如新 (NUS) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2013 Nu Skin Enterprises earnings conference call. My name is Whitley and I will be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to your host for today, Mr. Scott Pond, Director of Investor Relations. Please proceed, sir.

Thank you, Whitley. Good morning, everyone; we appreciate you joining us. Today on the call we have Truman Hunt, President and Chief Executive Officer; Ritch Wood, Chief Financial Officer; and Joe Chang, Chief Scientific Officer.

Just a reminder, during the call comments can and will 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. And with that I will turn the time over to Truman.

Thanks, Scott, good morning, everyone; we appreciate you joining us today. Last fall, as we were firming up our forecast for 2013, we knew that the second quarter was going to present our most difficult comp as we were going up against a 40% revenue increase in the second quarter of 2012. So we are really pleased with our results for the second quarter. We generated record revenue of $683 million, which is an 18% increase in local currency, while increasing our earnings per share by 30% to $1.22.

Given the strong growth we are seeing in our consumer base, which has continued through the month of July and is reflected in our active account number, we are also increasing again today our guidance for the remainder of the year. We now expect revenue to increase by 35% for the year with earnings up over 40% year over year.

As also announced this morning, our Board is increased our stock repurchase authorization by an additional $400 million. We are pleased to receive this most recent increase from our Board and it reflects our optimism for the future of the business. We're also generating significant levels of cash flow as the business grows, so we are happy to return as much as possible to our shareholders.

Our strong second-quarter results can be attributed to the sustained interest in our innovative products as reflected in the 32% growth in active accounts of the quarter as well as by enthusiasm for the business opportunity we offer as reflected by 23% growth in our executive count.

Turning our attention to a few geographic markets, greater China's growth obviously continues to be very strong. Sales in the second quarter in mainland China were $198 million. And, as we announced a few weeks ago, we are pleased that China recently approved five additional direct selling licenses which will become increasingly important as our business develops throughout China.

We continue to invest to sustain growth in this market and are committed to working to ensure our long-term success there. From what we are seeing we believe that the market continues to have significant upside potential.

Our North Asia region also had a very strong quarter. South Korea generated an impressive 54% quarterly gain in local currency and continues its long run as a stellar market for us. And Japan had another solid quarter with 5% revenue growth. The weakness of the yen against the dollar is obviously hurting our reported results, but we feel good about the direction of our business in Japan and we believe that North Asia can be a $1 billion market for us in the next few years.

The Americas and South Asia Pacific also performed well in the quarter, Latin America growing at a very robust rate, the US is steady with an 8% increase in Q2, while Colombia and Venezuela, in particular, are progressing very well. The Q2 revenue decline in South Asia is a comp issue against last year's product launch. The sequential trends there are very good and you will see a return to year-over-year growth in the second half of this year.

Our first-half results set us up nicely for what we expect to be a strong back half of the year. As you know, we are looking forward to introducing our latest ageLOC innovation, the TR90 weight management system, in the third and fourth quarters. We have spoken now on several occasions about how we expect this to be our largest product launch in our history and, as indicated in our release today, we are increasing our outlook for the global limited time offering to $450 million in net sales.

Now Ritch is going to review the timing and expectations for the TR90 launch market to market in just a minute. But all indications are that this product will be well received with LTO volume spread out over both Q3 and Q4.

Our product launch process has become one of the key elements in our accelerate growth rate over the past few years. When we initially introduce a product we use a limited time offer, an LTO, first on a global basis and then on a regional basis which allows our sales leaders a brief window in time where they can buy the product. We then stop selling the product and don't make it available again for a few months.

And while we are forecasting now $450 million in global LTO volume this fall, we believe that next year's LTOs on a regional basis could generate an even higher level of sales volume before the product is made available on a full-time basis. So from a comparative perspective, if you are wondering how we will comp this year's strong results, particularly in the back half of the year, we are feeling quite confident that we will be able to do that through our regional LTO mechanism.

We will then repeat this launch process for the next global product launch in 2015. So our launch process has added a potent dynamic to our business. Our product development pipeline is full for several years with very compelling products and our launch process is becoming more refined and more powerful as more markets and as more of our sales leaders around the world adopt the process, giving as confidence that we can continue to sustain growth.

So looking at the second half of the year, and at the LTO launches that begin about one month from now, it is a very exciting time for us. Our 165,000 square foot innovation center here at our home office is nearing completion and, in fact, we are scheduled to move into it in about six weeks time. For those of you who plan to come to our global sales convention in October, we certainly hope that you will take time to visit our new corporate campus. And we are also on schedule to move into our new greater China headquarters outside of Shanghai by the end of this year. So with that let me turn the call over to the Ritch.

Thank you, Truman, and good morning to all of you. I remember at the end of last year, as we were providing our initial guidance for 2013, feeling a sense of anxiousness to get to the back half of this year. Here we are, we've made a beyond the difficult comparison to the first half and we are now into the significant product launches that will be happening here in the second half of the year.

I like the way the first of the year came together -- revenue growth driven by very strong increases in our consumer base as well as our sales leaders. Our growth in our distribution channel really is what gives us confidence, an increasing confidence, in our ability to deliver on our revenue and profit expectations in the back half of the year.

I'll provide a little more detail on our expectations for product launches in a minute, but, needless to say, I like the way that the business is developing and especially as we look to begin rolling out the TR90 products the first part of September.

Strong revenue growth in the second quarter helped us to achieve an operating margin of 16.8% which was ahead of our previous guidance and slightly ahead of prior year's 16.5% operating margin. The higher operating margin was due primarily to our ability to leverage our overhead. Our gross margin for the quarter was 83.7% compared to 83.9% in the prior year; selling expenses this year at 45.2%, similar to the 45.1% in the prior year.

Our G&A expenses for the quarter as a percentage of revenue improved to 21.7% compared against 22.3% in the prior year period. And then our tax rate came in at 34.4% compared to 36.1% in the prior year.

During the quarter we paid dividends of $17.6 million and our stock repurchase authorization was approximately $121 million at the end of June. After pre-releasing our Q2 results a few weeks ago we were able to get back in the market repurchasing shares. And as announced this morning, our Board approved an increase to our authorization of $400 million.

As Truman mentioned, we continue to be very optimistic about the future and feel that we can create shareholder value using excess cash to repurchase shares. The additional authorization represents our conservative estimate of excess free cash flow available over the next 24 months. That is after meeting our planned investment that will be required to sustain growth in the business combined with our commitment to continue to increase the dividend each year.

I'd just remind you that we have a long track record of both share repurchases and dividend increases which would be a fair expectation as we move forward into the future.

Just a little bit of detail now on the guidance that we updated this morning. We see great enthusiasm and demand for our new products. We believe that being conservative in forecasting as the business accelerates is important; and so we are particularly careful in forecasting the product launch sales and the growth that we are seeing in our China business.

Our methodology for projecting sales and our limited time offering of new products is done by estimating the size of our active base and multiplying that by the percentage of actives that we believe will participate in the new product launch. Our active base, as you all know -- notice in our numbers, has grown substantially in the past six months, which increases our confidence in the size and delivery of our LTO sales during this upcoming LTO.

So we are raising our overall expectation for net LTO sales in the back half of the year to $450 million, that is a $70 million approximately increase over our previous guidance. As you know, we previously discussed an LTO sales target of around $600 million. This continues to be the target that our sales leaders are shooting for. So we believe the $450 million is conservative and reflects our estimate for returns and cannibalization as well.

The LTO sales and shipments for greater China and Southeast Asia will be split between Q3 and Q4. We currently include about $190 million of LTO volume from these two regions in our Q3 guidance and a total of $260 million of LTO sales in our Q4 guidance making up the $450 million. Today's guidance reflects a yen rate to the dollar of 103 for the balance of the year, Korean won rate of 1150 and our euro rate at 0.78 to the dollar.

We now project our 2013 revenue to be $2.91 billion to $2.95 billion including a negative 5% impact from foreign currency fluctuations -- by the way, that is consistent with our previous guidance and how that related to the foreign currency impact. And we expect our earnings per share of $5.05 to $5.15. We continue to see operating margin for the year slightly above 16%.

For the third quarter we estimate revenue to be $790 million to $810 million, assuming a negative impact from foreign currency of 6% to 7%. We estimate third-quarter earnings per share to be $1.35 to $1.40, and we anticipate fourth-quarter revenue therefore to be approximately $[890] million to $910 million. So with that we will go ahead and open it up now for questions.

(Operator Instructions). Rommel Dionisio, Wedbush Securities.

(Technical difficulty) structure of projects in Provo as well as in China. What is the progress on the facilities that you are building? And I think you mentioned, Truman, that you are going to have the Provo one up and running fairly shortly. Just a little more color on that, please.

Sure, thanks for the question, Rommel, we are actually really excited about both of these facilities. And we are about six weeks away from moving our staff into our innovation center here in Provo. This building, for those of you who may not have seen it yet, is actually attached to our existing -- our previously existing high-rise building here in Provo. And it is an absolutely stunning facility. As it has come to fruition it's more beautiful in reality than it even looked on paper as we designed it.

So, we are very excited about it. In terms of square footage it is about the same amount of square footage we have here in our original office complex. So it nearly doubles the size of our downtown campus and will be a real showpiece for our distributors who of course like to come to the home office and kick the tires here.

And I know Dr. Chang and his team of scientists are very eager to move into their new labs. And we're really just really happy with the way it is coming along.

In Shanghai we are building a Greater China headquarters, which is also quite large in scale. And will enable us to have enough infrastructure to continue to grow there for some time. It includes manufacturing facilities, warehousing facilities, office facilities, as well as a recognition center for China sales leaders. It too will be a real showpiece and will attract a lot of our sales leaders from around the Greater China region who will be very proud of that.

So we will be into that facility in the December/January timeframe and are equally excited to be moving into that one. Thanks for the question, Rommel.

Thank you.

John Faucher, JPMorgan.

Just some quick clarification on the share repurchase program. So you talked about what you had left at the end of June. I am assuming you've finished that program entirely since then. If you could sort of give us again how much that would have been since then?

And then looking out -- you talked about using excess free cash flow to get to the $400 million number. I guess can you give us some updated thoughts in terms of whether you would consider adding additional leverage or adding any leverage from that standpoint in terms of buying back more stock? Thanks.

You bet, thanks, John. Yes, as it relates to share repurchases, our sort of focus is anytime we have excess free cash we want to make sure we are trying to return that to shareholders. And as we look out over our projections we believe $400 million is a conservative look at the excess cash that we will have for share repurchase availability when taking into account our first two priorities, which would be -- number one, to sustain the growth in the business; and then number two, to continue to raise our dividend and payout a good dividend.

We were in the market in July, we don't normally state how much that is, we will update that at the end of the quarter. But we haven't used all of the $121 million. We will roll that into this new $400 million and continue to work on that.

What we really watch for, John, is try and look at where our multiple is trading, where we believe that is trading, what our optimism is for a go-forward plan for the business and then evaluate how much we should be in the market or not. So our commitment is to continue to use free cash to create shareholder value. And that has been our historical approach and will continue to be what we approach as we go forward.

Let me just add to that, John, on the question with respect to our philosophy with respect to leverage. I mean, as you know, we have been very conservative with our balance sheet and traditionally historically really since our inception have been largely debt averse.

We are not afraid to borrow money, but, we do like the flexibility that our balance sheet provides. And it is nice to have options. And even this week as Ritch and I approved some large capital expenditures for China supply chain initiatives, they are critical to our supply chain there, that frankly we didn't foresee even six months ago because of the rapid rate of growth that is happening there.

And so it is really nice, I've got to tell you, from a management perspective to have the flexibility that we enjoy with our balance sheet. And particularly during a period of rapid growth which we are going through and which we expect to continue, it is nice to not be limited with levels of debt.

Okay, great. And then you did a good job in terms of laying out how we should be thinking about the LTO through the balance of this year. I guess one of the things I am still struggling with is trying to figure out what the impact is going to be as we head into 2014. And I am not looking for guidance on that, but how should we be thinking about the impact of weight loss? You are going to have sort of eight or nine incremental months heading into next year. What is the right way to think about that just sort of conceptually?

The right way to think about it conceptually is that despite the fact that the second half of this year is loaded with LTO volume, we are feeling very comfortable today that our launch process as we go into next year's regional launch -- regional launches and then making the product available on a full-time basis will allow us very comfortably to nevertheless surpass the global LTO sales that we'll generate in the second half of this year.

So it will be staged a little bit differently because most of the regional launches happened in the first half of next year. So next year's volume will be largely first-half weighted against this year's second-half weighting, but we are very comfortable that we can still lap on a year-over-year basis very favorably the launches that will be coming up.

Okay, great. Thank you very much.

Frank Camma, Sidoti.

I had a couple quick questions, one on the historical performance. For the quarter the selling expenses on a sequential basis at least went up and there were no LTOs during the quarter. So typically we see that go up when you have an LTO. I was just wondering, could you explain that.

You bet, Frank, thanks for that question. As it relates to selling expense, obviously the growth of the business is one thing that impacts in addition to LTO. And then we have this incentive that we have talked about in our Greater China region that if the Greater China region achieves $1 billion there is a special incentive that we put in place back in 2009 that would pay out. And at this point in time we are highly confident and obviously on the track we are on now we will exceed that $1 billion target this year.

So we are accruing to hit that number, that has pushed our selling expenses up just a little bit. We also have more people in qualification, more people qualifying to hit sales incentive targets, kind of trip incentives and promotional incentives that we put in place, which has also pushed the incentive up just a little bit. The way we really calibrate that though is that the faster growth helps us to leverage our overhead as well. So the growth in selling expenses is offset in the overhead number which allows us to continue to improve margins as we go forward.

Yes, absolutely. And that actually leads me into my second question, which is on the guidance. I mean, clearly it looks like margins on the second half of the year -- well, first of all I guess just starting with the selling expense. Should we think about it as when you roll out these LTOs typically you do pay out more, am I correct about that? I mean, is that --?

That is correct, that is correct. I'd expect the selling expense in the back half of the year to be somewhere around 47% to 48% in the last two quarters. And then the G&A obviously will come down as a percentage of revenue because of the increase in the revenue. And then I would just highlight also in the fourth quarter, October, we have about a $10 million planned expense for our convention. Overall our margins are going to be strong because we will have a lot of LTO sales, but we do have a $10 million expense associated with the convention in October.

In October. So we should see fourth-quarter G&A -- I mean obviously -- that should be your highest obviously.

On a dollar basis, absolutely.

On a dollar basis. Okay. And I guess so the final question then -- or just if you could reiterate that you said the operating margin for the year you expected slightly north of 16% did you say?

That is right. Yes, 16.1%, 16.2% is what I have modeled in the numbers that I provided this morning.

Okay, so I mean the fourth quarter must be -- I mean just based on what you gave us, I mean fourth quarter obviously is your lowest -- has got to be lower than your third quarter, I mean that is obvious, right?

Yes, no, I think they should be fairly similar, actually, Frank, because the increase in the revenue, we should be $900 million or so in revenue, which will help to offset the convention expense. So I would expect both quarters to be 16% to 16.5% in operating margin.

Okay, all right, great. I will drop off. Thank you.

Bill Schmitz, Deutsche Bank.

Just talk about the cash flow a little bit more. Can you just talk about what you think the ongoing normalized CapEx is, because obviously it is massively elevated this year because of the facility in Shanghai and obviously the headquarters. And then in terms of inventory build, I think there was a big use because you're obviously building inventory for the weight management launch. And so kind of as we look forward does that inventory also come down?

Yes, great questions, Bill. And as it relates to the CapEx we have both the big headquarters for China and for here coming up, those will be primarily complete this year. Next year as we go forward the CapEx we believe will continue to stay somewhere in the $150 million to $200 million range, that is an early estimate. So we will fine tune that as we get towards our Investor Day in November.

But basically the vast majority of that will be going towards China as we look to expand our manufacturing capacity as well as tripling the number of stores that we have in place today. By the end of 2015 we will have three times the number of stores we have today. So a lot of CapEx going into China to sustain that growth.

Furthermore, we think there are some pretty important initiatives from an IT side that can really help us get better at customer relationship management that we are putting in place in Korea and Japan, which will be some CapEx projects. So I think as a percentage of revenue our CapEx is not going to be increasing, in fact, probably coming down a little bit. But the number overall will probably stay high as we continue to invest behind some really key growth initiatives that we have going on. Let's see your other question related to, sorry --.

Inventory.

Inventory. Oh, yes, and you are exactly right, we are building inventory right now. Much of that will come out in September with the first shipments of the TR90. It will still be elevated at the end of September because of the product that is built up for our October LTOs. It will come down in Q4 but then it will begin to ramp again right after that as we build inventory for next year's LTO. So we will be accustomed to a little bit higher inventory balances here over the next few quarters as we build for these significant launches.

Great. And then what are you guys seeing in Japan? I mean did you feel things really improving? Obviously the results for Nu Skin have been great. Maybe it is down a little bit sequentially, but I mean is there sort of a different mindset in terms of consumption developing?

Well, you know, I wouldn't say, Bill, that we are really noticing kind of a fundamental change in consumer mentality there. But last year has obviously been encouraging, four straight quarters of growth. Now we still expect Japan to be up 5% or 6% this year. And we are doing some innovative things there that we'll talk more about at our Investor Day.

But we are really quite excited about what our team is doing their to sustain top-line growth, some out-of-the-box thinking. And we are just actually in the test phase now so we haven't talked much about it. But hopefully going into this fall we'll give you a little more of an insight about why we think we can continue to sustain growth in Japan.

Got you. I mean -- and obviously I'm not trying to beat you up here because it's 5% growth in Japan, it's a great number year over year. But it actually came down a little bit sequentially. Is there any issue there or kind of what is going on?

Maybe if I could just add one comment, too, Bill, on that. In the second quarter, first quarter we were rolling out the Body Galvanic Spa, which was exciting for our sales leaders. So our earnings were -- or our revenue was up a little bit stronger. There is pretty good excitement building for the TR90 LTO which will happen in October. This will really be kind of a follow on to our first sort of launch using the LTO process that we do everywhere else, the first time we kind of did that was with the Body Spa in Japan, we got fairly good traction. So we will see if we can execute on this next one well.

The reason we are being a little cautious I think with our guidance in Japan is that our active number hasn't gone positive yet. We like our executive number, we are up 9% in the quarter. The active number continues to trail down about 4%. So, once that active number continues to come up we will feel a lot more confident in our ability to sustain that growth going forward. So I would say we are encouraged about the way things are developing but still cautious because we are looking for those indicators to move in the right direction.

Got you, and one more if I could. What is the timing again for the launch following the TR90? And maybe any kind of color you can sort of talk about on what you think that is going to be and maybe some expectations of how it is going to grow?

Yes, so you mean what follows TR90 on the product pipeline?

Yes, I know what it is, I just don't know how to describe it.

Right, yes, we haven't really said much about it yet. But let me just say, and I'm going to have to be a little bit careful here to damper my enthusiasm for it. But as successful as the TR90 launch is going to be, what is in the pipeline for 2015 I really believe is going to be even more dramatic.

And we are really excited about what we are going to be showing the field hopefully in the upcoming few months and perhaps we will even talk about it more at our Investor Day. But we have done a lot of work on this concept. And years in development, very innovative, very unique in the personal-care space. And we are just really excited about it. So very optimistic that the 2015 global launch is going to be very powerful.

Great, thanks very much, guys.

Scott Van Winkle, Canaccord Genuity.

Thanks, congrats. Ritch, I want to follow up on that margin question. I can't get to a 16% EBIT margin in this third quarter, maybe I miss-heard you. I kind of back in with your guidance to like an 18% plus margin.

Yes, I think just walking through the top -- kind of the top issues there, I see our selling expenses moving between 47.5% and 48% is what I have in my model. I have our overhead coming in somewhere around 20%. So -- and then gross margin should stay pretty consistent with where we are at. So that puts us right between kind of a 16%, 16.5% margin for the next two quarters.

There will be quite a bit of promotion expense surrounding the LTO launches here in the next few months. So that will push our overhead as a dollar -- in dollar terms up a little bit. But obviously it will be offset with the increase in sales.

Okay, any anything strange or different on the taxes or share count that you could indicate or --?

I still expect the tax rate to be about 34.5% and then our share count I have just factored in right around 60 million shares. So not a significant change to the share count either.

Okay, I will follow-up off line. But on China you talked about authorizing some capital investments on the procurement side. You know more broadly with the sales level you are doing there, I mean how stressed is the infrastructure, everything from management to back office operation, systems, etc., etc.?

Yes, well, I guess -- I mean it is stressed on all of those fronts. I mean our team is working their tails off, not just at the management level but really throughout the entire organization. From an infrastructure standpoint, as you know, Scott, we are fairly rapidly building out our store presence this year and next.

The supply chain initiatives are important. I mean, we are really constrained to some degree in our ability to meet demand there by how much product we can put on shelves. And that is an issue. It is not a critical issue yet, but as the business continues to ramp we obviously need to be able to continue to stay in stock. And with the local manufacturing requirements there that requires some capital investment.

So, yes, I mean, this rate of growth is putting some strain on all of those issues. But so far our team is doing a phenomenal job of managing through them.

Great. And then lastly, the comment -- did I get it correct that the $400 million buyback was an estimate of your excess free cash flow that you could utilize for repurchases next year?

In the next two years, that's right. Over the next 24 months.

The next 24 months, all right, I was looking at next year and trying to figure out our earnings number off $400 million of free cash. And I'm glad I corrected that.

Yes, 24 months.

Awesome, thank you.

Tim Ramey, DA Davidson.

Ritch, I admit that my head is spinning slightly so I may have this wrong. But I've got the same problem as Scott. And I think one of the clues might have been I think I heard you say your 3Q guidance was like $1.43 to $1.50. But the press release says $1.63 to $1.70. Am I -- where am I wrong here? Because if it is $1.63 to $1.70 EBIT margin on $800 million of sales has got to be 18%.

No, our EPS guidance should be $1.35 to $1.40; I will go back and check --.

For the 3Q, okay, there is an error in the press release then.

Okay, we will go back and check. It should be $1.35 to $1.40 with about -- in the fourth quarter somewhere around $1.60 to $1.63.

That is going to make life much different. Okay. Yes, that -- you might want to get an 8-K out on that.

We will put that out.

Okay. Let's see, so let me think if I can get my breath here then again. Should we assume that you were not in the market in the 3Q -- or in the 2Q because of the fact that your delivery of earnings looked like it was materially above your guidance?

Well, we are -- as a policy we don't tell when we're in the market, when we're not in the market, why we're in, why we're not, because then we have to update every time something changes. So, yes, we weren't able to be in the market in Q2 for reasons that obviously keep us out of the market. And we were in during the month of July.

Got it. Okay, thanks so much.

Thanks, Tim, and thanks, everyone, for joining us on the call today. I want to close with just one additional thought. Back in 2006 those of you who have followed us for a long time know that we initiated what we called our business transformation effort, and this included not only an overhaul of our business strategy and a significant corporate reorganization, but it also included the initiation a performance-based equity incentives for our senior management team.

So our first performance target was $2 EPS per share, which we achieved well ahead of schedule on a rolling four quarter basis. And then when we hit the target our Board doubled down and put a $4 EPS target in place with a similar structure. Now we had until 2015 to hit that target, but we will actually be achieving that target in the third quarter of this year on a rolling four quarter basis more than two years ahead of schedule.

So recognizing that achievement and believing in the power of performance-based incentives, our Board has recently approved a new incentive plan with EPS targets set at $6, $8, $10 and $12 per share. So we have six years to hit that $12 target. But if history is any reflection of the future, I think our team is going to be laser focused on getting to that target on as aggressive a timeline as possible.

Back in 2009 you will also recall that we announced our Nu Skin 2.0 vision, this notion of becoming the world's leading direct selling company by paying more to our sales leaders than any other company pays to theirs. And at that time this required a $5 billion revenue level to enable us to pay out $2 billion in commissions. That goal was originally set for 2020, but at that time our growth rate at the time wouldn't have really even justified that aggressive a timeline.

Now at this point in 2013 the prospect of achieving $5 billion of revenue has gone from being a remote possibility to what I believe is a high probability and well ahead of schedule. We are focused with our sales leaders on this objective and I honestly think it could happen sooner than people think.

So we look forward to talking with you more about our progress towards this objective at our October sales leader convention, for those of you who can make it, and at our annual investor meeting in November. Thanks for joining us today.

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