to work hard to maximize shareholder value and feel that these efforts are paying off.

So we look forward to answering any additional questions you may have. Thanks for joining us today.

Thank you very much, sir, and thank you, ladies and gentlemen, for participating in today's conference call. This concludes your presentation for today. You may now disconnect. Have a good day.