如新 (NUS) 2015 Q4 法說會逐字稿

(Operator instructions)

Good day, ladies and gentlemen and welcome to the Nu Skin Enterprises Q4 2015 earnings conference call.

(Operator instructions)

As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Scott Pond, Head of Investor Relations. Sir, you may begin.

Thank you, Crystal. Good afternoon, everybody.

With me in the room today are Truman Hunt, President and Chief Executive Officer; Ritch Wood, Chief Financial Officer; Ryan Napierski, President of Global Sales and Operations; and Joe Chang, Chief Scientific Officer.

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 statement. 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 refer to the Investor Relations page of our corporate website at ir.nuskin.com for any required reconciliation for non-GAAP financial numbers.

I will now turn it over to Truman.

Thanks, Scott. Good afternoon, everyone. We appreciate you joining us.

As you saw in our release this afternoon, fourth quarter revenue came in at $572 million, which represents continued sequential improvement and a slight uptick over the prior year in constant currency. Revenue was negatively impacted 7% by the strengthening of the dollar. Earnings per share of $0.62 were also affected by currency as well as a few other factors that we'll discuss on the call.

Frankly, this quarter was a frustrating one for us and I think it's likely to be a difficult quarter for investors to evaluate. So I hope to provide some clarity on what we're seeing in the business and, of course, we'll be happy to answer questions, as well.

The quarter was frustrating to us because we saw really strong signals and results from product introductions in key markets such as the Americas and Japan. But, on the other hand, our December launch of ageLOC Me in South Korea generated only about half of the response that we had expected.

So, first I'll touch on the positive signals that we saw in the quarter and then I'll talk specifically about South Korea.

As you know we are early into what we believe will be a strong product cycle with ageLOC Youth and ageLOC Me. These products are the most compelling product innovations I think Nu Skin has ever produced. In fact, our consumer trials and the feedback we're getting from product users have been very favorable for both of these products. And, importantly, our sales leaders are now familiar with these products and are very enthusiastic about introducing them into their markets. So we feel confident about the quality of the ammunition we have to move the business forward.

In November, we had a very strong LTO of ageLOC Youth in the Americas region. The LTO generated about $21 million in sales and we quickly sold through our available inventory. This launch generated a 16% year-over-year revenue improvement for the region and was a nice follow-up to the third quarter LTO of ageLOC Youth in Southeast Asia, which led to a 44% constant-currency growth rate in that region in the third quarter. So the first two introductory launches of ageLOC Youth have gone very well.

AgeLOC Me, as you know, is our new customizable skin-care system. In December we introduced ageLOC Me in the North Asia region using two different approaches. First, in Japan we offered the product only through high-level sales leaders. And not only did the product sales in Japan meet our expectations, but we were also very encouraged with strong growth in the number of sales leaders in Japan. After several years of some fairly tough sledding there, it was nice to see Japan come to life with the introduction of ageLOC Me.

In South Korea, we tried a different approach. As you know, we have heavily promoted our product's subscription programs over the past several years. We've found that these programs augment the lifetime value of a consumer. AgeLOC Me is ideal for a subscription program because it comes with a 30-day supply of serums and moisturizers in measured doses.

So our Korea team decided to offer ageLOC Me at a slight discount in exchange for a 12-month product subscription to obtain the discount. And, as it turns out, that 12-month commitment seemed to be a stumbling block for many consumers. As a result, we ended up selling through about half of what we had included in our model for guidance purposes.

And, on the positive side, with the subscription component, we've seen a very high level of follow-on purchasing in January and February. And it's encouraging to see that the opportunity to customize one's skin care regimen is working well, as the vast majority of those reordering are in fact customizing their order. So the subscription offer appears to be a nice retention mechanism, but it obviously didn't work to maximize initial sales.

These insights from the initial launch events will be valuable as we leverage them in 2016 and now have the opportunity to roll out two very compelling products globally.

You'll note from our report today that we generated growth in sales leader in the fourth quarter in nearly all of our regions. The two standouts during the quarter were South Asia Pacific and the Americas with improvements of 24% and 17%, respectively.

We also saw double-digit gains in sales leaders in greater China, which is a healthy indicator. But we are being cautious about guiding China because of economic conditions and uncertainty there. And we are also cautious in our guidance with respect to South Korea as we sort out the extent to which the December softness was an execution misfire on the LTO, or whether there are other factors causing general softness in the market.

From a financial perspective, we continue to generate healthy cash flow and continue to enjoy a strong balance sheet. As reflected in our release, we repurchased $60 million of shares in the quarter and about 5% of our shares outstanding for the year. Our Board of Directors also today increased our quarterly dividend for the 15th consecutive year.

Currency has, obviously, had a huge impact on revenue over the past few years. In fact, if we had the same exchange rates we did in 2012, our reported revenue would have been over $400 million higher in 2015. Our updated guidance for 2016 is reflective of continued strengthening of the US dollar.

So while it's prudent to revise our guidance for 2016, this revision does not dim our optimism for the business nor our prospects for the future. Our team is fully committed to growth and we're focused on maximizing the impact of these new products, on growing our channel and our consumer base and on executing with excellence.

So with that, I'll turn the time over to Ritch.

Good afternoon, everyone. Thank you, Truman.

We closed 2015 having made consistent sequential improvements on our top line, as well in our balance sheet and having generated a good year of improved cash flow. We used our cash to repurchase more than 5% of our outstanding shares during the year and currency negatively impacted our top line by approximately $200 hundred million and continues, frankly, to be a headwind to us.

Our fourth quarter results finished a bit softer than we expected and, as Truman mentioned, our results were less than anticipated primarily because of the lower-than-expected LTL sales in Korea. While we're getting good feedback from the field related to the launch of the ageLOC Me product, we believe initial sales results were influenced by the way we bundled the unit with the annual commitment of consumables.

Overall, we enter 2016 with strong product initiatives, with our primary launches planned for the second and fourth quarters of 2016. Critical to our success will be growth in sales leaders and consumers throughout the year.

Operating margin for the fourth quarter was 10.8% compared to 15% in the prior year. Gross margin was 78.8% versus 82.5% in the fourth quarter of 2014. We continue to experience pressure on gross margin from the strength of the US dollar.

Also consistent with the first three quarters of 2015, we reclassified to cost of sales certain inventory-related expenses from general and administrative expenses. While this reclassification has no impact to operating income or earnings per share, the $7.9 million which was reclassified during the quarter negatively impacted gross margin by 1.4% when compared to the prior year.

In the current quarter, gross margin was also negatively impacted by approximately 50 basis points from expedited shipping charges related to product launches during the quarter. We anticipate our gross margin will return to the 79.5% to 80% range in 2016.

Selling expenses for the fourth quarter were 41.5% of sales compared to 42.1% in the prior year. General and administrative expenses for the quarter, as a percent of revenue, were 26.5% compared to 25.4% in the prior-year period. We held our global convention in the fourth quarter of 2015, an expense of approximately $7.5 million, with no similar expense in the prior-year quarter.

We incurred a loss of $3.3 million in the other-income-expense line item compared to a loss of $16.1 million in the prior-year period. Both periods were impacted by foreign currency losses related to the translation of our balance sheet and in our Company accounts, while the prior year also included a $7.4 million expense due to the prepayment fee associated with refinancing our debt.

Our income tax rate for the fourth quarter was 38.7% compared to 38.1% in the prior year. We anticipate the income tax rate for 2016 to be in the 36% to 36.5% range.

In summary, our revenue was at the low end of our guidance, but we missed our earnings per share due primarily to the lower gross margin, the FX charges in other income and a slightly higher-than-anticipated tax rate for the quarter.

During the quarter, we paid $19.8 million of dividends and repurchased $60 million of our outstanding shares. Cash provided from operations for the quarter was $80.1 million. Since the time we provided our initial 2016 guidance in December, the US dollar has continued to strengthen and we've adjusted this trend into our updated guidance.

Based upon January rates, and estimating the Chinese renminbi and Korean won may continue to weaken against the dollar, we now estimate a negative 7% impact from the strength of the US dollar in 2016 compared to our initial forecast of 4%. It's possible that this currency guidance might be conservative, particularly with the weakening of the dollar against the yen in the past few days.

All things considered, we've updated our estimates for 2016. We're now forecasting even local currency revenue in North Asia and EMEA versus 2015 and mid-single-digit growth in each of our other regions. These forecasts combined to a consolidated local currency revenue-growth projection of about 2% for the year. At this revenue level, we forecast an operating margin range of 10.5% to 11% for the year.

I'd like to provide further detail on how I currently model 2016 on a quarterly basis. For the first quarter, there are no significant planned LTO events. We estimate revenue to be $450 million to $470 million and earnings per share of $0.35 to $0.38. By the way, that reflects a 6% to 7% negative currency impact.

In the second quarter, we introduce ageLOC Me in the greater China region. We also have a follow-on launch of ageLOC Me in Japan. These launch events should result in double-digit local currency growth year over year in Q2.

In the third quarter, we don't have any significant plans for product LTOs. And we'll compare against a successful LTO in South Asia Pacific in the same quarter of 2015. Then finally, there are several product introductions in Q4 which should produce low- to mid-single-digit local currency revenue growth in that quarter. When factoring the currency impact of 7% to our revenue, we estimate 26 revenue to be $2.1 billion to $2.15 billion with earnings per share of $2.40 to $2.60.

So, with that background, we will now open up the call for questions.

(Operator Instructions)

Bill Schmitz from Deutsche Bank.

Can you talk about the confidence level you have in guidance? It seems like there's a new opacity in the business that didn't exist before. I'm wondering, do you think you're still getting good information from some of the country presidents and some of the bigger distributors in those markets? Because I go through the pieces, and it seems like there's a fair bit of conservatism across the board, but I'd love to hear some of your thoughts on that.

Yes, I think, Bill, where we land on guidance today is reflective of some conservatism. We just don't want to miss. And I think that, with respect to the feedback and the input we're getting from our geographic managers, I think they're also obviously feeling that pressure and they may be overly conservative in the way they're guiding the business right now. But, you know, the issue in Q4 was the LTO event in Korea.

And otherwise, our LTO events have gone really well. And, in fact, we had such a strong November, particularly with the US LTO and sales in greater China, that we actually went into our investor day meeting in early December thinking that we could potentially even raise guidance for the quarter. So, it was really a South Korea issue, and I think that our team there is being a little bit conservative given the fact that the December LTO did not hit actually anywhere close to what we thought it would.

So, yes, there's a measure of conservatism here. But I think we're getting good input from our management teams, Ritch, don't you?

Yes, I agree with that, Bill. And I think the fact of the matter is when you miss you try and recalibrate to a point where you don't miss again, and that's reflected in the way we put out our numbers today. I think everything from currency to guidance.

That's helpful. And is there any macro contagion, do you think, on the consumer side from China to Korea? Do you think it was purely just a change in the launch strategy that impacted it or do you think consumption will strengthen? I'm wondering why those guys launched with a bundle after the essential oils bundle didn't work before. You know what I mean? Because you sort of had the data point that maybe there wasn't a great deal of demand for like a broader bundled offering than [you in effect] tried to get. I'd love thoughts on both.

Let me give you a little color on that. We're trying to evaluate the extent to which economic or other general issues might be weighing on Korea a little bit. And frankly, it's hard to know. We're not hearing that from our field leaders or from our management team in Korea right now like we are hearing it from our management team in China, in particular, some concern over economic conditions. So, that's one of the reasons for conservatism here, as we mentioned in our remarks. It's just a desire not to be overly aggressive about the Korean environment in the event there are other macro factors at play.

The bundle was not borne out of ignorance on our team's part. I mean, what they were trying to do was make the product proposition a little bit more attractive from a consumer-pricing standpoint. So, the discount that was offered was designed to lower the effective monthly cost of purchasing the system and I think they just underestimated the impact of what a 12-month commitment means. And we think that's what muted the response.

So, what we've heard from them is that their belief, and our belief today, that it was LTO programming that really impacted December's results in Korea. But we've moderated our guidance for the market, and we'll obviously monitor that going forward so that we give ourselves a little bit of a cushion in case it's something more than that.

Okay, great. Thanks very much.

Thanks, Bill. All right. We have no other questions in the queue right now. So we're just trying to conclude by thanking you for being on the call again today. And as always, we will be available to answer any questions that you may have that we're able to answer. Okay, we do have another question in the queue. So operator, can you go ahead with the next question?

Mark Astrachan from Stifel.

Thanks for squeezing me in. I wanted to ask about the revenue expectations. I appreciate your commentary about wanting to be a bit conservative in your commentary about North Asia. But you did look - or at least it looks like you lowered your local currency revenue expectation for every geographic region across the world. So I guess I'm curious how much of that is macro versus what you're hearing from your folks and what your expectations are in the business itself.

Yes, thanks, Mark, for that question. I think generally, the big reductions in guidance came from greater China and South Korea. We made some minor modifications overall. Again, I think when you miss you try and get conservative everywhere to make sure that doesn't happen again. But the primary reductions in guidance, the big-dollar items, all came from greater China and from Korea.

Got it. Okay. And then on operating margins, so that came down as well. I guess I'm trying to put that together. So a little bit is gross margin as you talked about, but it seems like it's more G&A expenses, the level of fixed costs on a lower revenue base. Obviously offset by the selling expenses.

A, is that a correct assessment? And, B, sort of broadly, how much does it reflect a view that maybe you've got to do more in the business whether it's from a G&A standpoint or gross margin where that's still a little bit lower, even with the expedited shipping relative to what you had expected that means you're going to be selling product at a discount to try to stimulate demand here considering, partly, the macro piece?

Yes, the primary factor impacting operating margin is, as you stated, a mostly fixed level of G&A on a lower revenue number. In fact, we've had a debate as a management team on the best way to manage this going forward. We still feel more optimistic probably than is reflected in our guidance of our ability to grow the business this year. So, making significant disruption or cuts to the business doesn't feel at this time warranted.

We are committed to being profitable and making sure that we remain very profitable going forward, but at this point in time believe that we should keep a lot of our programs and so forth in place that are meant to generate growth in the business and support these product launches which we think will be positive. And then we can kind of monitor it as we go forward. But the primary factor is, as you mentioned, a fixed level of G&A on a lower revenue number.

Got it. Okay. Thanks.

Tim Ramey from Pivotal Research Group.

Ritch, you mentioned that the biggest whacks were greater China. And yet, it didn't look to me like its performance was significantly out of expectations in the fourth quarter. Was it to you? Is that where you felt it? You talked about Korea, but that's North Asia. Why would you single out greater China for the most reduction in outlook?

Yes, thanks for asking that so I can clarify my feelings related to that as well, because, actually, fourth quarter was decent in greater China. We saw an uptick sequentially in sales leaders. We saw a slight uptick in active. So we enter the year in certainly a better position than we entered 2015, where we were sort of on a soft trend. So, that was pretty good.

What I did was back out some of our expectation of the LTO in the second quarter. Given the softness in the LTO in Korea, I kind of reflected that throughout the year also in greater China although we continue to hear very, very positive responses. We did, in the fourth quarter, a leader preview of about 5,000 units that was right towards the end of December which we received really good feedback on, and our leaders feel really optimistic. So, probably the impact of the Korea LTO is affecting my forecast for greater China when the indicators would point to some good stability in that business with an opportunity to grow going forward.

Then, just taking a step back and not meaning to be tough on you, but I think about this time last year we also had a similar sentiment where we didn't want a misguidance. We wanted to be conservative about the outlook. And it is pretty stunning, the difference in outlook today versus December 4. So, what assurances can you give us that this is different than the level of conservatism you employed on December 4, or perhaps at this time a year ago?

Yes, I think, Tim, this is Truman, I think we're programmed, both Ritch and me, to be fairly conservative in the way we guide. And, we always have been. I think we always try to guide to what we think is a realistic level and we did that on December 4 and we're doing that again today. And unfortunately, in the interim between these two dates, we laid an egg on our LTO event in Korea and that's it. That's what's happened.

Let me just add a little more color to perhaps our China sentiments. You know, the first of almost every year in China is just really hard to read the business because China is typically a soft month globally. And, this year, January rolls into Chinese New Year almost immediately when essentially the country just rolls up and disappears. And so it's hard for us today to have really aggressive expectations for China when we can't get a very clear read on it, year to date. And I think that's what's feeding into our guidance today as well.

Okay. Thank you.

Yes. All right, we have no other questions in the queue. So again, we appreciate you joining us and are available to answer other questions that we can.

And, as I mentioned, we remain optimistic and enthusiastic about our prospects for 2016 and beyond. And maybe that's because we're familiar with the product ammunition that we're bringing to the market which we are very enthusiastic about. And probably even more so, if you knew the sales leaders that we have around the world, as I do, and the level of their capability and the level of their optimism for the future, I think it would be hard for anyone to be anything but optimistic about our potential. So, we'll get back to work and do our best to make shareholders proud of what we accomplish in 2016. Thank you, everyone.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.