如新 (NUS) 2009 Q3 法說會逐字稿

Good day ladies and gentlemen. And welcome to the third quarter 2009 Nu Skin earnings conference call. My name is Yolanda. I will be your coordinator for the day. At this time all participants are in listen-only mode. We will conduct a question and answer session towards the end of today's conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.

I would like to turn the presentation over to Mr. Scott Pond, Director of Investor Relations. You may proceed, sir.

Thanks, Yolanda. We appreciate all of you joining us today. Sitting in the room is Truman Hunt, President and Chief Executive Officer, Ritch Wood, Chief Financial Officer; Dan Chard, President of Global Sales and Operations; and Joe Chang, Chief Scientific Officer. Just a quick reminder that during this call comments may be made that include 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.

With that I will turn the time over to Truman.

Thank you Scott. Hello everyone. We appreciate you joining us today. As our release this morning indicates we had a very strong third quarter. Revenue was $334.2 million which represents our largest revenue quarter ever and an 8% improvement year over year. Earnings per share for the quarter excluding $0.01 for restructuring were $0.41 which is a 58% year-over-year improvement. Highlights for the quarter included solid top line growth in all of our regions, a 270 basis point improvement in our operating margin, reaching 12.5% excluding restructuring. We're really pleased with both the top and bottom line results, with our earnings reflecting the benefits of our global restructuring over the past three years.

We also remain optimistic about continued growth, going forward. This optimism is based on three factors. First, our demographics continue to play in our favor. We're in a strong position to leverage both the aging consumer debt demographic as well as the increase in those seeking alternative income sources. We see these marketplace trends reflected in our results around the world. For the quarter, we posted double digit growth in South Korea, Southeast Asia, Europe, Taiwan, mainland China, and Latin America, and we continue to generate consistent growth in the US with continued sales trend improvement in Japan. So from a global perspective, I would say that the third quarter reflects our most consistent uniform results we have ever generated.

Last week, we had a very exciting week. We brought 12,000 of our international sales leaders to Los Angeles for our global distributor convention which you may recall we hold every two years. Our distributors certainly generated their enthusiasm for our new product platform by swamping our product store, and keeping our cash registers very busy.

This leads to the second reason for our optimism, which is the strength and innovation within our product strategy. Last week at our convention we unveiled our new ageLOC daily skin care system which we call ageLOC Transformation. This set includes four new products infused with innovative anti-aging skin care science that target both the sources as well as the signs of aging. So as we explained last week to our sales leaders, ageLOC science is based on the discovery of what we have labeled, age-related super markers. These super markers are found in the human genome and determine how we appear as we age. Our proprietary science and new research partnerships give us a head start in identifying and ultimately in resetting the clusters of genes that keep us looking young.

The science behind ageLOC is very compelling but even more compelling are the clinical results of our new skin care system. The products are highly effective at improving skin characteristics in all of the important areas, including lines and wrinkles and texture, pore size, tone, et cetera. Results from using the system can be seen very quickly. The tag line we introduced during our convention last week is "Eight ways in seven days," reflecting how significantly and how quickly these products work. The response to the introduction was very strong. We would like to see how the month of October finishes and how the first half of November goes before we disclose any specific sales information related to convention, and before providing an update on our forecast for the fourth quarter. Which we will do in a couple weeks at our annual analysts day on November 17.

One thing I would note, however, is that is the launch of the new ageLOC skin care system is much more global in nature than what we have done in the past. Typically in the past our product launches have been staged over as much as a two-year time frame. But with ageLOC, we plan to launch the skin care system on a much more compressed time line with all of our regions launching in the first half of 2010. So, the launch enthusiasm at convention may have been augmented by the immediacy of the launch in markets around the world.

Now, we also announced last week an important research partnership with Stanford University as well as an exclusive research partnership with a company called LifeGen Technologies which is a Wisconsin-based research company that we believe is really on the cutting edge of studying aging, and in particular studying the genetic roots of aging. These partnerships will continue to enable us to innovate and to validate the science behind the ageLOC approach to anti-aging products.

We believe that to effectively fight the battle against aging, it must be fought from both the outside as well as from the inside. So we plan to incorporate ageLOC science into our nutrition line, as well, with an initial product launch in the fall of 2010. We're really proud of the fact that among major direct selling companies we're really the only company that is almost equally weighted between the personal care, skin care category as well as the nutrition category, and feel like we enjoy a very important competitive advantage in that way. And so we will continue to infuse ageLOC science throughout our skin care line as well as into our nutrition line next year.

We have always felt confident in the strength of our product offering and the fact that we have always been backed by solid science. But with ageLOC we really believe that our product strategy is more compelling than it's ever been.

The third reason for our optimism is our continued operating margin improvements. We're enjoying the benefits of the business transformation which we initiated three years ago. G&A in the most recent quarter improved 160 basis points year over year and the impact of innovation on our distributor commission structure is also improving our operating margin. The net effect of these efficiencies is a 270 basis point improvement in operating margin in the quarter.

So overall, we're very pleased with the direction of the business. Our strategy to thrive through this recessionary period was to innovate, and we did that effectively. And we believe we're in a great position to continue to grow at a healthy rate. Looking to the fourth quarter, and into 2010, we continue to see great things ahead for Nu Skin Enterprises.

With that I will turn the line over to Ritch.

Thank you, Truman, and thanks to all of you who are taking time to join with us today. I will first give the local currency revenue figures in our major markets. In the North Asia region, third quarter revenue in Japan was JPY10.7 billion compared to JPY11.2 billion in the same quarter of 2008. South Korea achieved another record revenue quarter with revenue of KRW46.7 billion versus KRW40.7 billion in the prior year. In the Americas the US posted $50.4 million in revenue, compared against $48.5 million in the prior year. Canada, continued to post extremely strong growth, reporting C$6.6 million in the quarter compared to C$4.5 million in the prior year. Latin America revenue was $4.9 million compared to $4.5 million in the prior year quarter.

And then in the greater China region, mainland China revenue was CNY123.2 million during the quarter versus CNY104.3 in the prior year. Quarterly revenue in Hong Kong was HKD94.0 million compared against HKD102.5 million in the same quarter of last year. And finally, Taiwan revenue was NT794 million compared against NT718 million in 2008.

Our gross margin for the quarter was 81.4%, that's 30 basis points lower than the prior year. Although gross margin has been impacted by the increasing sales of the Galvanic Spa unit as well as a shift in our global revenue mix, we did experience a slight sequential improvement and believe our gross margin is now headed in the right direction. Selling expenses for the quarter were 41.3% compared to 42.6% in the third quarter of 2008. As we discussed in prior quarters, these improvements are attributed to the wealth maximizer modifications to our distributor compensation structure. And currently all the markets around the world for us, with the exception of South Korea and China, operate on this new unified global plan. Again, the objectives of the plan are to achieve retention level income for early executives and then to increase productivity of all of our sales leaders. We're seeing those objectives being accomplished.

General and administrative expenses for the quarter were $92.5 million or 27.7% of sales compared to 29.3% of sales in the prior year period. And we just continue to experience nice progress as we streamline our business and better leverage our corporate overhead structure. We incurred a planned restructuring charge of $0.8 million during the quarter. This was related to the restructuring of our Japan operations. The final piece of this Japan restructuring effort should take place in the fourth quarter, expected to be about $1 million, and associated with some final walk-in center changes that will be happening in the fourth quarter.

The Company's operating margin was 12.5% for the third quarter. That is excluding the restructuring charge. And that represents a 270 basis point improvement over the prior year. We're tracking well ahead of our planned operating margin goal for this year. And now expect our 2009 operating margin, excluding restructuring charges, to be somewhere in the 11.2% to 11.3% range. Operating income for the quarter, excluding the restructuring charges increased about 38% over the prior year.

During the quarter, we reported a net loss of approximately $2.8 million in the other income expense line of our income statement. This expense is made up primarily of foreign currency translation losses and net interest expense. In the prior year, the Company reported a loss of $8.3 million on the same line item, which was due mostly to foreign currency translation losses. Our tax rate for the quarter was 32.9%. And during the quarter we paid out $7.2 million of dividends and repurchased $7.8 million of Company stock. And this leaves our Company's approved repurchase authorization at approximately $70 million.

We have raised our fourth quarter revenue estimate to $343 million to $348 million. That puts our annual revenue guidance at approximately $1.29 billion to $1.3 billion. The fourth quarter revenue projections estimate a benefit from foreign currency of around 3% to 4%. And based upon this higher revenue and our improving operating margin, we also increased our earnings per share estimate for 2009 to $1.38 to $1.40, excluding our anticipated 2009 restructuring charges of approximately $0.13.

Note that in the fourth quarter we did have our international convention which we held last week in Los Angeles. That will add an incremental overhead cost of about $7 million that just essentially adds into our overhead in the fourth quarter of this year.

With that, we will go ahead and open the call up now for questions.

Thank you. (Operator Instructions) Your first question comes from the line of Olivia Tong with Bank of America, Merrill Lynch, please proceed.

Thanks, good afternoon. Just wanted to talk a little bit about the Q4 outlook. You guys did pretty substantial organic growth this quarter. And if you take out 4 points of FX looking at a 4% organic growth expectation for top line in Q4? Is there something that I am not thinking of that would make it decelerate from the plus 7% did you in Q3 or is this just it is still early on in the process of recovery and you want to -- you don't want to overpromise so early on?

Yes, I think it is a matter of trying to be conservative of what we have going on. Our big launch of ageLOC really happens in the first quarter of next year. We did have a real strong convention which came in as we -- right after we had given the fourth quarter guidance, as Truman mentioned. We will weigh that in with the end of the October month here and the beginning of November. Essentially with 3% to 4% benefit from foreign currency, it puts our growth rate in about the 5% to 6% local currency growth rate which is an acceleration from where we were in the first half of the year, so we do continue to see the business very strong coming into the last half of the year.

Got it. And then just the margin expansion, obviously has been pretty impressive this year. Just wondering, I know it is a little early and you will be talking about 2010 come analysts day but wondering if you could just give us a little insight into where you think margins will go in the next couple of years and what is going to drive that? Whether it be gross margin getting a little bit better or if it is more efficiencies in G&A or better leverage on the wealth maximizer program?

This is probably an area as a Company management team we're very encouraged about because it has taken a lot of work to get to this point, but we really do feel like we're just starting to feel the benefits of a lot of the efforts we put in place. Obviously we're seeing that in selling expenses. We are seeing it in G&A. We will have some additional benefits next year because we will get the full effect of the Japan restructuring. We do believe there is opportunity in gross margin, especially with the launch of ageLOC. So we will lay out our details and the way we see the plans rolling out at our investor day and try to give more transparency to what we're thinking at that point in time.

Okay. And then share repurchase is something that you guys continue to do a little bit of. But are there any thoughts as far as stepping that up a little bit? Your cash balance is building quite a bit this quarter so just wondering what your plans are as far as cash usage.

You're right, Olivia. We do see healthy accumulation of cash. And we will continue to accumulate cash at a rapid rate, actually, going forward. Our history is to use our cash to improve shareholder value. We now have a 9-year track record of increasing dividends. And I think we have been very generous, as well, in our share repurchase programs. So, using our cash to benefit shareholders is our top priority and it's what we have done, it's what we're likely to do going forward.

Are there any thoughts on potentially accelerating share repurchase a little bit?

There are always thoughts but as you know that is a board decision, and an issue that our board will consider every quarter when we get together.

Fair enough. Then just lastly I wanted to talk a little bit about Pharmanex, clearly direct selling momentum business. You talked about some of the things you're planning to do in 2010 but this has been an overlooked half of the business, dare I say, over the past couple of years as you put more of the efforts behind skin care. Just wondering what your thoughts are on the switch towards that business, again, in 2010 given this is a momentum business and how you're going to build that?

Well, it is a momentum business and whatever we do, we like it to be incremental to current activity. For our sales force, though, they are now really accustomed to the notion of operating in both of these two categories. And the fact of the matter is that the ageLOC story is probably more impactful and more meaningful internally than it even is externally. So the infusion of ageLOC science into the Pharmanex line is going to make for a very compelling story in 2010 and 2011. But, we think the two sides of the business can really operate hand in hand because they are both very relevant in fighting the anti-aging battle.

And just one other comment maybe is that we were really encouraged with the strength that we saw in the Pharmanex business in the third quarter, whereas that business has been a little bit soft over the last, let's call it, four or five quarters with the strength of the Galvanic Spa. We actually saw it steady a little bit and grow about 4% or 5% sequentially up second quarter. So we're actually quite encouraged with that business and the way it is holding very steady.

Got it. Thanks very much.

Your next question comes from the line of Tim Ramey with DA Davidson. Please proceed.

Good morning, and congratulations again. There was some really big number that was bandied about in terms of the amount of sales that could occur at your convention. I don't know whether you would get into that level of granularity but did you -- you said that it was well received, and so on. There was a lot of enthusiasm. Is there any estimate of how much ageLOC product might have been sold at the convention?

Yes, Tim, there was unprecedented enthusiasm and demand for ageLOC products at convention. And I think it is fair to say that our sales results there really blew right through our projections and kept us working all week trying to fill demand for the product. But we had wanted to wait to get through the month of October before we really start talking about specifics because there are some unique factors that went into sales results at convention, including perhaps most significantly, the fact it was a limited time offering. So to get a hold of the new ageLOC system between October and January you had to be at convention to do it and that really fueled the purchasing dynamic at convention. But I don't say that to take away at all from the magnitude of the launch. It was significant and will be multiple times higher than what we have experienced at past conventions.

Okay. And did you mention, if you did I missed it, the discrete sales level for Galvanic Spa or that system, how that's been tracking?

In the third quarter the Galvanic Spa and gels bumped up again to about $68 million, up over about $65 million, as I recall, in the second quarter. So good energy remains there. And what is really fun, frankly, about the new system, is that it works hand in hand with the Galvanic Spa and will really add fuel to the Galvanic Spa fire.

Terrific. Thanks a lot.

Your next question comes from the line of Rommel Dionisio with Wedbush Morgan. Please proceed.

Thank you, good morning. Truman, could you provide a little more color on the mainland Chinese market? It definitely saw nice double digit growth there in local currency. Could you maybe walk us through what is working there for you and the outlook for that going forward.

Yes. As you know, and as anyone who has been following us over the past few years knows, we really more or less pushed a reset button on the China business in the fourth quarter of 2007. So we're about two years into reformatting our business model there in line with Chinese regulations. And, what we have today is an infrastructure that is profitable, which is very important and encouraging to us, but which also really, I think, provides a solid foundation for growth going forward. Our management team has worked very hard there to get the business back on track. Third quarter results reflect that. The benefits of the changed business model and the restructuring are really beginning to play out. But I would say that the fourth quarter is a difficult comp because we launched the Galvanic Spa last year in China in the fourth quarter, and we also had a large contingent of Chinese sales leaders at our US convention last week who did a lot of purchasing in the US. Frankly, market to market results in the fourth quarter will be a little bit tricky because of the fact that convention revenue will be booked in the US. But China is back on track, and we're optimistic that it can be a growth story going forward.

Good to hear, thank you.

Your next question comes from the line of [Pear Oklin] with Jefferies & Company. Please proceed.

Good afternoon everybody, congratulations. Question, on executive distributors or I guess I should say distributors as a whole. By my reckoning, this is the best executive distributer growth in some time, at least going back a few years. I think in four of the five regions it looks like the trends in actives lagged that of executives. Just curious if that is mostly the economy at large? And then, secondarily, is there an opportunity here, as this new product story, as compelling as it is, as this story develops, is there an opportunity to go back and target and try to reactivate those people?

Our reckoning aligns with your reckoning and you're right. The executive trends are improving. We are also very pleased with the trend in the number of people who are qualifying to become executives. And that's really starting to be reflected most significantly in Japan where our turnaround efforts there are really paying off and we have more and more people coming in the business. I do think the increase in executives is reflective of the economic trends generally. Executives in our business are really the people who are joining the business to try to make some money. And the fact that the executive number is trending up is a good sign. And our revenue will continue to trend with that.

Maybe one other comment, too, to add to that, is that in order for us to really grow the business with the ageLOC opportunity launch, we have to grow sales leaders. And our focus over the last several months as we have been preparing for this launch is to really talk to that opportunity. It is a good indicating sign to us that we are seeing the executive number grow, and that will be the real telltale as to how successful the ageLOC product launch is and that is can we drive our executive number forward.

Related to Japan with the local currency trends improving there, maybe just qualitatively, can you update us on what exactly the restructuring in Japan entailed. Obviously we know that the impact is $0.13 to the bottom line but just what maybe one, two, three initiatives specifically have been undertaken to get that market aligned with how the other markets are behaving.

Yes, the restructuring in Japan, really at the highest level, entails aligning the Japanese business and growth initiatives in Japan with what is going on in the rest of the world. And so our management team there really has been formatting the business, leveraging all best practices from markets, from other markets around the world, and aligning our growth initiatives there with what is happening elsewhere, including alignment behind the ageLOC strategy and upcoming product launches. So one of the things we're doing differently in Japan from a top line perspective that is beneficial there, is that we are launching ageLOC in Japan actually slightly ahead of the rest of the world. We will launch the Future Serum formally in Japan in December as opposed to January. And I think, the Japanese leaders are very enthusiastic.

We have a large event scheduled for December where we anticipate having about 15,000 Japanese sales leaders there, really formalizing the launch of ageLOC in Japan. So at the highest level and from a top line perspective, Japan is aligning with the rest of the world. From a bottom line perspective, the transformation we've done there is really related to head count and to physical facilities and walk-in centers. Do you want to add to the bottom line?

I think that's about right. The cost is about a 12-month recoup. We picked up about $5 million of benefit this year and we will pick up another $5 million next year but essentially reduced our overhead infrastructure by about $10 million from our 2008 level.

Our forecast for the fourth quarter anticipates slight trend improvement in Japan. And, the real potential upside play to Japan is the fact that we are launching ageLOC a little bit ahead of the other markets, to some extent, in December. So there is some upside to our guidance there.

Excellent. That's very encouraging. Thank you.

Your next question comes from the line of Dieter Rickbash with Canaccord Adams. Please proceed.

Hi, thank you. At the convention, there was a group of distributors that were not able to get the ageLOC product, at least on the first day, and I am just wondering, did you have any kind of fallout because of that? And as you head into your global launch, are you adequately prepared on the supply situation?

Yes, it was a bit of a frenzy, and there were some disgruntled distributors, it is true, on the first day of convention. But our team went to work and we even had, believe it or not, spouses of employees, shrink wrapping product and working their tails off to fill demand for the product. It is fair to say that we did not fill all of the demand for the product at the event but we did succeed at making sure that everyone who came to convention was able to purchase at least one, and in most cases even two or more, sets of the ageLOC products. So by the end of the convention, we had managed, I think, to alleviate most of the angst associated with the first day of sales.

And I think from a supply standpoint, we're modifying forecasts and looking at that, based on their experience, but there is not a supply issue, other than the time frame, trying to meet the time line, that is out there.

Okay. When you look at your Asian markets, the ones that are growing double digits, would you say those markets are driven more by the product, or the business opportunity? And can you compare that to North America?

That's the age old debate with any direct selling company, I suppose, but the answer to that question is that our business moves forward based on the appeal of both the business opportunity and the product platforms. And it is really not one or the other, it is both working together, hand in hand. And the fact that the economic environment around the world is really ripe for business opportunity, and the fact that we have a very compelling product platform, combines to make for a good story right now.

Okay, thanks, and congratulations.

Your next question comes from the line of Mark Astrachan from Stifel Nicolaus. Please proceed.

Thanks, this is Donald standing in for Mark and actually all my questions have been answered already. Thank you.

Your next question comes from the line of Bret Jordan with Avondale Partners, please proceed.

Good afternoon. Couple of quick questions here, and one of them goes back to the convention retail volume. Do you have a feeling for what was done in the balance of the convention after the first day on ageLOC product? Were you able to get as much product as you went into it with to replace, from the first day's sell through?

We do have a feel for the sell-through at convention after the first day and we will be providing transparency on that number on our analysts day meeting on November 17. We just want to get through the month because we want to make sure that the excitement that we saw at convention was really incremental to October sales volume generally before we put a number out there that might get people excited.

Okay. And then at convention do you have a feeling for the demographic? Was there a particular region of distributer that was excited about ageLOC versus another? Did more products go into Asian consumption? I guess they were capped at two packages apiece for some of the export markets. Was there a feeling for any markets that were particularly strong in that category?

The reality is that we saw huge demand for the product from all of the regions. Japan, Korea, greater China, the Americas, and Europe, all very, very anxious to get their hands on the ageLOC products. Southeast Asia probably a little bit less than the other regions only because they will be bringing the product line on a little bit later than the other regions will. One thing we did learn in the product showroom is the Chinese and Koreans tend to be the most aggressive physically to get their hands on product. But the enthusiasm for the system is really global.

At some point during convention it came up that the margin on ageLOC is a couple hundred basis points higher. Was that higher than your aggregate gross margin or higher than a comparable skin care product gross margin?

It's really both. Well higher than our aggregate gross margin and about 200 basis points higher than what we would expect potentially cannibalized products.

Okay, thank you.

(Operator Instructions) Your next question is a follow-up from the line of Tim Ramey with DA Davidson. Please proceed.

Yes, Ritch, I think you said everyone got one or maybe two kits of the ageLOC. What is the price point there on these kits or however you termed that, I'm not sure.

Generally what we were selling, especially the last couple of days, was what we call the transformation kit which is one of each of the four products that we launched. The price on that is around $275.

All right. Thanks very much.

Thank you and thanks to everyone who has joined us today. We are very excited about the direction of our business. Probably in my experience, frankly, we have never had it quite this good, and the markets are lined up, and moving in the same and positive direction. And we look forward to a very successful fourth quarter, and a very successful 2010. We invite all of you to join us on November 17 at the Waldorf Astoria 9:00 to noon where we will go over an update on our fourth quarter plans and we'll also lay out our plan for 2010 and even a little bit beyond 2010. We look forward to seeing you then. Thank you very much.

Thank you for joining today's conference. That concludes the presentation. You may now disconnect and have a great day.