如新 (NUS) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Nu Skin Enterprises' third-quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference call is being recorded.

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

Thank you, Takia, and thanks, everyone, for joining us. On the call with me 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 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 refer to the Investor Relations page of our corporate website at ir.nuskin.com for any required reconciliation for non-GAAP financial numbers.

With that, I'll turn it over to Truman.

Good afternoon, everyone. Thanks for joining us on the call today. As our release indicated, we posted a strong quarter, generating third-quarter results above guidance. Revenue was just above the $604 million mark, which was a 6% improvement over the prior-year quarter.

Currency was in our favor a bit in Q3, giving us a slight benefit, and earnings-per-share also exceeded guidance at $0.98, due to sales exceeding guidance as well as a tax benefit from closing operations in Venezuela, which Ritch will explain in a moment. The strong third quarter is allowing us to bump revenue guidance a bit for the remainder of the year or for the year 2016.

So, overall, we are pleased with the direction of the business. Throughout 2016, we've generated good growth in our core business when you sift through the introductory profit volume. In the third quarter, we saw growth almost everywhere with the exception being South Asia-Pacific, which had a tough year-over-year comp with the LTO of ageLOC Youth in the third quarter of 2015, which generated about $47 million of revenue last year.

As we previously indicated, we accelerated the launch of ageLOC Me in Korea from Q4 of this year to Q3, which helped to boost our revenue in this key market during the quarter. We are seeing good activity in the business as a result of two key initiatives. The first is the global rollout of ageLOC Youth and ageLOC Me.

These new products are receiving good responses in the marketplace, which is reflected in growth in our consumer base as well as in our sales leader numbers. In the third quarter, sales leaders grew 3%, led primarily by the Greater China region, where sales leaders were up 22%. Our quarterly active number also rose modestly, again led by the Greater China region, where there was a 22% increase in actives.

In addition to the introductions of Youth and Me, we're also seeing a rise -- a rising tide of enthusiasm for business building through social media. This trend really started in the UK, which is now our largest market in Europe. In the third quarter, you can see a nice uptick of 10% growth in actives in the EMEA region.

As we've mentioned in the past, we are investing significantly in building out a platform for our sales leaders to enable them to more effectively manage their business activities in a digital environment. Our initial field tests of the new platform will begin this month and will roll out globally over the course of the next year. We are really focused on this initiative, as it dovetails perfectly with momentum we are already seeing in social media business-building efforts.

We also continue to refine our thoughts on maximizing the value of ageLOC Me in the marketplace. We know that this product is perfectly in line with the customization trend that we are seeing all around us. AgeLOC Me is a first-of-its-kind skincare system that enables a user to customize their skincare regimen to conveniently provide exactly what the consumer wants in a skincare regimen.

AgeLOC Me is yielding high consumer loyalty and improved retention rates, but we also recognize the cost hurdle that consumers face with the initial purchase. So, in the fourth quarter, we'll begin running some promotional trials designed to lower the barrier to an initial purchase while maximizing the lifetime value of a customer.

In South Korea, for example, we'll offer the device and a first month of formulas for an aggressive introductory price with a loyalty reward offered after six months of using the product. So we like the feedback that we are getting on ageLOC Me, and we're just trying to find a sweet spot in terms of the economic proposition for the consumer.

Looking forward, while our fourth quarter does not include any LTO revenue, versus about $50 million of LTO revenue last year, we have a lot of promotional energy in the markets. In the Americas and Southeast Asia, we'll roll out ageLOC Me and we'll also launch ageLOC Youth in Japan and in South Korea.

As I mentioned on our last call, we are introducing an air purification system in China this quarter. And in EMEA, we will focus on holiday and social media promotions.

As you also know, the first quarter in Greater China is always impacted by the Chinese New Year celebrations. So to offset this factor, and given the fourth quarter launch of the air purification system in China, we have decided to push the launch of ageLOC Me to January for the Greater China region.

I also want to note that our product pipeline continues to look very strong. Our 2017 product is now called Lumispa, and is designed to complement our Galvanic Spa and our ageLOC Me devices. Lumispa is a handheld device that, we will argue, cleans and treats skin more effectively than any other device on the market today.

The device will cost about half what the Galvanic Spa costs, which, as you know, has been a huge success for us. We have very high expectations for this product, and look forward to demonstrating it at our Annual Investor Day meeting next month.

And finally, we are extremely pleased with the relationship that we continue to forge with Ping An and ZQ Securities in China. This relationship is already proving very helpful as we learn from experienced veterans more about the China marketplace. We have initiated dialogue with Ping An with respect to ways that we can leverage the presence, and their resources and their infrastructure in China.

And as Ritch will discuss in a minute, we also have plans to be in the market heavily in the fourth quarter as we look to fully utilize the $210 million of cash generated from the convertible loan transaction with Ping An earlier this year. So, overall we are encouraged by the direction of the business, and look forward to the coming year where we believe we can accelerate our growth.

So with that, let me turn it to Ritch.

Thank you, Truman, and good afternoon, everyone. Our-third quarter performance, as Truman mentioned, came in ahead of guidance and above the prior year. We benefited during the quarter from solid limited time offer sales of approximately $55 million, and most of that in South Korea.

Earnings also came in very strong and also benefited $0.09 from a tax benefit from closing operations in Venezuela. The closing of Venezuela resulted in a $6.4 million tax benefit offset by a $1.7 million write-off charge in the Other Income Expense line item. Operating margin for the quarter, third quarter, was 13.6% compared to 7.4% in the same prior-year period. Gross margin was 79.2% versus 73.3% in the third quarter of 2015.

Both operating and gross margins were negatively impacted in the prior year by an inventory write-down. Selling expenses for the third quarter were 42.3% of sales compared to 42.1% in the prior year. General and administrative expenses were 23.3% of revenue in the third quarter compared to 23.8% in the prior-year period. We incurred a loss of $5.7 million in the Other Income Expense line item of the income statement. This loss is primarily interest expense. The increase in interest expense from prior quarters relates to the addition of the convertible debt related to the Ping An transaction.

Our income tax rate for the third quarter was 25.8% compared to 42.1% in the prior-year period. The lower rate in the current period is due to the tax benefit that we talked about earlier from closing operations in Venezuela.

During the quarter, we paid $19.9 million of dividend and repurchased $17.4 million of our stock during the quarter. This leaves about $405 million and our share repurchase authorization as of the end of the quarter. Our plan is to utilize the balance of the proceeds of the $210 million convertible note to repurchase shares prior to the end of this year.

Cash provided by operations for the quarter was 49.6% -- or $49.6 million. And now let me speak to the guidance that we provided in our plans for the fourth quarter.

We are encouraged with the way the core business continues to develop. In the first quarter of this year, we did not have any LTO revenue and generated approximately $472 million in sales. In the second quarter of 2016, sales were about $600 million with just over $100 million coming from LTO sales. In the third quarter, we reported sales of $604 million with LTO revenue of about $55 million.

As we head into the final quarter, we don't anticipate any LTO sales, as we are deploying a customer-focused strategy with ageLOC Me. AgeLOC Me has proven, as Truman mentioned, to be our most retentive product that we've launched to date. And we believe the customer-focused approach will positively impact the steady growth of our global business.

So, for a customer who agrees to a subscription to the monthly consumables of Me will offer the device and the first month of cartridges at a significantly discounted price. We estimate that not having an LTO with ageLOC Me and offering at a discounted price will negatively impact our revenue modestly in the fourth quarter, but should have a positive effect in 2017.

Furthermore, in the first quarter of 2016, we felt that we lost momentum in our business throughout the Chinese New Year celebration, particularly in Greater China. To provide a strong initiative in our Greater China region in the first quarter, we have determined to push our ageLOC Me -- or decided to push our ageLOC Me launch from the fourth quarter of 2016 into January of 2017, and believe this will help us sustain many of the positive developments that we are seeing happening in China right now.

So, this change also negatively impacts our fourth-quarter revenue projection modestly from our previous guidance. And then finally, as it relates to foreign currencies, they have been, as you know, quite volatile of late. Fourth-quarter guidance includes a foreign currency impact that is approximately equal to or slightly more negative than our previous fourth-quarter guidance.

So, for 2016, we are raising our annual guidance to $2.23 billion to $2.25 billion, continuing to assume a negative impact from foreign currency of approximately 2%, with earnings-per-share of approximately $2.60 to $2.64 or $2.96 to $3 when excluding the $0.36 impact of the Japan customs charge, which we took in the first quarter of this year.

For the fourth quarter, we project revenue of $550 million to $570 million, with earnings-per-share of $0.77 to $0.81. Our revenue guidance in the fourth quarter anticipates a negative foreign currency impact of approximately 0% to approximately 2%.

So with that background, let's now open the call up for questions.

(Operator Instructions) Faiza Alwy, Deutsche Bank.

So, I just had a quick question, first of all, on the trend of the executive distributors. So it was up big in China and it was up big last quarter also. So can you just talk about where you expect that trend to go from here as we look ahead to 4Q and into 2017? And then just similarly, if you could address some of the declines in North Asia and Americas, and where you expect that trend to go.

Thank you, Faiza. I'll answer that -- this is Ritch. You know, we were really encouraged, frankly, with trends that we are seeing in Greater China. As you remember, we had a big uptick in the second quarter following some of our LTO activity there in Greater China. And so the fact that we were able to maintain those new sales leaders that came in was very positive.

So hopefully, we'll be able to kind of maintain again in Greater China as we go into the fourth quarter with fairly solid initiatives in the first quarter next year, as we launch ageLOC Me. The rest of the regions have some interesting comparables.

So, for example, in Southeast Asia on a year-over-year basis, we have the LTO in the previous year, which really pushed our executive number. So, that's a little bit of a weird comparison. The Americas was impacted in its year-over-year comparison, primarily with some Latin America activity. So, closing Venezuela and so forth, that made that comparable look bad.

So I think it's probably best, as you look at the trends with the executive and active base, to really look on a sequential basis in those markets, particularly Southeast Asia and the Americas.

And then finally, maybe just comment on Korea, where we saw a nice uptick in sequential sales leaders, but have not seen that same uptick in the active base. So we're looking really to deploy this consumer strategy in the fourth quarter with ageLOC Me that should build our active base in Korea specifically.

So, hopefully that kind of covers the globe in terms of some of the comparables. And again, I think the most important thing is to look at the numbers on a sequential basis with the changes on a year-over-year basis that make them look a little bit odd.

Okay. So, just to follow up then on Greater China on a sequential basis, we saw just a slight decline in the sales leaders. So, are you comfortable sort of with that sort of [31%] level going forward? Or do you think it should accelerate from here?

Yes, we were actually very encouraged with the fact that we were able to hold that pretty consistent after, I think, a 45% or something increase from Q2 -- or Q1 to Q2. So, I think our focus right now is to maintain that sort of a level as we come into Q4, and then get ready for another push as we launch ageLOC Me in the beginning of next year.

Okay. And then would you mind just talking a little bit about the air purifier product? Is that -- I think you said it's going to launch in Q4. Sort of any -- and if you could just elaborate on that a little bit more.

Yes. This is a product that was designed specifically for the China market. It's a fairly high ticket item. It's about $1,000 to service an average-size apartment in China, where, as you know, air quality is a big issue.

We have started to sell it to leaders in China just this month, and anticipate -- and in the fourth quarter, we'll move about 15,000 units or about [$15 million] in sales in the quarter from this product, which is not insignificant, and which, as I mentioned in my comments, is another reason why we are pushing Me to Q1, is just to enable them to focus on one product launch at a time.

Okay, great. Thank you.

Thanks, Faiza.

Tim Ramey, Pivotal Research Group.

Thanks so much for the question. Ritch, as I was trying to deduce earlier, and I think you got me there, but $6.4 million tax benefit offset by a $1.7 million cost in Other -- that doesn't quite get me to a $0.89 -- maybe it's something we should handle off-line, but is there any other component to that one-time item?

No, we can discuss it off-line if it's helpful, but one of those items is obviously the $6.4 million kind of an after-tax impact. So it has a different EPS impact from the expense; obviously, that's a pretax issue. So, together, they come out to a $0.09 impact for the quarter.

Got it. Okay. And was curious about the relatively low use of share repurchase in the 3Q. I kind of thought you would be off to the races earlier. Is there any reason in particular why most of the share repurchase is loaded into the fourth quarter?

Well, just that, as you'll recall, Tim, that in the third quarter, our -- the resolution of the SEC matter came to a head right at the end of the quarter, so we were only actually in the market a couple of days.

Oh, got it, okay. And then I think I had like $0.5 million in there for that. Is that something you just plugged into SG&A somewhere and we're not really calling it out?

Yes, that's right. We actually -- that was expensed in the second quarter. It was an estimable range at that point in time.

Got it, okay. Thanks so much. That helps.

Thank you, Tim.

Olivia Tong, Bank of America.

Can you talk about how much the launch of ageLOC Youth in South Korea contributed to the quarter? And when to do decide to roll out that? Because I think, last quarter, you said that it wouldn't hit until Q4, so it's obviously a little bit earlier. So that's the first question.

Yes, I think in total, it was about $55 million -- I'm sorry, about $50 million, and I think $49 million in Korea in the third quarter. We made a decision to move that up after our first quarter, and as we were coming into the second quarter, noticing that the trend was softer in South Korea than we had hoped.

You'll remember that when we launched the ageLOC Me in the fourth quarter, that didn't generate the level of excitement and growth that we had hoped for. So, we determined at that point in time to advance the LTO of the ageLOC Me into Q3.

Got it, okay. So when you guys said that -- when you guys had the press release and said that you expect results to be towards the top end or above the range, that was inclusive of that pull-forward for Korea?

Oh, yes. That's right. Yes, we had had the LTO already in July, so we had a pretty good idea of where that was coming in at.

Got it, thanks. Now then the follow-up question to that is, you obviously beat your expectations on sales, but it doesn't look like you got any operating leverage off of that. So, why wouldn't you have gotten some more margin expansion off of that better sales number?

You know, we beat our revenue by about $25 million, and our beat on the earnings line was about $0.05. So actually it was a decent improvement -- and normal, I would say, in terms of what our expectation would have been.

Okay. And then the tax benefit that you got from Venezuela, what's sort of your expectation for a tax rate for the full-year at this point, an ongoing tax rate going into next year?

The tax rate in the fourth quarter will come back to around 35.5%, and then I'd anticipate going forward in 2017, be somewhere around 35% to 36% as well. You know, very consistent with our normal quarters, I would say.

Got it, okay. And then would -- the movement of the launch of Me in China to January, I get that you want to get around the -- build some momentum around the New Year. But historically, don't your distributors typically take a break during the New Year holiday?

And I'm just kind of curious, because from what we've seen, it looks like you've already started to run some promotions for it. So, just trying to understand how that -- when you kind of made the decision to push back the launch of Me a little bit into fiscal 2017.

Well, that's just a recent decision, actually, Olivia. I mean, there's kind of always been the possibility that we might promote ageLOC Me in the month of December in Greater China. But in talking with the team, even just over the course of the last week, we've decided to hold that off, and just all things considered in the market.

And there are no ageLOC Me promotions going on in China right now. The promotions that we are running are outside of China. So, China just had the LTO of ageLOC Me earlier in the year, and we just feel like, all things considered, we want to learn what we can from these fourth-quarter promotions that are very consumer-focused, and then take another swing at the China market in January.

Chinese New Year this year is right at the end of January and first of February. So, we plan to go out after the New Year for the rest of the world with a second and third week push in China, ahead of Chinese New Year.

Got it. And then just lastly on the recent skincare consumption tax changes. Any update there in terms of the impact that it could potentially have on you guys?

You know, we continue to look at it, but at this point in time, I really don't have an update on what that's going to do.

Got it. Thanks, guys.

You bet. Thank you.

Frank Camma, Sidoti.

Hi, Truman, a question on ageLOC, maybe your comment about the pricing. Totally understand that in a market like the US, but like in the past, you've had issues with your distributors wanting maybe even more premium pricing in Asia. So can you talk about that dynamic as it relates to this product?

Yes. Well, so, South Korea, Frank, is probably one of the more sophisticated skincare markets in the world. And it really actually has kind of become the epicenter of skincare and color cosmetics in Asia. And there, you will recall, that we initiated ageLOC Me sales at an initial price of about $600 to buy the product, the device, one month of cartridges, and we also asked for a commitment -- a subscription commitment, in connection with the purchase.

And you know, this is a sophisticated market, and the product launch went okay, but it was below the expectations of our management team there. And as we have evaluated the market, and the product launch in that market in particular, and talked with our sales leaders, they love the fact that it secures a customer who essentially has to reorder on a monthly basis, but they are finding a bigger hurdle than we would've anticipated with the initial purchase.

And so we just want to test, in the fourth quarter here, some more aggressive pricing, and see if it makes a difference. So, in South Korea, for example, our fourth-quarter ageLOC Me promotion will offer it to a consumer willing to sign up for a subscription for $300 instead of $600. And then after they have been a product subscriber for six months, we'll give them a loyalty credit that will enable them to purchase about $150 of Nu Skin products.

And so, a much more aggressive approach to securing more customers and really maximizing the lifetime value of an ageLOC Me consumer. It's more of a razor-and-razor-blade approach, and we just think it's worth a shot here as we try to maximize the value of the product.

Otherwise, the feedback on the product is very positive. Everyone loves the product, what it's doing for them. They love the convenience of the system. And we've really felt, over the course of the last 12 months since we started introducing the product, it's just a matter of dialing in the right economic formula.

Okay, great. And then my only other question is on ageLOC Youth. What are you seeing there as far as people also buying -- or their willingness to also buy the monthly subs supplement in addition to it? Do you see any cannibalization? Just kind of curious now that you've got some data on that.

Yes. Thanks, Frank. I'll answer that question. So, AgeLOC Youth for the quarter was really strong -- about $80 million total. Obviously, that included about $50 million from Korea. And it really hasn't fully launched everywhere in the world yet. So, we are encouraged with what we are seeing.

We saw our LifePak sales hold pretty consistent as well, and not be cannibalized too much by the rollout of Youth. So we are encouraged with that. And it's just really now, as the product starts to roll out, that we'll see the subscription customer base and what that looks like. But all things to date look positive for Youth and we like the direction it's going.

Great. Thanks, guys.

Thank you.

(Operator Instructions) Beth Kite, Citi.

I just want to go back to China if we could, and just in addition to talking about the rep growth that you are seeing there, if you could talk to us about, post the Me quarter in June, here in the September quarter, what maybe other products are working? Have you made other sort of execution-oriented changes in the marketplace to how you are interacting with your reps? Were there other promotional activities going on? Just to sort of understand maybe some other elements of the China business.

There really haven't been any dramatic changes in the way that we are interfacing with sales leaders or with consumers in the market. The Galvanic Spa has been and continues to be a product of primary focus in the marketplace. And, from time to time, we will run Galvanic promotions that always generate a big response.

But we are also -- probably the one dynamic that we have definitely noticed just relates to our earlier comments on the retentive benefits of the ageLOC Me skincare system, as we are seeing cartridge sales trend very nicely on a month-to-month basis. And we are really happy to see a growing customer base on what is essentially a subscription-oriented type product.

Excellent. That actually leads me into my -- one of my other questions, which was -- are there any statistics you are able to share with us for the Me cartridge repurchase rates, either globally or in certain other countries that have had it longer?

You know, maybe I can speak to that, Beth. Thanks for that question. You know, we are very, very encouraged. I think the longest -- the market that's had it the longest is Korea, and we continue to see just this very stable user base that has started back in December, when we first sold the product, and has continued. We feel like the initiative that we did to get people on a subscription of the product there, with a slightly reduced price at that time, was beneficial.

And we've seen a good acquisition of customers from that. So, that's really leading us down this path of adjusting and promoting the product with a subscription associated to it.

So, a little early still on a lot of the markets, because the product is just rolling out. Even in China, we just had that initial sale of units. And so we are seeing now the customers customize the product and start to order the customized cartridges. But it's just a little bit early to have too much data yet.

Okay, excellent. And just one last geographical question. Here in the US, I believe sort of late summer-ish you launched the BeautyBox for women, which was more to a product you'd had in EMEA. And then there was a men's version that came out kind of late September/early October. Can you just talk to us about each of those? And sort of have they had the response here domestically that you had seen in EMEA that you were hoping to see?

You know the BeautyBox is really a kind of a derivative of increasing levels of interest in pushing the business through social media. And what the US team did was essentially take the five or six products that are most prominent in social media environments around the world, and put them together in a kit that they call the BeautyBox.

They are all relatively low to moderate price point products. And so to BeautyBox is very affordable. And for those who are pushing the business through social media, it's been a really nice product in North America and in Latin America, where I don't believe that any of our markets yet have packaged these products on a similar basis. But in North America and Latin America, both the gender-neutral as well as the male BeautyBox, are getting a really nice response.

Okay, perfect. And last one, I assume it might be in December, but is the plan at the Investor Day to talk to us about the local currency sales growth you are expecting for next year?

Exactly. Yes. We are really looking forward to talking more about Me, and what we're learning through our various tests around the world. And I think we'll go into more detail on the retention benefits that we are seeing in Me. And we'll also, of course, talk about our launch plans for the Lumispa product in 2017, which we are very excited about.

Great. Thank you all so much.

Thank you, Beth. Thank you for joining us on the call today, everyone. As usual, we'll be available for additional questions, and just want to also take this opportunity to invite you all to attend our December 7th Investor Day presentation in New York City. We're looking forward to talking about our exciting product launch plans for 2017, and of course, we'll be available to answer more detailed questions there. Thanks so much.

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