如新 (NUS) 2013 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Q1 2013 Nu Skin Enterprises, Inc. earnings conference call.

My name is Ian. I will be your operate for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of the conference. (Operator Instructions).

And, as a reminder, this call is being recorded for replay purposes. I would like it to turn this call over to Mr. Scott Pond, director of Investor Relations. Please proceed, sir.

Thank you, Ian. We appreciate you joining us this morning on the call. Today in the room we have 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 reminder. During the call, comments be 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 complete discussion of these risks. And with that, I will turn the time over to Truman.

Thanks, Scott. Good morning, everyone. As indicated in our release today, we're off to a great start in 2013.

Posting another record quarter exceeding guidance for both earnings and revenue, and substantially increasing our forecast for the remainder of the year. During the quarter, we generated revenue of $550 million, a healthy 19% increase with local currency revenue increasing by 22%. We posted earnings-per-share of $0.90 and 22% year-over-year increase, and well ahead of expectations.

Given these strong results, as well as the momentum we're seeing in the business, our revenue guidance has increased by $190 million for the year despite a more significant currency headwind than we had previously anticipated. Ritch will provide details on the increased guidance in a few minutes.

We believe that our sustained growth is a reflection of three primary factors. First, we remain committed to introducing innovative anti-aging products that provide compelling results to consumers. We introduced the ageLOC product platform in 2009 with the goal of focusing on the sources of aging in and not just on the signs and symptoms of aging.

Our understanding of the science of gene expression has played a significant impact on the formulation and development of several ageLOC products to date, and our product development team continues to produce innovative products that produce results. We're on track to introduce an ageLOC weight-management system this coming fall.

We'll announce the name and details of this system next week in connection with our annual trip with our global sales leaders. So today we're still talking high-level a bit about this product, but the system is designed to enable consumers to transform their body composition in 90 days. It includes four proprietary nutritional products, a simple science-based eating plan, as well as lifestyle suggestions to help consumers reach their goals.

Our research shows that many, if not most, weight-loss programs focus on maximizing pound lost whether that weight loss comes from fat or from muscle or both. We're focusing our system on healthy overall body composition, on maintaining lean muscle while promoting healthy overall weight loss. So our objective is to burn fat and -- and retain or even build muscle.

Now, that's not easy to do, but we've been pleased with the results that we are seeing in our clinical tests of this system, and we think that our sales force is really going to enjoy taking this program to the marketplace this fall. Our new guidance for the year anticipates $350 million to $400 million in sales of the weight-management system, including the impact of cannibalization of other products which is typical in connection with new product launches.

We're also continuing development beyond weight management. Our sites are clearly focused on our weight management loss launch and will be for a couple of years, but I'm really pleased with the development of our product pipeline, which remains robust and compelling. Weight management is going to be a very large category for us, but I believe that the launches that will follow are in our launch cycle following weight management will be even more impactful.

The second factor enabling us to sustain growth is our ability to continually renew the appeal of the business opportunity we offer. We believe in the power of our channel. Person-to-person selling continues to be an effective way to educate consumers.

And while the majority of people who join Nu Skin as consumers, we work hard to provide a compelling opportunity for those who are interested in a full- or a part-time business. To enable us to align our efforts with our sales force efforts we continue to refine an innovative business cycle that helps our sales leaders leverage our product introductions to both grow their consumer groups as well as their sales networks.

Our product launch process consists of a two-year cycle where we offer products in limited quantities during LTO's or limited-time offer windows. And after educating our sales leaders about upcoming products months advance, we then offer the new products, aimed at increasing both our sales leaders and our actives. We first do this globally doing our biannual global convention and follow up throughout the following year with regional LTO events. This process primes the pump for the official launch of new products for general sale in the following months.

So we continue to refine this process to better enable our sales leaders to build the business during each product launch phase. We have seen the LTO's grow in size, and we're now ramping up for another global LTO in the second half of this year with the ageLOC weight-management system. And if you keep track of Nu Skin sales leaders, you're going to hear numbers even higher than what we have articulated this morning. And in our sales leader trip next week, we'll be talking in terms of a $600 million target in gross sales of the weight-management system.

As I mentioned, our forecast of $350 million to $400 million in net revenue benefit will still be our largest product launch by a wide margin, and will obviously positively impact results in the second half of the year.

The strength of these launches is also a tribute to our large and growing sales leader base, highlighted by the 32% increase in sales leaders globally in the first quarter. Our sales leader count is now at an all-time high of over 54,000 leaders around the world, and as I meet these folks around the world I can tell you that these are highly energetic and very capable people who are doing a great job of taking the Nu Skin message to the world.

The third factor that is enabling us to sustain growth is the that we're enjoying strong trends in important markets. In the north Asia region, we're again encouraged by a 13% local currency growth in Japan in the first quarter. That first quarter result marks the third consecutive quarter of year-over-year growth in Japan, and we believe that we will continue to see growth there for the balance of the year.

The initiation of the business cycle that I just referred to is what has been key to renewing growth in Japan, which, as you know, has been our largest market for many years. South Korea continues to also perform well, up 9% for the quarter. I was just in South Korea last week, and continue to be impressed with the local leaders there, as well as our Corporate Management Team.

Today's updated forecast reflects even stronger growth in South Korea throughout the remainder of 2013. We also continue to grow at a very strong pace in greater China. During our tour of Asia last week, we were with about 4,000 sales leaders in the greater China region. And I can assure you that these are highly excited and very motivated people who continue to grow the business in this dynamic part of the world.

Despite our growth in China, we're still many times smaller than the leading competitors and, in fact, still not yet even among the top ten companies in our space. So we have a lot of room to continue to run in that market. We continue to be confident in the direction of our business in South Asia-Pacific. We face a tough comp in the first quarter that, excluding last year's LTO sales volume, that rolled from the fourth quarter of 2011 into the first quarter of 2012, sales in the region would have been up about 8% over the prior year.

We would also encourage you to remember that our Q2 comp in South Asia this year will be difficult due to the very large LTO in Q2 of last year. The Americas posted a 15% increase in Q1 over the prior year. Latin America is becoming a more meaningful component to this region's results, which is encouraging as we look to expand our presence in this important direct selling market.

The US is still enjoying good growth despite the fact that we have not been able to import the Galvanic Spas for some time until we complete the registration [inaudible] which is ongoing. Now, we knew coming into the year that the first half was going to be difficult. And as much as we were up against huge LTO events in 2012, but the first half is shaping up to be stronger than we anticipated and the momentum of the business is enabling us to post growth even in the face of difficult comps in the first half.

This is going to lead to a very strong second half of 2013. And with that, I will turn the time over to Ritch.

Thank you, Truman, and good morning everyone. We are certainly pleased with the overall results of the first quarter and our start to this year in 2013.

The Company's operating margin for the first quarter was 15%, which was in line with previous guidance and slightly lower than the 15.5% operating margin reported in the same period of the prior year. We're investing behind a number of initiatives to support the growth we anticipate in the back half of this year and beyond.

As previously guided, we expected operating margins to be approximately 15% in the first half of the year with stronger margins in the back half of the year as we execute our product LTO's. We continue to feel that we're on track to reach our target of about 16% operating margin for this year.

Our gross margin for the quarter was 83.6%,even with the prior year and we feel positive about this, as we have been successful in maintaining our gross margin in the face of a currency headwind which causes a slight negative impact to our overall gross margin. Selling expense for the quarter were 44% compared to 43.8% in the first quarter of 2012.

Both of these quarters included very little LTO volume, so our base compensation plan paid out consistently in both periods. The slight increase in the current year relates to the additional accrual that we're making in greater China as we move closer to the incentive target to reach $1 billion in revenue in the region by 2014. It's possible that we could reach this target before this date.

My model currently has greater China at approximately $920 million in 2013. We increase our accrual as sales approach the billion dollar target, and we're currently accruing at a rate which assumes we are on track to achieve this target as early as 2013.

General and administrative expenses for quarter the as a percent of revenue were 24.6% compared to 24.3% in the prior-year period. We anticipated this slight increase as we invest behind initiatives meant to support the business growth we're seeing and anticipating. Specifically, our R&D expenses increased due to clinical studies relating to our weight management products as well as an increase in development expenses relating to products currently scheduled to launch in 2015.

In addition to that, our promotional expenses were higher. These were planned promotion expenses built around strategic brand-building efforts in both China and Japan. Our tax rates for the for the quarter was 34.4% compared to 36.5% in the prior year.

We are permanently reinvesting a portion of our foreign profits, which is lowering our tax rates slightly. And we anticipate this tax rate of about 34.5% holding for the balance of this year. During the quarter, we paid $17.5 million of dividends and repurchased $14.6 million of our outstanding shares. Our stock repurchase authorization was approximately $121 million at the end of March 2013. This morning, we updated our quarterly and annual guidance.

Let me first address our Q2 guidance, and then I can give a bit more detail on our thinking around our 2013 numbers. As you know, in the second quarter of 2012, we reported a very strong quarter driven by significant LTO sales in South Asia and greater China.

Our revenue growth rate in the prior year was 40%, and reflected LTOsales of $140 million, again, primarily in greater China and South Asia regions. Our previous guidance for this upcoming second quarter indicated that our revenue and constant currency would be down somewhere around 8% to 10% against this difficult comparison. Given the strength of our business, we now see constant currency revenue for the second quarter flat to slightly positive compared to the prior year.

We expect currency to negatively impact revenue by 3% to 4%, and therefore we see our revenue in the $570 to $580 million range and we expect our operating margin to be slightly above 15%, and anticipate earnings-per-share to be in the $0.91 to $0.95 range.

The uphill volume in the second quarter of the previous year will also impact market comparison. For greater China, which reported growth of approximately 150% in the prior year, we forecast single-digit growth in this upcoming quarter. For South Asia, which reported a growth rate of 66% in the prior year, we estimate sales to be down, around 30% to 35% in the second quarter.

We also significantly increased our 2013 guidance this morning, and here are a few key factors impacting our modelling for the balance of this year. First, as you are all aware, currency has continued to move against us, primarily with the Japanese Yen and the Korean Wan. I have adjusted my modelling to reflect the yen rate to the Dollar of 100 for the balance of the year. And the Korean Wan rate of approximately 11.40. These adjustments negatively impacted our previous annual guidance by another $35 million.

Fortunately, we exceeded our first quarter guidance by approximately $40 million, which essentially offsets the impact of that currency change. The net increase to our guidance is $190 million on the upper end of the range and $210 million on the lower end of the previous range. The increase is spread throughout the balance of the year, with about one third in each of the quarters remaining in 2013.

We now forecast our weight management LTO to generate sales in the $350 million to $400 million range. Also, we have increased our expectations for sales in north Asia and greater China, as both regions are tracking ahead of plan so far this year. We now project revenue for the year to be in the $2.51 billion to $2.54 billion range with earnings-per-share in the $4.18 to $4.30 range.

This guidance assumes a negative impact from currency of 5%, or more than $100 million to revenue, and estimates constant currency revenue growth for the year around 20%. And this is especially impressive on top of the 24% growth rate that we reported in the prior year. We continue to see operating margins for the year in the 15.8% to 16.1% range, which is consistent with our prior guidance.

Now finally, let me just share a few thoughts that relates to creating shareholder value. Over the past ten years that Truman and I, and our current management team have managed this business, we have been highly focused on generating long-term shareholder value. And this remains our Number One focus today. In order of priority, we believe that we can increase shareholder value by three key areas. Number one, and top priority, driving long-term sustainable growth in our business. That is both on the top and the bottom lines.

We have made difficult decisions in the past, and will continue to do so as we go forward to strive to achieve the results we believe are possible. We have made management changes when necessary. We executed a very successful transformation effort, and we have aligned our management team with performance-based incentives that has been highly effective in aligning our management around the world. Generating sustainable growth in the future will remain our top focus.

Secondly, we have returned cash to shareholders through increasing our dividend, which we have done every year since the dividend was initiated over ten years ago. We recently raised the dividend by 50% in this current year.

And finally, we look for opportunities to utilize excess cash to repurchase shares in the open market. We believe this is a great use of our cash. We have been even -- we have even used our balance sheet when we felt that it was appropriate, such as last year when we borrowed $100 million in Yen-denominated debt and used this to repurchase shares. In fact, last year we repurchased about $200 million of our outstanding shares, or 7% of our float,which positively impacted EPS this quarter and will for the rest of this year.

While we do not discuss the specifics of when and why we are in and out of the market, we do believe that share repurchases are a great use of our cash. I like our position. I like our product pipeline. I like the growth metrics we're seeing in the business. I like the growth in emerging markets and the stability we see in our mature markets. I like our balance sheet, and I like our chances at successfully generating shareholder value as we continue to move forward. And with that, we'll go ahead and open up the call now for questions.

Thank you, sir. (Operator Instructions). Our first question comes from the line of Olivia Tong at Merrill Lynch. Please go ahead, Olivia.

Thank you. I want to talk through the sales and EPS increase and just get a better understanding of what drives such confidence for such a big increase, particularly in China.

Yes. Thanks, Olivia. As you know, we continue to try and be careful in our guidance. That is our policy.

So even as we come out with these numbers, we try and look at what's happening with the underlying metrics of the business and forecast out. The big question mark in my mind is what happens with the weight management launch, and as Truman indicated, our sales leaders have a high expectation for a successful launch.

We've dialed back the guidance that we provided from the number that they would anticipate doing. But basically, if you look at the key indicators in the greater China region as well as the rest of the world, those indicators in both the growth in our sales leaders, as well as our active base, which crossed over a million actives in the quarter for the first time in our history, point us to a position where we can be, you know, take those numbers up and be a little bit more confident in continued growth into the future.

Maybe if I could follow up. Can you talk about what's sort of the driving the distributor growth? Are there any new criteria to calf for access to the LTO later this year?

No. There are no particular new qualification requirements, Olivia. It's just a rising tide of business globally that's lifting both the sales leader number, as well as the active number. And, in fact, if you go back and chart the quarterly growth in sales leader since the beginning of 2011, on just the sequential quarterly basis, you will see that there's been a -- a very nice and strong escalating growth rate in that number for a couple of years now. And that's just raising the tide of the business globally.

So, in your mind, if ageLOC, the original transformation product, is that just gaining more penetration amongst your existing users? Are they getting out to more -- more distribution? Maybe if you could go a little bit further into that.

Well, yes. As I mentioned in my remarks, Olivia, there are several factors that contribute to our ability to sustain growth, and ageLOC is certainly one of those. And the continual renewal of the business opportunity through the product launch process is also a key component of that.

So it's -- it's not only the product ammunition itself. It's the way that we're using it and the fact that we're aligning better with our sales leaders globally as we go into these product launches that is making the -- the products all the more effective in enabling us to grow the business.

Got it. Thanks. And then you guys mentioned strategic brand building initiative in China and Japan.

That's the first I've heard of that. Can you just elaborate on what specifically you're planning to do?

Yes. Actually in the last part of 2012 and going into 2013, we have done some things that are a little bit out of the box for us. Trying to explore ways for us to build the brand and build consumer awareness and create the brand image that we seek to create globally. And so, for example, in Japan in the fourth quarter we -- we opened a Nu Skin products store in the Ginza shopping district of Tokyo. And this is not a long-term commitment on our part.

It was a -- it was a temporary effort to just measure the impact on -- on product sales and on brand image through that kind of an initiative. And so, that's not an expensive proposition, as you might imagine, to open a store in the Ginza district, but a very interesting experiment for us. One that had positive results and was very encouraging in the sales force as they enjoy those kinds of initiatives, and so that's and example of what we did there.

Similarly, in China the -- you know, we already have a retail store infrastructure in China which we're upgrading on an ongoing basis. But there the brand building efforts in particular are also related to participating in humanitarian relief for episodes such as the earthquake which recently hit the Sichuan province again. We always are happy to jump in and help with relief efforts to the extent we can, and some of that runs through the G&A line as well.

Thanks. And then, lastly, I just wanted to touch on sharer [inaudible] the comment that you made there and know that you have a couple of investments that you're doing right now, whether it be the CapEx for the headquarters or building ahead of the launch. But after that are there any initiatives that are particularly pressing on cash or, so how should we think about share purchase once these investments sort of die down?

Good question, Olivia, and our CapEx will drop significantly after the -- you know, the balance of this year. So even into 2014 our CapEx will come down to a much more -- more reasonable number. You know, probably in the $60 million range or so going forward.

So yes, it's primarily the pinch is -- I would say the next two quarters as we build the inventory. Once we come through the LTO, you know, the cash comes in very, very strong the latter part of the year.

Thank you for your question. With another question for you. This one is from the line of Tim Ramey at Davidson. Please go ahead, Tim.

Good morning.

Good morning.

Ritch, you said you're anticipating pretty close to the $1 billion sales level this year in China. I'm going to assume that that means that you will have completed your accrual for the bonus this year. Can you remind us what that accrual might have been in terms of the impact on this year's P&L? And, as well, what's the status of the Southeast Asia bonus objective of, I think it was $500 million in sales?

Yes. Yes. Thanks, Tim. As far as it relates to China, this initiative was announced back in 2010 with a total investment or a total spend on the initiative of about $30 million. And we've been -- we started accruing back then as certain sales leaders reached target. And as we get closer to the $1 billion, we have scaled that up.

The current year, if we were to hit $1 billion, which, again, would -- would be $80 million higher than what I have in my current guidance for this year, the total spend related to this initiative in the current year would be close to $20 million or a little less than 1% of our global sales for the year. That would be the quantification of the impact this year.

Southeast Asia, on the other hand, is tracking not, not quite as, as fast on track with their schedule. And it's a much smaller amount that's in the, you know, total incentive payout so that one's really immaterial to the overall numbers.

So should we assume that there will be some other new and exciting incentive in fiscal 2014 or is this a little bit of a discontinuity in terms of selling expense or G&A expense when we get into 2014?

Well, I think for 2013, it's certainly going to be higher. Our objective -- I think our learning has been that incentives that align our management teams and our sales forces are very, very effective. So we would anticipate obviously if we achieve this one that there would be consideration for another incentive. Just as with our management team, we have used performance-based stock options and our next big target really is $4 per share from management.

We would anticipate continuing forward with and incentive. Now, 2013 is going to be a little bit higher, I think, in terms of the expense because we're tracking towards this next target a lot faster than we had previously anticipated. So that accrual steps up as the achievement of the target becomes more realistic. So I think it will come down slightly as a percentage in 2014, but the likelihood of putting a new incentive in place is very high.

That's a good thing. And does it look likely that the southeast Asia bonus will accrue by -- by fiscal -- I think it was -- is it by 2015 that it has to happen?

Yes it's by 2015, and it's $0.5 billion. We're looking at somewhere around $300 million this year, so there's still a pretty good upswing, but don't count -- don't count southeast Asia out. I think there is a likelihood that them move towards that target.

Thank you so much.

You bet.

Thank you. And we have another question for you. This one is from the line of Bill Schmitz at Deutsche Bank. Please go ahead, Bill.

Good morning, Truman and Rich.

Morning.

I definitely want to put this nonsense behind us but can we just talk about the US? I know it's only 14% of sales, but any FTC conversations recently, and then herbal life talked about some non-recurring charges as some of this stuff kind of boiled over. Was there anything in the quarter expense-wise that you guys had to spend to communicate and educate people on your business model?

You know, in our case, Bill, we -- we would not attribute any material SG&A to that issue in Q1.

Okay. And how about any, like, recent color from the FDC? Like I said I think it's total nonsense. But have they given you any comfort, or has there been any conversation at all recently?

Yes. I can understand why people would be interested in an answer to that question, given the environment that we've been living in for the past year. In our case, you know, our inclination, Bill, is not to provide updates on that question because, frankly, we don't want to have an obligation to update going forward.

Okay.

But I think that -- I think that the environment is mellowing from what we can tell.

Okay. Great.

And then, obviously, it was an amazing blowout quarter, but there's only about $14.6 million of repurchase in the quarter. Were you tempted to buy back more at any stage, especially as you saw things ticking to the upside?

Yes. I mean, that's also an issue that is -- is an issue that we discuss regularly at the Board level. As Ritch indicated, our priorities are to invest and continue to grow the business, continue to pay a strong and increasing dividend, and third, to use our balance sheet to repurchase shares and build shareholder value.

It's -- it's just difficult to discuss openly with the market the whys and the whens of when you're in out of the market or when you're in the market. And so we will choose not to do that, but I think our track record would say that we're of a disposition to want to use our financial strength to create shareholder value, and that will continue to be and objective going forward.

Right and than a couple housekeeping questions. What was the subscription level in the quarter?

57% was subscription loyalty program sales.

Got you. So that keeps ticking up. Right? I mean it was.

Yes.

Great. And then lastly, have you thought longer-term what the right payout ratio is on the dividend?

We have -- Bill, we have discussed this actually at length with our Board who has their fingers well into these discussions and I think longer-term would like to be at about a 30% payout ratio of our free cash flow. So we're a ways from that still today. That's why we've kind of stepped up the increases that we're doing on and annual basis, but it still leaves us room, I would say, to be aggressive in the upticks on the dividend going forward.

Got you and you could easily do that with US cash flow, right? So there's no repatriation issues or anything like that.

Yes. Generally, we repatriate most of our cash from around the would anyway. That's why our tax rate remains fairly -- fairly up there so there wouldn't be, you know, any -- any hindrance to that direction that I just talked about, given the strategy that we used today.

Okay. Great. Thanks very much, guys.

Thanks, Bill.

Thank you very much. We have another question for you. This one is from Rommel Dionisio, Wedbush Securities. Please go ahead.

Yes. Good morning. Thanks.

Hey Rommel.

Could you just update us on how the Tru Face Essence Ultra launch ageLOC transpired in the United States? I think you mentioned it beating your expectations in Q4. I just want an update on Q1. And given the success that you have seen there initially, does that make sort of -- make you rethink the possibility of taking some additional products and combining them with some of the ageLOC technology and bringing that to the market as well, both in the United States and overseas?

Yes, no doubt about it Rommel. I think we have felt very pleased with what has happened. This is an existing product that he have with' been selling for some time, generated in the US as we actually rolled the product out for availability in the first quarter. About $4 million in revenue and I think our True Face Essence sales in total were about $14 million for the quarter. So as we look to actually roll out that latest innovation into this product around the world we think that product becomes more effective.

It likely won't be the key sponsoring product that will highlight in this LTO phase, but rather be kind of and addition to our current pipeline, which we're constantly doing with a number of products through our portfolio. Updating, refreshing and so forth. So, yes, we are encouraged by it. It's one more arrow that we can pull out of the quiver and shoot, and we expect to do that, I think, in the other -- in the foreign markets going forward, as well.

And, Rich, would that be true also of supplements as well as of skincare?

Yes. Yes. What we don't want to do is distract from the key initiatives, these -- as Truman mentioned, kind of these cycles that we have going. So we'll be cautious to kind of make sure anything we're doing is seen as incremental and not distracting to the overall business cycle that we've got in place right now.

And applying ageLOC's science to the existing product portfolio, Rommel, has always been part of the strategy. If you go look and look at, in particular, the [inaudible] that we've shown in the last couple of investor days. And not at the bottom of that, that part of the strategy has always been to apply ageLOC to existing products. But that is more realistic and more available, frankly, on the personal care and skincare side of the equation than it is on the nutrition side.

Great Thanks very much.

You bet.

Thank you. We have another question for you.

This one is from the line of Frank Camma at Sidoti & Company. Please go ahead, Frank.

Good morning.

Hi, Frank.

Just quick clarification on the guidance. Does that include -- I wasn't clear. Was that including repurchases or [inaudible] repurchasing.

You know, because we don't give a lot of guidance on repurchases we've elected to not include repurchases in the guidance going forward. So I still have a $61 million, approximately, share count in my forecast that pushes EPS to about $4.30. So, obviously, that will be impacted by our decisions to be in or out of the market.

Great. Can you -- I know the weight management product is going to be rolled out in Q3. Can you let us know a little more detail on a region basis how that works? I mean, I know you have the international convention, but does that impact all regions or is it -- you mentioned the incremental revenue would be in the third, but can you give us a little more detail on the regional level?

Yes. We'll update this, Frank. It's a great question. We'll update this in the end of July when we give our Q2 earnings because we'll have and actual nailed-down list.

As it looks right now, based on the progress of registration and so forth, greater China for certain will go in September and southeast Asia will likely also go in September with the balance of the world launching the product I think October. There is some question in southeast Asia still, probably, on the exact timing, but that's the way it's looking as of today.

Thanks. And have you announced a pricing for the product?

We have not yet announced final pricing for the product, no.

And just a final question, if I could, on the anticipated launch in Brazil next year. I was just wondering. Could you give us just lessons you may have learned from being there in the past? What you anticipate when you re-launch?

Well, Brazil as you know, Frank, is a very important and large top-five direct-selling market.

Right.

We gave that market a shot, and, actually, it is the one market in the world that we closed several years ago after having struggled there for several years. We have not yet announced publicly any plans to re-enter the market. It would be fair to say, however, that we are definitely evaluating a potential re-entry into the market, and I think it likely that we will give you an update on that topic, probably, at our Investor Day in November of this year.

Okay.

Great. Thank you.

Thank you, Frank.

Thank you, Frank. We have another question for you. This is from the line of Scott Van Winkle at Canaccord Genuity. Please go ahead, Scott.

Hi. Thanks, guys. A few questions. First, Rich, on the selling expense you talked about the comparison being relatively flat year-over-year because of the LTO last year.

Is that the primary driver of when we see the uptick in selling expense, these LTOs? I kind of thought it was the executive distributor growth was kind of driving the higher selling expense. And we saw very strong again in Q1, and I would have thought that that growth rate maybe the selling expense would be even higher than what you reported.

Yes. Certainly the larger growth in the -- the executive base does push the selling expense up a little, but the primary driver is the LTO's, and what happens is you're pushing a lot of volume through the same number of executives. It pushes their group sales volume up, which is one of the determinants on the percentage payout on their group sales volume. So the primary driver to an increase in the overall commission expense is the LTO.

So we will expect to see that in Q3 and Q4. Our selling expense will jump up probably even into the 46%, 47% range for those two quarters, depending upon the size of the LTO. The other impact is -- is there, but it's actually fairly consistent right now year-over-year. So although it's a little bit higher than it was, you know, two years ago, it's fairly consistent with what we are seeing a year ago in terms of driven by the growth in sales leaders.

Great. And you know I certainly appreciate you want to wait in the Q2 report to talk about the Q3. Following up on the question about the timing of launches in greater China and southeast. If we think about a September launch, is the majority of the LTO volume for those two regions going into fall into September or -- I'm just wondering kinds of the mix there.

No. It will. The vast majority will all be shipped out at the time that the product is sold in September. So Q3 is going to be a really -- a really fun quarter to report, we anticipate.

Okay. And then inventory. How -- how much does that build, you know, into Q2? I would assume it would peak in Q2 if you're going to be shipping in Q3.

Yes. That's exactly right. It will need to be basically in market by the end of July for that September launch.

So you will see it push up in Q2. You will see it drop way down in Q3, and kind of finish and stabilize back to where we were in Q4. I would mention, though, one other thing.

We will follow-on this global LTO, which has been our focus obviously, that we've talked about for the last little while with regional LTO's that will then kick off in the beginning and middle part of 2014. We expect those to be significant as well. So, as soon as this wave hits in September, October and we move through that product, we will be in process of building the next wave of inventory for the launches is in 2014 as well.

So the inventory balance will come down some, and then build up again as we come into the beginning of 2014. 2014 should be a really strong year, as well, as we roll these out with our regional LTO emphasis in that year.

And then just lastly, Rich, the accrual in greater China. Is that in selling expense or G&A?

No it's actually in selling expense.

Great. Thank you.

You bet.

Thank you for your question. We have another question for you. This one is from the line of John Faucher at JPMorgan. Please go ahead, John.

Thank you. Ritch, I was just wondering. I got most of it, but can you go through the China guidance for Q2 again? What you're thinking from a revenue standpoint given the comp on the LTO last year?

And then, continuing on the China theme, sort of can you give us an update in terms of where you stand with licenses with the Chinese government, and sort of discussions you are having with them about potentially continuing to expand the business there? Thanks.

You bet. So I have greater China at being -- well, let me jump back to last year. We had a quarter that went from essentially kind of a run rate of $90 million to $100 million to $200 million in the second quarter of the last year with the LTO, which was almost $100 million.

This year, I'm looking at about $200 million or a little bit more than $200 million for the quarter. So I show a mid-single digit growth rate this year compared to last year in greater China. As it relates to licenses and things like that, there's really no update there.

We don't control that timing. We have a number that are in process and we will announce those as they come through, but we really don't have an update as it relates to when that timing would be.

Great. And then -- got it. And then one sort of final question here.

You guys said the Korea numbers continue to generally look good. We continue to hear from other companies not using your sales channel that things are tough in Korea. What is it about direct sales that seems to be working in Korea right now?

Yes. That's a great question and we were in Korea Thursday, Friday, Saturday of last week. Had our annual convention there and hosted about 10,000 sales leaders. And I can tell you from the tenor and tone and temperature in the convention hall you never know that things are stagnant from a consumer perspective in Korea.

I think that it's a combination of our management team executing very effectively there. We have great sales leaders in the market, I mean really phenomenal sales leaders who are doing a terrific job of executing against these product launches. And I think they are disciplined in the way they execute is a large part of their ability to continue to grow the business at, you know, very healthy growth rates now for well over a decade in that market. Korea continues to be a model for us. We continue to export best practices out of that market and into others.

In fact, you may recall that our Korean general manager we actually put over in north Asia about two years ago, and he is a large reason why our Japan business has turned as they have started to execute the product launch process, product launch cycle in Japan as well. So think it's just great ammunition and disciplined approach to execution that's enabling us to get through a tough economic environment.

Great. Thanks.

Thank you, John.

Thank you. We have another question for you. This one is from Mark Astrachan at Stifel. Please go ahead, Mark.

Yes. Thanks and good morning guys.

Hey Mark.

Latin America. Can you give us a little bit of color on what drove the growth, and which countries are the product or sort of combination.

Yes. We are see seeing actually surprising growth to us in Venezuela, Columbia, both doing very well. Mexico continues to do okay, still small markets given the total global framework and picture of things, but Latin America is a region that we -- that we need in the future, certainly, to reach our potential. And we're very pleased to see growth in those markets, and to see a lot of enthusiasm for the future so, you know, we -- those markets are really growing based on internal momentum on the ground in those markets. And almost without a lot of corporate attention or corporate effort being focused on them, which I think as great sign because it just speaks to the fact that our products can still resonate in that environment and -- and that the viability of business opportunity is real. Even in markets that are typically lower -- on the lower scale of the socioeconomic spectrum.

Great. And then on the -- the weight management product. Curious your thoughts about broad cannibalization versus existing products. And then in terms of what you're thinking about on a per distributor basis, how much do your models say that they're going to be ordering relative to other product launches. Does it imply some sort of improvement or lack thereof in productivity? And, I guess, sort of related to that, southeast Asia so that -- that looks like sales -- I guess you are saying will be down a little bit year-on-year.

How much of that is due to cannibalization of this product given that you already have pretty strong weight management product system in that region?

Well, the southeast Asia issue, Mark, is related entirely to the huge LTO in Q2 of of last year. And that's -- that's the only reason why you're going to see it down in Q2 in south Asia is because of comp. You know, we're still learning as we get further and further into each successive product launch and we have been very pleasantly pleased that our -- our launch he is using this LTO model have been far less cannibalistic than what they were in prior launches.

However, we've never had one this big, obviously, as what's coming up this fall. And so that's why we're cautiously guiding to a $350 million to $400 million net endcap of the product launch. Hopefully, we can do better than that as we strive to minimize cannibalization.

The reality is that this is a product category that we already do $100 million plus in weight management products, and a lot of that is southeast Asia based, but it's a -- it's a largely untapped category for us in other regions and should be more incremental. I mean, you know, people who are interested losing a few pounds and changing their body composition are people who are probably largely incremental to what we're doing currently with respect to our nutrition products.

So we hope that weight management can become a $1 billion category for us. It certainly has all the potential to be that, and then it can be highly incremental to the rest of the business.

Great.

And just sort of related to that, you know, I guess I'm just trying to get a sense from a distributor level standpoint. So you've obviously had some, or it sounds like more than some, conversations about who's buying the product and at what rate. So when you you think about it, if you sort of segregate your business into personal care, nutrition, sort of broadly is it fair, then, to assume this is -- is another pillar, so to speak, of how distributors are going to be ordering? And who are -- who's ordering this product? Like, do you think there's going to be new distributors brought in? Do you think it's going to be existing distributors? Does it skew male, female? Just sort of any color you can give there would be helpful.

Well, I mean, everyone. Existing and new distributors will be buying the product. We do expect the penetration rate of our existing active consumer base to be higher with this product launch than our penetration rate has been with prior product launches. That's partly because we're just getting better at executing the launches is and our sales leaders are pushing deeper into their active base with each new launch.

So you will see both existing and you will see a lot of new, too. I mean, it's a new opportunity for people to build a business around. It's obviously an enormous market, and growing around the world.

You know, I think to a great extent one of the -- one of the surprises to us has been the fact that there's been a very warm reception to the weight management category in markets that you wouldn't typically think have huge weight management needs. Like Singapore, you know, Malaysia, Thailand and even China, where the obesity epidemic is really just starting to hit unlike in the US where we're in full bloom with the obesity epidemic. But even in those markets people care about body image.

And they care about the way they look. And so, whereas they might have five to ten pounds to lose and American might have 30 or 40 pounds to lose there's still a very strong appetite for this product category in those markets.

Thank you.

Thank you. And we have a further question from the line of Bill Schmidt at Deutsche Bank. Please go ahead, Bill.

Hey, guys. Sorry for jumping back on again. Hey, would you mind telling us what the pre-orders are for weight management relative to the $350 million to $400 million guidance.

Yes. We actually don't have pre orders yet, so what we do is start to set goals with our sales leaders and the pre-orders will really start to come in right in September when we actually are Real close to that launch time frame.

Okay. But when you tang about the excitement that you've heard from your existing executive distributors how do you -- how do you gauge that? Like, where does that come from?

That's reflected in the forecast coming in from our management teams, who are working with local sales leaders.

Okay. Great. And then I'm kind of impatient to wait for the 10Q, but is there any update on the, the customs settlement in Japan and sort of the timing of -- if and when that money comes through?

Yes. There hasn't been anything new in the last couple of months. We do -- we are getting word from our counsel there that they would hope to have resolution of at least one of the cases by the end of this year. So we're still probably three to six months away from having news on that front.

Okay, can you remind me it's, like, $35 million for one and $50 million for the other. Is that about right?

Yes. That's about right. With the Yen moving all over, it changes that. Yes that's about right.

Great. Thanks, guys. Thanks for letting me jump back on.

Thanks Bill. We appreciate everyone being on the call this morning. We're obviously very pleased with our first quarter results. And our level of optimism for the year has improved as we expect a better second quarter, certainly, against what is a difficult comp over last year and the second half of the year is going to be very strong.

I did want to make one note that we're -- as you know we're making significant investments in infrastructure both in Provo, here at our headquarters, with our new Innovation Center here, as well as our Innovation Center in Shanghai.

These are significant capital investments this year and are important investments in our future and necessary for us to enable us to reach our potential.

We are actually going to be occupying the Provo Innovation Center by the end of this second quarter. And so, for those of you who might have any inclination to pay us a visit, we would love to show you this facility. It's spectacular and it's really going to be I think a great symbol of our optimism in the future and will be very encouraging to our sales force. Thanks for joining us today, everyone.

Thank you, ladies and gentlemen. That concludes your conference. You may now disconnect. Thank you for joining us. Do enjoy the rest of your day.