如新 (NUS) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2015 Nu Skin Enterprises earnings conference call. My name is Joyce, 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 conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Scott Pond, head of IR. Please proceed.

Thank you, Joyce. And thank you, everyone, for joining us. With me on the call today are Truman Hunt, President and Chief Operating Officer; Ritch Wood, Chief Financial Officer; and Joe Chang, Chief Scientific Officer.

Just as a reminder, during the call comments 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. Please refer to today's earnings release and our SEC filings for a complete discussion of these risks.

Also during the call, certain financial numbers may be discussed that differ from comparable numbers obtained in our financial statements. We believe these non-GAAP financial numbers assist management and investors in evaluating and comparing period-to-period results in a more meaningful and consistent manner. Please see the investor relations page of our corporate website for any required reconciliations for non-GAAP financial numbers.

And with that, I will turn it over to Truman.

Good afternoon, everyone. Thank you for joining us on the call today.

As you saw in our release, our second-quarter revenue came in just north of $560 million, which was the top end of our revenue guidance, and also represented a sequential uptick over the first quarter. Earnings per share for the quarter were $0.75, again, at the top end of our range and also ahead of the first quarter. Our results this quarter were impacted by currency exchange headwinds that resulted in a negative foreign currency impact of 7%. So in constant currency, revenue would have been about $45 million higher at $605 million against last year's $650 million quarter, which included $76 million of limited-time-offer product sales.

So overall, second quarter was a solid quarter from both a revenue and an earnings perspective, and we remain encouraged by the enthusiasm of our sales force as we approach the launch of a number of exciting new products in the second half of the year.

As you know, the number of sales leaders is a relevant indicator of our business momentum. It was nice to see the sales leader count increase sequentially over the first quarter. A 19% growth in sales leaders in China was particularly encouraging, and we think this reflects an easing of the pressure we have been under there.

We're also pleased with our return to normalized cash flow dynamics. Inventory levels continue to normalize despite a build-up in Q2 for the second-half product launches later this year. Profitability levels are normalizing, and we are happy to put our cash to work as we repurchase $50 million of shares during the quarter.

I want to comment just briefly on two news items that occurred during the quarter. First, the MERS outbreak in South Korea slowed business activity a bit in that region. However, the impact was rather short-term, and we do not view it as having had a material impact on the quarter's results. Additionally, the stock market turmoil in China has drawn a lot of media attention. From our perspective, however, when we look at the Chinese market our team there believes that the Chinese consumers are much less rattled by the performance of the country's stock market than one might think. So stock market dynamics there are not being cited by our team as a concern right now in that market.

So we are now looking forward to the second half of the year, when, as we have stated before, we anticipate a return to growth, with China stabilized and with strong product introductions. Our new products are extensions of our highly successful ageLOC product line. On the nutrition side, we will be introducing ageLOC Youth, our most advanced anti-aging supplement. Youth will become the new core of our nutritional supplement offering. It is a product developed with the benefit of literally decades of anti-aging research and is designed to support the body's ability to fight aging with the right nutritional support.

With most nutrition products, people really don't feel the difference that a product makes. But with ageLOC Youth, we're getting a lot of feedback from trial users who are noticing a significant difference in their energy and stamina. So we are really very optimistic that this product will be well-received.

And in personal care, we're excited to introduce ageLOC Me. This is a truly unique anti-aging skin care system that allows consumers to personalize a daily regimen based on their individual preferences and skin care needs. AgeLOC Me delivers skin care products through an innovative, smart countertop device that incorporates cartridges that dispense your customized skin care regimen as you use it both morning and night. It's also ideal for building monthly subscription orders with a fixed-dose, 30-day regimen that can easily be refilled every month on an auto-ship basis.

Our product development team has spent years developing, testing and refining these new ageLOC products, and we are delighted to finally bring these innovations to market beginning next month through limited-time offers with subsequent full-time launches staggered throughout 2016.

We're also pleased to be launching what we call ageLOC Essentials in the greater China region. This is a line of specialized cosmetic oils that we plan to pair with our top-selling Galvanic Spa system in mainland China in particular. In early July, we begin rolling out oils to top sales leaders there and have been very encouraged with the initial response. We will follow this up with a more widespread rollout of oils in August and September. And then in the fourth quarter, for the greater China region we'll preview the ageLOC Me skin care system for sales leaders who are working in that region.

The launch of cosmetic oils in greater China follows the launch of our Epic brand essential oils in North America in the second quarter of this year. As we have indicated in the past, this is a growing product category in many markets, and we expect the category to contribute nicely to our sales lines.

Now, in terms of the product rollout schedule for other regions, let me just give a few highlights. In the North Asia region, we will introduce ageLOC Me in the beginning of October. Both Japan and South Korea, as you know, are strong skin care markets. In competition with our sales leaders there, we actually gave them the option of launching either ageLOC Youth or ageLOC Me in whatever priority they prefer, and they very enthusiastically chose ageLOC Me first.

The EMEA region will also begin rolling out ageLOC Me in September, and we believe that it will be well-received in that region as well.

The remainder of the world will focus their attention on our ageLOC Youth launch this fall. The early response to this product has been extremely positive, and our sales leaders in the Americas and South Asia and Pacific regions have been particularly anxious to start building their business with ageLOC Youth. We'll begin rolling out this anti-aging product in late September in advance of our global sales leader convention that occurs in October.

Now turning to our financial performance and our balance sheet, cash flow for the quarter was strong, and we would anticipate this to continue to be the case going forward. As I mentioned earlier, we repurchased nearly $50 million of stock in the quarter, and stock buyback continues to be a priority for us with our excess cash.

Additionally, we saw our inventory balance decrease despite a buildup of inventory for the upcoming product launches. And Ritch is going to provide some additional details on that issue in just a minute.

With regard to regulatory matters, we continue to cooperate with the SEC inquiry, but we really have no update to provide on that front or to report to you today.

So overall, we are pleased with our position as we expect to return to growth in the second half of the year. While currency headwinds are challenging, we continue to anticipate that we will post healthy local currency growth during the next two quarters, which will set us up nicely for a solid 2016.

So with that, I will turn the call over to Ritch.

Thank you, Truman. And good afternoon, everyone. Our second quarter really represented a solid performance against our expectation, and in constant-currency terms the second quarter was down over the prior year about 7%, compared to the first quarter, which was down 12% on a constant-currency basis. A nice improvement there, and we are now well-positioned to move into our product launches and see growth and improved results in the second half of the year.

Our operating margin for the second quarter was 12.8%. That's a slight improvement over the 12.6% reported in the first quarter of the year and compares to 8.4% in the same prior-year period. Gross margin was 80.3%; that's versus 76% in the second quarter of 2014. Note that both the operating margin and gross margin in the prior year were negatively impacted by a $50 million inventory write-down.

Similar to our practice and discussion in the first quarter of this year, we reclassified to cost of sales some inventory-related expenses that historically have been reported in general and administrative expense. While this reclassification has no impact to operating income or earnings per share and is material to our financial reports, we feel the accounting is more accurate, and we will continue to follow this practice going forward.

In the second quarter, the amount reclassified was $7.6 million, or about 1.4% of sales, as a reduction to gross margin and a corresponding reduction to general and administrative expenses. In addition, gross margin continues to be negatively impacted by the strength of the US dollar against most foreign currencies.

Selling expenses for the quarter were 42.7% of sales, compared to 43.6% in the prior year. G&A expenses for the quarter as a percent of revenue were 24.8%, compared to 24% in the prior-year period. We incurred a loss of $2.8 million in other income expense, compared to a loss of $21.1 million in the prior year, which of course included a foreign currency expense incurred in Venezuela.

Our income tax rate for the second quarter was 35.3%, compared to 42% in the prior year. And again, that was also higher in the prior year because of non-deductible currency expense recorded in that same quarter of last year.

During this quarter, we paid $20.5 million of dividend, purchased $49.6 million of our outstanding shares, and that leaves our authorization at $271.5 million as of the end of June.

Cash provided by operations for the quarter was solid at $85 million. We continue to make headway with our inventory balance. It reduced by $8 million, and the inventory balance included $7.5 million of products that were produced for Q3 limited-time offers and product launch sales. So really, again, another nice step forward with our inventory balance.

We're enthusiastic about our business right now. And as we approach the second half of the year, we anticipate growth of approximately 15% on a constant-currency basis in the second half. We anticipate solid limited-time offerings of new products as well in the second half, and our modeling includes about $50 million to $60 million of sales generated by new products in Q3 and about $80 million to $90 million of new product sales in Q4.

In constant currency, we would anticipate that the third quarter would be up about 7% over the prior year, and the fourth quarter in constant currency would be up above 20%.

We anticipate that the growth will be supported by gains in our active customers and our sales leaders. For comparison purposes, in the second half of the prior year we had $85 million in sales from new products through limited-time offerings. So a portion of the growth in the back half of the year is coming from an increase in the amount of new product sales; but, more importantly, we anticipate healthy improvement in the base of our business.

As we are all aware, the US dollar has continued to move against foreign currency. This negatively impacts our guidance for the back half of the year. In our previous guidance, we anticipated a negative impact from foreign currency of approximately 7%. We now anticipate the impact to be 10% to 11%, and that reduces our overall guide for the back half of the year by $50 million to $60 million. The primary drivers of these currency impacts come from South Korea, South Asia Pacific currencies and from Europe. And note that the reduction in our guidance is fully attributable to our modeling of currency, as we continue to see the business performing in line with our previous expectations.

So third-quarter guidance, we estimate revenue to be $600 million to $620 million and earnings per share of $0.96 to $1. For the year, we anticipate revenue to be $2.4 billion to $2.44 billion, again, reflecting a negative foreign currency impact during the back half of the year of 10% to 11%.

Earnings per share for the year are anticipated to be $3.47 to $3.55. And this annual guidance includes a $0.12 expense associated with Venezuela foreign currency charge that we took in the first quarter of this year. So excluding that charge, our guidance would be in the $3.59 to $3.67 range.

So with that information, we will go ahead now and open up this call for questions.

(Operator Instructions) Frank Camma, Sidoti.

I had a couple questions on ageLOC Youth, first of all. I assume this -- if I was taking LifePak, would I now take ageLOC Youth? So how does that cannibalize sales? Is it a higher price point?

AgeLOC Youth will be priced about the same price point as our LifePak Nano product, Frank, so, above the regular LifePak price point.

The best option for consumers would be to take both Youth and LifePak. For those who can't afford to do both, our recommendation would be that they probably skew in favor of Youth because it represents the latest in scientific advancement with respect to anti-aging. For those who have a hard time getting core foundational nutrition in their diet, they might have a preference to take LifePak over Youth. But there may be some cannibalization. We don't anticipate any effective price erosion because of the price point of ageLOC Youth. But hopefully, consumers will see them as complementary.

Is the margin profile similar?

Yes.

Okay. Which leads me to the guidance for at least 3Q. It looks like you are projecting a pretty good margin expansion there. Just wondering where that's coming from. Is it more of a gross margin issue?

No, Frank. It's really just the leverage of our overhead expense. So with revenue improving about $60 million -- $40 million to $60 million -- the overhead number will be fairly consistent with where it has been in dollar terms, Q3 versus Q2 and Q1. You just pick up leverage on that side. That should continue into Q4, too; we should have stronger margins in Q4 as well.

Okay. But not on the gross margin side? The reason why I asked that is traditionally, when you launch new products, you usually get a little bit of a margin lift, don't you? Hasn't that been the trend?

Yes, you are exactly right. We have not factored that in, primarily just because we continue to have the currency headwind which is offsetting any slight benefits we're getting from product launches.

Okay. And the last question I have is just on China. It sounds like you clearly have a huge negative impact, as was expected. But the active count went down. And I was just wondering if you could -- obviously, sales lead was up, which is positive, but the total active went down. I was just wondering if you could add some color to that.

Yes. The active count, Frank, has been more a reflection of the success of our team there in managing inventory through product promotions. And they brought inventory risk down a lot through effective product promotions, which boosted our active numbers. But as you know, from a core business perspective, the leading indicator on business momentum is the number of sales leaders, and that's where we are seeing some really nice movement.

Okay, great. Thank you.

Olivia Tong, Bank of America.

First question is just around the launch posture in North Asia. Why do you think the North Asia distributor base chose the Me product before Youth? And are Youth and Me now already approved for sale in all the regions you intend to launch it in in the second half? And then where does it stand as far as China?

Yes; in the North Asia region, Olivia, that market in particular for the past decade has really skewed in favor of skin care, just from a revenue perspective. Very robust markets for skin care in both Korea and Japan.

We literally sat with sales leaders, now, a year ago and laid out both product concepts and gave them their choice of which product they prefer to push first. And in both Japan and Korea, the sales leaders were so animated about ageLOC Me that they just didn't want to have it any other way. Which, frankly, works out well for us because ageLOC Me has a higher price point. It's going to be priced in the range of the Galvanic Spa, for example. And it's also a brand-new device. And so to have the ability to launch it in just a couple of markets initially is a good thing, as it will help us to really refine our supply chain and manufacturing processes for the device and the system, inasmuch as it is really innovative and a very new concept.

So we were actually quite pleased with the decision and thought that it made sense for us from a global perspective to launch both products but do it a little bit differently region to region.

Are both products registered in all markets now, Joe? Can you answer that question? Do we see any registration issues with either Youth or Me anywhere?

Well, no, but the only one that we are still waiting from is from mainland China, and that's why it's a slight delay in launching the newest product in China.

Yes; the timeline for product registrations is longer in mainland that it is virtually anywhere else in the world. And so China will be one of the later markets to get the Youth product.

But Me is already approved in China?

Yes.

Okay, got it, Joe. So basically it's all the markets that you intend to launch it in, and it's approved, with the exception of, obviously, mainland China for Youth?

Right.

Okay, got it. And then in terms of -- I just want to understand, just a clarification in terms of the actives in China. You mentioned about managing inventory and promotions. I'm not sure I understood the answer to the question in terms of why you think that the actives decelerate sequentially in greater China.

Yes; the active count in the fourth quarter and first quarter, Olivia, were positively impacted by product promotions. So we were putting out very enticing product promotion propositions to consumers, and it drove the number of active purchasers.

And so the number of product promotions and the types of product promotions and incentives actually pretty much came to an end in the second quarter. We really didn't run any really aggressive promotions, and so the active count came down a little bit. But you see the nice increase in the count on sales leaders.

Is that understandable? Did you understand how our active number would tick up with product promotions?

Yes, yes, yes. I just misunderstood the explanation. So basically Q1 and Q2 benefited from incremental promotion. You didn't write as -- you basically ended that by the end of Q2, and you started to see some deceleration in terms of the actives?

Q4 and Q1 benefited from the product promotions, yes.

Right. Okay, got it. And then I'm not sure, in terms of the -- oh, the SEC -- can you give us any detail into what they're looking into, what they are asking you for, how your discussions have gone on their inquiry?

We just honestly haven't had a lot of discussions. And so there is just no new information to update you on other than what we talked about in the last quarter.

Got it, okay. And then just in terms of share repurchase, last question, you did a chunk this quarter. How do you think of that going forward?

Well, we continue to like the opportunity to use our cash flow, particularly, to buy back shares. And that's really what we've done the last three quarters is taken excess cash that's come in through cash flow and use that to repurchase shares. So we will continue to follow a similar thought process as we go forward and analyze how the business continues to develop. But we like repurchasing shares, and over the last three quarters we have taken in a little over 3% of our outstanding shares. So it has been a good opportunity for us.

So it accelerated in Q2. Is your thought process that it would accelerate further or that Q2 is the right run rate going forward?

Well, we usually don't lock into what we're doing exactly. We evaluate that as time goes along. But the Q2 number is reflective of an improvement in our cash from operations and a better situation, I think, with our balance sheet. So as that continues to improve we will just decide where the best place is to deploy our cash and continue to drive growth in the business and value for shareholders.

Got it. Thank you.

Tim Ramey, Pivotal Research Group.

So couple of questions here, thanks. First on ageLOC Youth, the first questioner was comparing it to LifePak Nano. And I don't think -- they are not at all the same, are they? LifePak Nano is basically an essentials or minerals type of product. And Youth, as I recall, was an antioxidant product. Is that right?

Well, not exactly. You are kind of right with respect to LifePak Nano; LifePak Nano is all about nutritional support. So really antioxidants, vitamin, minerals and vital nutrients.

Youth is all about anti-aging and what developed using not only antioxidant science but also gene expression science. So you will remember, Tim, that really what we are trying to do from an ageLOC perspective is light up the genes that need to be lit up to keep us young and really support the body's ability to fight aging through youthful gene expression. And that's how Youth was developed and formulated.

You talked about this being a -- way back, you talked about this as the mother of all supplements, and this is a supplement that you can actually feel the difference on. Tell me what it actually means to feel the fact that you are taking ageLOC Youth.

Well, we might have to talk to you off-line about that, Tim.

(Laughter) Okay, all right. Send me a bottle, and I'll see what I can do.

What you are going to notice -- and in fact, I'll be interested to talk to you about this to see if you notice it. But what most users experience is a rather rapid change in sleep patterns. When the alarm clock goes off, you are no longer dragging yourself out of bed. You are up and at it.

And so, most immediately, people are noticing it with their energy levels and their stamina throughout the day. But what I am also hearing anecdotally -- and there's nothing scientific about this data yet, obviously, because we're still in trials with consumers around the world. But I'm also hearing from our sales leaders that they're actually noticing a big difference in their skin texture. And women, in particular, are finding that is literally helping them look younger. So just really good anecdotal feedback.

Joe, what else are you hearing from Youth takers?

The other thing, Tim, to add to Truman's comment would be that this particular product -- the ingredients that we have infused into the product are ingredients that you don't normally even get in the most healthy diet. So that's an important distinction between this particular product and LifePak as well. And as Truman indicated, we are still assessing what all these feeling benefited around the world among our sales leaders. And there's not much more I can add to what Truman has just mentioned.

Okay. Ritch, on the inventory situation, it seems like we have seen that fall at a rate slightly slower than what we have discussed for the last couple of quarters. It seems like two quarters ago we were talking about $20 million-ish, and maybe last quarter I think you said $15 million, something in that range. It has been less. Should we be concerned about that? What sort of read would you give us there?

Yes; we talked at the beginning of the year, Tim, that we would see somewhere around the $15 million to $25 million reduction per quarter. It was a little bit higher than that in the first quarter. Second quarter, a little bit slower. We dropped by $8 million, but the inventory actually increased by about $8 million for inventory that was built for product launches that are happening here in the third quarter.

So it's going to fluctuate up and down a little bit, but we are really encouraged by the progress. I really think, to Truman's comment about the promotions we have run in China, the fact that we are running a lot less promotion there is an indication that we are getting our arms around the inventory-ish issues and feel like the risk there is much less.

So we are making good progress. We'll continue to see progress throughout the year. We had talked about having somewhere around a $275 million to $285 million balance by the end of the year and feel like we are still on good track to reach that. It will fluctuate a little bit month to month and quarter to quarter as we build for these LPOs that are coming in the back half of the year. But I really like the progress. I think we're in good shape.

And let me just add a little color to that, Tim, by giving some kudos to our management team. Because when we took a $50 million charge last year it was really somewhat speculative at the time, and we weren't exactly sure how the business was going to trend going forward from that moment in time. And frankly, I think we all recognize that to some level there may be continued inventory risk.

But I can tell you that from my perspective and from Ritch's perspective, we really feel a great deal of relief on this topic, as our team has done a great job around the world managing this issue and put together sales plans that have really helped us deal with problematic SKUs. And so really for the first time in a year we are feeling a great deal of relief on potential inventory risks.

Okay. And just one more for Ritch, on accounting -- if you were spending legal expense on the SEC issue, would it show up in other expense or would it show up in SG&A?

No; we are just running it through our normal SG&A lines.

Okay. All right, terrific. Thank you very much.

Bill Schmitz, Deutsche Bank.

How is attendance looking for the global conference relative to past years?

Attendance is looking good. We still obviously are early in the registration process, but we expect a good crowd. We don't expect, perhaps, the same level quite as we had last time because there are no huge LTOs happening at the exact time of the convention. And so there's probably a little less motivation in most markets for sales leaders to bring their groups to convention than perhaps there was in the last convention. So take out last convention's inordinately high level of attendance, and this year's convention will be in line with past conventions.

Okay. So they can't buy Youth or Me at the convention?

No, that is all happening at the local level.

Okay, all right. And then should we think -- when we think about next year, should we just reverse the launch schedule? So if they got Me this year, they would get Youth next year? Is it that simple?

Yes, roughly, yes.

And what is that going to be? How long are you going to have the Me launch? Is it a couple quarters and then you do the Youth after that?

Yes.

Do you have a timeline for that yet?

Yes, it will be on a similar pattern. So fall introductions and spring to summer launches will be the same pattern next year with the other product.

Okay, got you. And then, it seems like the timing shifted on the LTOs versus previous guidance. So it looks like you were going to do more in the third quarter and less in the fourth quarter. What happened there?

Yes; that was primarily the shift in North Asia to go from the ageLOC Youth product to the ageLOC Me. So initially they were planning to launch ageLOC Youth in the third quarter. The timeline to build the number of ageLOC Me products required for the supply chain took a little bit longer, so it pushed it out of Q3 and Q4. This is something we made reference to last quarter, that there was some timing shift that was happening and would be finalizing that.

Those ageLOC Me products required for the supply chain took a little bit longer. So it pushed it out of Q3 and Q4, and this is something we made reference to last quarter, that there was some timing shift that was happening and would be finalizing that.

Those ageLOC Me LTOs will now be at the beginning of December this year in North Asia.

I think you said ageLOC Youth, and you meant ageLOC Me. Right? We moved ageLOC Me into the fourth quarter?

That's right. It was going to be Youth in the third quarter, but when they switched over to Me, it delayed the timeline by a couple months.

Okay, got you. And then if the LTO sales come in above your target range, will you sell the additional stuff? Or are you going to hold back inventory?

Well, we didn't build as much inventory for this LTO as we have in the past. So there's not a lot of additional inventory to sell in these LTOs than what we have built into our model. So our strategy has adjusted a little bit to have a little bit smaller LTOs, enough to generate a lot of excitement but leave a good demand on the product launch that, as Truman mentioned, will then happen in the first half of next year.

Okay, got you. And then someone may want to ask this question. Has there been a change in the qualifications to be a sales leader in terms of minimum sales requirements? Because the language changed a little bit in the public filings.

No. I don't know exactly how the language changed in the public filing, but there haven't been any material changes to qualification requirements.

Okay, yes, because I guess a couple years ago it said sales leaders have completed and who maintains specified sales requirements. And then, starting in the 10-K from March, it says sales leaders are independent distributors. It doesn't say anything about who may maintain specific sales requirements. It just changed, right? I think it's just probably nuance.

Yes, yes, nothing there that was reflective of a structural change, Bill.

Okay. Great. Thanks, guys.

Scott Van Winkle, Canaccord Genuity.

I'll pile onto the questions about product launches. Since we are not using the term LTO and it's not an LTO, how is it different from the standpoint of which distributors have access to the product? Is it more wide-open? Are the package sizes different? What is different around this cycle than years past?

The biggest difference is the one that Ritch just alluded to, which is in the last cycle, in particular, we -- it wasn't like the spigot was open for everyone to purchase as much as they wanted. But it was largely open. And we just felt that we put a little too much product into the channel, frankly. You know, that sales leaders bought inventory that perhaps negatively affected their ability to maintain purchase levels and kept them inordinately focused on moving perhaps their own TR-90 inventory in stock for a few months after the LTO than what we would have ideally liked.

So that's really the biggest changes, that we are just throttling back the size of the LTO, we think, in favor of whetting appetites with the initial LTOs. And we're still calling them LTOs, so we haven't abandoned that term entirely because we do take the product off the market for a period of time in favor of really building to what we think will be a healthier launch three to six months later.

Anything to add to that?

I think the only other changes are recognition of the importance of having an LTO every year. Consistency in that, so our product pipeline -- we're working to adjust that to ensure that we have a new product launch every year. In 2014, we did the second launch of the TR-90, but we didn't have a brand-new product in place and felt like we didn't have the momentum of that new product to drive that momentum that we needed last year. So going forward you will see consistency and a new product each year coming to each of the markets.

Would it be fair and probably oversimplified to say that scarcity was driven by who was eligible to purchase in the past, and now scarcity is driven by how much inventory you build?

Well, yes, I suppose, to an extent. I think, to put it another way, just because we can generate revenue doesn't mean we always should. So what we're trying to do is put inventory into the channel in as healthy a fashion as possible and not put inordinate pressure on our sales leaders to stock inventory.

Got you. And then, Ritch, over the last year we talked about inventory, obviously, with the challenges over the last year. I wonder if, now that you have gotten it under control and you feel comfortable, if you look maybe structurally about how much inventory you carry -- if you go back years and years and look at your inventory levels, you don't really turn your inventory that fast. And I know there's appliances in there and durable products in there. But do you think maybe over the next several years that we will see just a faster inherent inventory turn? Is that possible? Is it something you want to achieve?

Yes, definitely possible. And we felt like we were making really good progress up through 2013, where we got up to about 2.5 turns, which is a really healthy rate for us. We manage the channel all the way to the consumer, so we feel like it's really important that we stay in stock about 99.5% of the time -- that's our benchmark that we shoot for -- and ensure that any time a customer needs a product that we have it.

So for several reasons it was a little bit higher in terms of what our -- or a little bit lower in terms of our turns but a little higher in terms of our inventory balance. But it's certainly an area that we can improve and believe we can get back to as we're going forward here. So the last year has been focused on trying to ensure that we didn't have additional write-offs, and now we can really focus as we go forward on getting more efficient with our inventory levels.

Okay. And then one more on China, if I could -- have there been any other changes in the market in the last quarter -- new licenses maybe you didn't announce; footprint on service centers and store basis? Has anything changed other than just cycling through the promotions and the inventory that you have now stopped and then getting ready for the next product launches? Or anything else you want to call out?

I think the biggest change, Scott, is that really for the first time since January of 2014, over the last few months the constraints on business promotion and holding meetings are really no longer there. And the constraints that are in place are really more self-imposed than anything. So the pressure from a regulatory standpoint has been dramatically lifted, I would say. Wouldn't you, Ritch?

Yes, I think that's right. And I would just add that the thing that's changed in my mind is we've got a new product to launch. We haven't had really new products to launch for a little while as we have worked through the inventory challenges and so forth. So now we have a real reason for people to get excited about bringing new people into the business, and that starts here in the month of August. So it's a real optimistic time as we look at pressing forward after a lot of things that we've learned in the past year or so in China.

Yes. Just anecdotally, Dan Chard and I will be in Shanghai next week attending a distributor gathering, a sales force gathering of something like 16,000 people. So to go from the days of really small, small group meetings to the ability to hold a meeting with 16,000 people is a dramatic shift from where we were a few years ago.

Great. Thank you.

Beth Kite, Citi.

A couple questions on the sales target for this year from the new products. I was wondering if you could help us understand the main drivers of Me and Youth and then, secondarily, essential oils. And then your longer-term expectations around essential oils, how big they might grow to, and your kind of, like, one to three years out. And lastly, if you have any ability at this point to forecast 2016 incremental sales from Me and Youth? Thanks so much.

Yes. Let me just preface the response there with some comments on the oil category generally. As I indicated in our initial remarks, it's an interesting category and one that we've seen a lot of growth in, in certain markets in particular. In China, our approach is a little bit different than it is in the United States because we're really trying to tie the essential oils that we are launching there to other products such as the Galvanic Spa. So a Galvanic Spa user in mainland China will take the facial spa treatment gel and infuse a couple drops of rose oil, for example. And the feedback that we are getting from trial users who are doing that are actually showing very positive results.

We can't do that in every market from a regulatory perspective, but there we can. And so consequently our positioning of oils is a little bit different. We don't expect to become an essential oils Company. We just think it's going to be a nice addition to our product portfolio. And this year, between China and the US, oils probably represent north of $50 million in sales. So a nice product category for us that we would expect to grow over time.

Do you want to add to that, Ritch?

Yes, just throw in, as it relates to Youth and Me, we have -- and I gave high-level numbers for what I have in my modeling as it relates to our LTO volume in Q3 and Q4. So, somewhere around $50 million to $60 million in Q3, and $80 million to $90 million in Q4. And breaking that down by product, it's about $40 million of ageLOC Youth and about $90 million of ageLOC Me, and the rest would be the essentials in China.

But again, those will be sold with kits in China, so there's additional sales coming through the kits that are beyond what the essentials, the oil products, are.

So as it relates to 2016, it's a little bit early to give that guidance. So I think our preference would be to see how the LTOs are received, and the feedback we're getting there would begin building inventory and projecting out where our sales will be in 2016. So probably by the time we have our investor day in November, we would have pretty good expectations for how to guide 2016.

Excellent. Thanks so much.

Unidentified Participant, Stifel.

This is actually Claire filling in for Unidentified Participant. My question is about capacity utilization at your manufacturing facilities in China. You talked about the inventory build-up for the new product launches but also your goal of reducing inventory levels. Can you give a sense of what capacity utilization has looked like over the past quarter compared to prior quarters? And then, as a follow-up, do you have any plans to expand the facilities to manufacture products that might not be a core to your business?

It's a great question, Claire. Thanks for that. There was a lot of talk about this, I think, a year ago, particularly in concern because we did slow dramatically the amount of product we were manufacturing in China. And so for several months our factories were unutilized to a large extent. That has picked up very nicely. And in fact, the report was that as of June we were getting back to really having full shifts going on in China, building the products going forward. So we are back in business, let's say, and moving forward in a good way.

In terms of building brand-new products and new opportunities, we will just have to consider those as we go. But we would envision the fact that we are going to have to expand our manufacturing as we go forward because we still have a limitation on capacity in China versus where we think the market can perform down the road. But at this point in time the factories are busy and working well. We still have additional capacity that we can leverage by using additional shifts and so forth. But things look real positive from that standpoint.

Thanks very much.

At this time, there are no questions in the queue.

Yes; let me just conclude by thanking you all for joining us on the call. As you can well imagine, those of us here at our headquarters are really looking forward to daily sales reports showing year-over-year growth going forward. So we are happy to be where we are at this point in the year and appreciate your support and, as always, stand by to address any other questions you may have.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.