如新 (NUS) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the third quarter 2010 Nu Skin earnings conference call. My name is Kobe, and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Scott Pond, Director of Investor Relations.

Good morning, everyone. We appreciate you joining us on the call today. In the room with me are Truman Hunt, President and Chief Executive Officer; Ritch Wood, Chief Financial Officer; Dan Chard, President of Global Sales and Operations; Scott Schwartz, President of Americas and South Pacific; and Joe Chang, Chief Scientific Officer.

Just a quick reminder, 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'll turn the time over to Truman.

Good morning, everyone. We appreciate you joining us again on our today. As we've mentioned in past quarters, these really are the best of times for Nu Skin Enterprises and that is demonstrated once again in our announcement this morning of another record quarter.

As our release indicates, we generated revenue of $383.6 million which is a 15% year-over-year improvement and includes a 4% positive foreign currency impact. This yielded record third quarter earnings of $0.55 per share, an improvement of 38% over the prior year. Given our Q3 results and the trends we're seeing, we are again increasing our 2010 guidance and Ritch will talk to that point here in a few minutes.

Our continued growth can be attributed to three key factors. First with the ageLOC anti-aging platform, our distributors enjoy a very innovative and very compelling skin care and nutrition product line that offers consumers tangible benefits. Second, we provide an increasingly compelling business opportunity that is attracting more and more people to our global distributor ranks. And third, we're enjoying the fruits of our business transformation over the past several years with the efficient execution around the world.

The ageLOC platform is a game changer for our business as well as for the anti-aging industry. It's based on attacking aging at its ultimate source within the human genome in addition to battling the signs and symptoms of aging. Having now presented the ageLOC positioning for the past couple of years, it's really nice to see frequent validation of this concept appearing in many third party sources.

Over the past year and a half, we've successfully integrated ageLOC into our skin care line with the ageLOC Galvanic Spa System and the Transformation Daily Skin Care System. This powerful combination has now generated over $450 million of skin care revenue in the past four quarters. During the third quarter we took steps to take the battle against aging inside the body by infusing ageLOC science into our nutrition line.

We chose to focus our first ageLOC nutritional product on one of the initial signs of aging and a problem cited by 85% of adults as we age, which is the loss of energy. Our new ageLOC Vitality product is designed to improve three dimensions of vitality; physical vigor, mental acuity and sexual health. And unlike competitive energy products, we positively influence these physical attributes without using short-term stimulates like caffeine.

Just as we did on the skin care side of the business, ageLOC Vitality is formulated to reset gene expressions to a more youthful activity level in the gene clusters that are associated with energy. And just as with our skin care products, the use of gene heat maps verifies in our laboratory testing, that indeed we are successful in positively influencing the critical genes related to vitality.

In anticipation of our October regional conventions in the US, Japan, and Europe, we initiated a limited time offer of ageLOC Vitality in September, and we were very pleased with the distributor response and really the ground swell of excitement and demand generated at these regional conventions. Vitality not only appeals to a universal need, but it's also priced at a level that appeals to a broad consumer audience. At $50 a month, we enable consumers to significantly reduce their spend on the most common sources of stimulants.

One of the questions we frequently hear from shareholders is whether consumers really feel the difference of our nutrition products. This question is easily answered when someone starts taking Vitality, as consumers definitely are feeling the difference that Vitality makes to their energy level. Over the past few years, we've refined our product-launch process to harness the energy of our distributors and provide the biggest possible splash for new product introductions.

In the month of October which we just finished, we participated in distributor conventions in the US, Japan, Australia, New Zealand and we just returned from our European convention in Copenhagen this past weekend. So to our distributor leaders who may be listening in, a special shout-out and congratulations to you for making these events so successful.

I can tell you that the energy surrounding the introduction of ageLOC Vitality is just tremendous. Our distributors have become walking testimonials of the product and are enthusiastically sharing the benefits with everyone they know.

With the launch of ageLOC into the current economic environment, we're also seeing more and more people join our distributor leader ranks. The growth in our executive level of distributors is strong. And it's really rewarding to see the influence that this company is having at an individual level, in a world where so many people need the security and opportunity that our business offers.

In addition to the success we're generating with our products and our business opportunity, we're also operating more efficiently than ever and executing well throughout our markets. The 150 basis point improvement in operating margin this quarter is further evidence of our focus on efficiency.

Now looking at the business geographically, we're pleased with -- that each of our regions contributed to our strong revenue performance in the quarter. We're particularly pleased with impressive results in South Asia-Pacific, where local currency revenue grew 42%, South Korea which grew 20%, and mainland China which improved 29% during the quarter. As we continue to globalize best practices, we continue to see improvements in consistency and stability as we further expand our business around the world.

You'll also note that we reported a 2% decline in Japan. We're encouraged to see Japan continuing to trend the right direction. And though we have a difficult comp in Q4 because of the launch of the ageLOC Transformation Future Serum in Q4 last year, we're cautiously optimistic about Japan in 2011, where a return to flat to moderate growth would obviously have a tremendous impact on our results.

United States revenue growth improved 8% during this past quarter. The market is responding very well to ageLOC Vitality and we're also encouraged with the most recent quarter's results.

Overall, we're very pleased with our performance and confident that we're on pace to achieve another record year. As you know, we're now coming up against some difficult year-over-year comps, given the launch of ageLOC Transformation in the prior year. But given our strong product pipeline, our compelling business opportunity and our ability to operate effectively and efficiently in our markets, we see great potential for 2011 and beyond. We'll be discussing our 2011 initiatives and business plan and providing financial forecasts for 2011 at our upcoming analysts day, which will be held in New York on November 18.

With that, I'll turn some time over to Ritch to provide some details on the numbers.

Thank you, Truman. Good morning to everyone. The local currency revenue figures as a reminder for each of our major markets are posted on our investor relations website.

Overall, this was a very strong quarter from a financial standpoint. We continue to make steady progress in all aspects of the income statement and the balance sheet. Our focus is to drive shareholder value to improve margins and a strong balance sheet.

First a quick comment about foreign currency. We continue to benefit from a weaker US dollar, particularly against the Japanese yen. We've tried to forecast conservatively as we look to the future. We must admit, with the yen in the low 80's and many other currencies strengthening against the dollar, we've truly benefited this year. For 2010 we anticipate an overall benefit from currency of about 4.5% to 5%.

The Company's operating margin for the third quarter improved to 13.8%. This represents an improvement of 150 basis points, driven primarily by improved gross margin and lower overhead as a percentage of increased revenues. For 2010 we now project our operating margin to finish around 13.8% to 14%.

Our gross margin for the quarter improved to 82.1% or a 70 basis point improvement over the prior year period. The higher gross margin is being driven from sales of higher margin products combined with the positive benefit from foreign currency movements against the US dollar. We anticipate the gross margin will continue to be in the 82.0% to 82.3% range for the fourth quarter.

Selling expenses for the quarter were 42.3%. This is a 30 basis point increase from the previous year. The selling expense rate for the quarter increased from higher distributor compensation, including an increase in the number of executive distributors qualifying for certain incentives and rewards. We expect selling expenses to remain in the 42.0% to 42.5% range in the fourth quarter.

General and administrative expenses for the quarter were $99.5 million or 25.9% of sales compared against 26.9% of sales in the prior year. We continue to leverage our revenue growth and find efficiencies in our infrastructure as reflected in this continued trend improvement with overhead expenses.

Our tax rate for the quarter was 32.4% which is similar to the tax rate in the prior year, same quarter of the prior year. We finished the quarter with $198 million of cash and $145 million of debt. And during the quarter we paid $7.7 million of dividends and repurchased 399,000 shares of our common stock for $10.7 million. Just note that we continue to see stock repurchases as a good use of cash and as of September 30, we had about $162.6 million remaining in our repurchase authorization. And our outstanding share count for the quarter was 64.1 million shares.

Today we're increasing both our revenue and earnings per share guidance for 2010. We now project revenue for the year to be $1.52 billion to $1.53 billion. We also are increasing our expected earnings per share to $2.04 to $2.07. This modeling anticipates an operating margin to be in the 13.8% to 14% range for the year.

Now looking to the fourth quarter, we forecast revenue to be $388 million to $398 million with earnings per share of $0.51 to $0.54. In this guidance, we've anticipated a foreign currency benefit to revenue of approximately 1% to 2% compared to the prior year. And we're also forecasting our Japan revenue to show about a 4% to 5% decline in the fourth quarter as compared against the Future Serum launch, as Truman mentioned, in the prior year.

We expect our tax rate in the fourth quarter to be approximately 37% to 38% which is consistent with our historical fourth quarter rate and slightly above the 32.4% rate in the third quarter. With those details, we'll go ahead and open up the call now for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Doug Lane with Jefferies & Company. Please proceed.

Good morning, everybody.

Hi, Doug.

Can you remind us on two fronts, over the next four or five quarters, when these rolling launches of the ageLOC and the Vitality -- when it goes where? And also what your convention schedule looks like for the rest of this year and 2011?

First of all, on the Vitality launches, Doug, the original expectation for Vitality was to launch only in the Americas, Europe, Pacific, and Japan regions, and not then for example in greater China, north Asia or southeast Asia. Really at all. However, we are given the success of Vitality so far and the fact that it's creating a lot of positive buzz around the world, we're re-evaluating that position and we may push Vitality into some other markets. But probably not during the first half of 2011. It would probably be in the second half of 2011.

Otherwise, it's fully distributed at this point?

It is. You know how sometimes we do limited launches of products and we make them available only for short periods of time, or to certain people who qualify at various levels? That's still the case. In the fourth quarter of this year, we would call it still a limited launch, even in the markets where it's distributed, because it may not be fully available in Japan for example. Beginning in January, it will be fully distributed in all of the markets where it's available.

And then, Doug, just a quick response to your convention schedule. No more conventions here in 2010. Truman mentioned that we held four in the month of October which included, Japan, US, Europe, and Australia. And then our 2011 convention schedule, we'll roll that out and lay it out for you at our investor day on November 18.

Okay. And is the ageLOC skin care regimen fully distributed? Or are there still a couple markets for that to be launched in? Is that correct?

It's fully distributed with the exception of mainland China, where it will be fully distributed -- it's available now on a limited offering basis and will be fully distributed in Q1 of 2011.

Okay, thank you.

Yes.

Your next question comes from the line of Bill Schmitz with Deutsche Bank. Please proceed.

Hey guys, good morning. Did you say what ageLOC sales were both for skin and Vitality in the quarter?

Yes. We didn't put that on our release. Let me pull this up. For the ageLOC skin care products, it was $48 million, and Vitality was just a little bit over $15 million.

Okay. And that's consistent. If you say like in previous quarters, there was kind of like $25 million of pre-sell -- that was in each quarter for ageLOC. So maybe that didn't repeat this quarter? Is that why it's down a little bit sequentially?

That's exactly right. In fact, the prelaunch sales in each of the last three quarters starting in Q4 last year was about $17 million in Q4, $20 million in Q1, and $25 million in Q2. If you back that off, it's a very nice trajectory. We're very pleased with the $48 million here in Q3.

Okay.

And just to clarify, that $48 million is just Transformation, and not Galvanic.

Just the Transformation, that product.

Okay, great. And then on the timing of the China, the skin care launch. Are you assuming that it has to get pushed off to 2011? I know before there was some conversation about it probably getting done in the fourth quarter. But maybe it got pushed forward? Sounds like now it's probably going to get pushed forward? Is that consistent?

As we mentioned, it's available to certain distributors who meet qualification requirements. And this is just a preference of the China management team, frankly, to push off the full distribution of it into Q1 of 2011.

Okay. So it wasn't an approval issue?

No. It's primarily the way that the management team there is executing the business and as you can see from third quarter results, they're doing a great job.

Yes they sure are. Thank you very much.

Your next question comes from the line of Tim Ramey with D.A. Davidson & Co. Please proceed.

Good morning. Just to follow up on the last question. The Vitality sales -- that was just the month of September? Is that right?

That is right. Just the last half of September. And that was only for the US, Canada, and Japan.

Okay. And I guess I'm trying to think about how the business sort of settles in. Do you think the Vitality run rate can be -- approach the skin care run rate? Is that there's an awful lot of channel fill in the September quarter?

Well, I think that the way the product was launched in September, where it was taken off the market for a period of time, did inflate September sales a bit, Tim. And I would also note too, that at a $50 price point versus a close to $300 price point for the Transformation set, we obviously have to move a lot more units of Vitality to hit the same number as we do on Transformation sells. But what we're seeing is such a wonderful response to Vitality that frankly, we're honestly surprised on the up side with respect to what this product is doing. It's just -- it's speaking to a universal need. And as it turns out, everybody out there is tired and most of the world is jacking itself up on -- at Starbucks. And so this product is really off to a great start.

And last quarter you gave us an interesting statistic. I think you said only 36% of active associates had purchased ageLOC. Do you have an update on that?

We don't. But we will plan to go into a little bit more detail on the product, the penetration, so forth at our investor day on November 18.

Okay, and just a final comment. Would love to have you and your principal directional and competitor to work out timing schedules so we don't go the same time. Which we seem to continue to do. And it makes it difficult. Thanks.

Got it.

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

Good morning, everybody. I guess in terms of following up on some of the ageLOC products, could you talk a bit about the cannibalization rates of the existing business, in terms of both the skin care as well as on the nutrition side?

Right. Well, as you know, Mark, whenever we shine a spotlight on a new product, we're inevitably going to see some level of cannibalization of other products. I think that will forever be the case. But we're getting better and better over the years at minimalizing that degree of cannibalization. And in fact, it's been very encouraging to us over the course of the last year as the spotlight has been shining so brightly on the Transformation Skin Care System to see very little erosion of sales of LifePak, our primary nutrition product. The erosion of LifePak in the face of all the skin care attention over the last year has been minimal, like 1% to 2%. Right, Ritch?

That's right.

And so we will always see some degree of cannibalization, but we're getting better at minimizing it. Do you have anything to add to that, Ritch?

No. I think that's accurate. We did see--We'll see a little bit of shifting from kind of the key sponsoring products because people will start to sponsor new people in with the new products that we've launched. That's generally what we see. LifePak, the great thing about that is that it's highly subscriptive. Most of the orders, I think 80% of our LifePak sales come through a subscription right now. The more we can push our orders over towards subscription as well, the less cannibalization we'll see in the future.

Great. Do you have a sense of the $15 million of Vitality, how much was US, Canada, versus Japan?

It's about $10 million North America, $5 million to $6 million in Japan.

Great. And then in terms of thinking about the success of Vitality so far, certainly in thinking about launching it into markets you hadn't thought about launching it into. Does that change the thinking a bit on the alpha product, in terms of anticipated rollout there? Or can you do both at the same time?

We're thinking very carefully about how to go about this over the course of the next 18 months. And we will reveal our investor day an approach that we think enables us to really satisfy the demand for Vitality and also stay on track with respect to the alpha launch. We'll talk about that on November 18.

Great, thanks, and congratulations on a nice result.

Thanks, Mark.

Your next question comes from the line of Olivia Tong with Bank of America Merrill Lynch. Please proceed.

Thanks, good morning. First I want to talk about, you mentioned that you had originally planned Vitality only for a few select countries, why was that? And why have you decided to change that around?

I think the original plan, Olivia, was for Vitality to go into the Americas, Europe, Pacific region, and Japan. I don't believe that that changed, right? That was always the plan. What we're seeing now is that the success of Vitality is creating such a buzz around the world that field leaders in other markets are calling for it. And it's the possibility of rolling it out into additional markets that may be new in 2011.

Right. I'm sorry if I wasn't clear. My question was more why did you decide originally not to have it in greater China.

Oh originally. The strategy really is to just make sure that our sponsoring proposition, our recruiting proposition in each of our countries is vibrant. And as you know, because of logistic issues and regulatory issues, the introduction of products does tend to be staggered a little bit around the world. We didn't really need Vitality in greater China, in southeast Asia, in Korea, because the business there is already clicking along at such a nice pace that we just didn't feel a need to push Vitality into those markets at this point in time.

Understood. Are the margins on Vitality similar to the skin care?

No. They're very similar to our nutrition line margins but slightly below the ageLOC Transformation set.

Got it. And then switching topics, on gross margin, clearly another strong margin expansion year-over-year, but there was quite a bit of deceleration from the year-over-year expansion in June quarter to September quarter. Can you just give a little bit of color behind that?

We mentioned this a little bit after our second quarter as well. We had a big $25 million launch of the ageLOC Transformation set during the second quarter in greater China, where our margins are very strong. That pushed our margins a little bit higher than this 82.1%, low 82% is where we anticipate kind of holding in the next few quarters.

Understood. Thanks a bunch.

You bet.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Bret Jordan with Avondale Partners. Please proceed.

Yes, hello. This is Anand in for Bret. It may be too early to tell, but how much of the Vitality ordering is on a subscription basis?

Right now none is really on subscription. We're just starting that here in the fourth quarter.

Okay. And then just a little bit more on the rollout. What are some of the factors that you think have to fall in place before you decide to expand your rollout beyond the Americas, Europe, Pacific and Japan?

We need to see Vitality continue to enjoy great demand and yield great results from consumers. And we also need to make sure from a regulatory perspective that we can qualify Vitality for sale in each of our geographies. And those are really the primary factors.

Perfect, thank you.

Your next question comes from the line of John Faucher with JPMorgan. Please proceed.

Thank you very much. You talked a little bit about the sequential improvement in Japan and your modeling a little bit of a falloff in the fourth quarter, which I'm assuming is related to some of the introductory volume from last year. Can you talk a little bit about what you think you need to do from an execution standpoint in terms of getting to flat in Japan? And then, also as you look at the Americas comp in the fourth quarter, can you talk about how lapping the convention sales last year how we sort of model that in in the Americas piece? Thanks.

With respect to Japan, John, the keys are to keep our eyes on our distributor count and our executive count. And one of the reasons why we're encouraged with the prospects for Japan as we move into and move through 2011 is that we have those trend lines both moving the right direction. So we see our active distributor base growing sequentially. We see our executive distributor base growing. And those are the key factors.

A couple of years ago when we made our management change there, we decided to implement the same business tactics and strategies that are working so effectively everywhere else in the world, which had been a little bit ignored by our Japan management team at the time with them believing that things had to be done differently in Japan.

As it turns out over the last two and a half years now, we were right. What we're doing there is consistent with what we're doing elsewhere. We have -- we put our Korean general manager, Luke Yoo, over the north Asia region, which includes Japan. He relocated to Tokyo earlier this year. And the management team there is executing very effectively. And we see the key distributor number indicators trending in the right direction.

Then just to speak to the convention and the comparison, John. The US had about $17 million of sales at the convention, $11 million of which came from foreign distributors purchasing in the United States. So I think the best way to look on a comparative basis, the US sales is if you back out $11 million from the prior year, that will really give you a US distributor sales number. And we had expected--obviously last year there was a lot of excitement surrounding the launch of the transformation. So I think as we kind of look to model the business, it should be somewhere in the low single digit growth rate for the third quarter. Somewhere around maybe 2% to 4% or something like that for the fourth quarter.

Okay, Ritch, thanks. That's what I thought. And I guess wasn't a lot of that volume coming from Japan? And I guess doesn't that make the Japan comp maybe a little bit easier? And could we see Japan trends in the fourth quarter more in line with what we've seen the last quarter or two, as opposed to getting a little worse sequentially?

As we looked at Japan, they also launched -- it wasn't as much buying as we typically see from Japan because at the same time, we launched the Transformation Future Serum there in Japan, the same time we had the global convention here. That off set a little bit. And if you look at our trends last year, where as we were trending down 6% and 5% in Q2 and Q3, we were actually down only 1% in the fourth quarter of last year. That's what we're comparing against. We were down 2% here in the third quarter. We think that'll move kind of down 4%, to 5%. But then should return into the lower single digits as we start the year 2011.

Okay. Great. Thanks so much.

You bet.

Your next question comes from the line of Mimi Noel with Sidoti & Company. Please proceed.

Hi, everybody.

Hello, Mimi.

Just one question also on Japan, obviously, it's been awhile since we've seen that business grow. And I'm trying to re-familiarize the sensitivity of growth there to EPS. Can you provide me with any contacts like that? In your prepared remarks you do talk about a tremendous effect on the results that a resumption of growth in Japan could lead to.

Yes--That's -- as we model it out, we'll be down around 3% for the year for 2010. And it makes up about 30% of our business. As you look first of all, the top line, let's assume that business were to go flat. That would pick up somewhere around a 1% benefit to the top line growth number for the Company. Japan is our most profitable market. Any growth at all coming out of Japan is going to be very beneficial to our overall outlook. To model it exactly to earnings per share, I don't necessarily have that. But I think with that guidance on the top line, you can push it down through our operating margin numbers.

Okay. All right. That helps. And the only other question I had was about the latest interest expense in the quarter. It doesn't look as though it was at all affected by strengthening in the yen for market-to-market year yen for denominated debt. Is that accurate? Were there offsets in place there?

Yes, there were just offsets in place, Mimi. We had some gains that we picked up with the euro and with the Korean won. We had some dividends and so forth that we had waited to send out because of weakness in earlier quarters that we then brought back in the third quarter. So that was able to offset some of the impact of the strengthening of the yen on our debt.

Is that typical or is the second quarter dynamic more typical where you suddenly saw a $7 million interest expense?

We try our best to offset them as much as we can. Obviously things worked out a little better for us here in the third quarter than they did in the second quarter. I think normally, we would have had kind of a $3 million to $4 million loss in the third quarter. But we were able to offset it against these other benefits.

Okay. That's helpful, thank you very much.

At this time there are no further questions appearing in queue.

Great. Let me just conclude by saying once again that it's a great time to be associated with Nu Skin Enterprises. We're really firing on all cylinders and generating terrific opportunities for our distributors and our shareholders. We look forward to seeing you at our upcoming investor day on November 18 and sharing our plans for 2011 and beyond. Thank you for joining us today.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.