如新 (NUS) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Nu Skin Enterprises Second Quarter 2017 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 presentation, Mr. Scott Pond. Sir, please begin.

Thank you, Howard, and good afternoon, everybody. Thanks for joining us today. On the call with me today are Ritch Wood, Chief Executive Officer; Ryan Napierski, President; Mark Lawrence, Chief Financial Officer; 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 in comparing period-to-period results in a more consistent manner. Please refer to the Investor Relations page of our corporate website at ir.nuskin.com for any required reconciliation.

I'll now turn the time over to Ritch.

Thank you, Scott, and good afternoon, everyone. Thank you for joining us on this call today. As we reported in our release this afternoon, we're pleased with our quarterly results. And we see healthy momentum developing in our business. We generated second quarter revenue of $550 million at the top end of our prior guidance. Quarterly earnings came in above our guidance at $0.77 and was positively impacted $0.04 by a lower-than-expected tax rate. We're implementing our strategy to grow this business through accelerated customer acquisition. Our initiatives are centered around 3 key growth areas: platforms, products and programs. We introduced this strategy to our top sales leaders during the second quarter and feel we're getting strong alignment with these leaders, who are our most influential business partners. We were encouraged by the 5% year-over-year improvement in customers that we generated in the second quarter, which also represents an 8% sequential improvement. We believe growth in our customers will support growth in the number of sales leaders later this year.

As we focus on platforms, social media allows us to expand our reach, introducing new customers to our products and to our business. We have made great progress applying social selling in our businesses in the Americas, many parts of EMEA and select markets in South Asia/Pacific. We're working to train and align our sales force around these social selling platforms in all of our markets and believe this to be a key driver to our future growth. Our marketing and R&D teams have been working at a fast pace to develop new products that are ideal for social media. You will see several of these new ideas previewed at our global LIVE! distributor event in October, and we are very optimistic and excited about our October introduction of ageLOC LumiSpa, our innovative facial cleansing and treatment device.

Additionally, we are enhancing our sales programs to optimize the performance of our sales leaders and reward them more quickly. We also expect these enhancements will be a strong influencer to our growth opportunities in the future. I feel so positive about the developments in our business today. We truly have amazing sales leaders and they are key business partners with us. We have great initiatives planned primarily for the fourth quarter, and I believe these will continue to drive momentum in our business, positioning us to generate solid growth in our future as well.

So with that quick introduction, let me turn the time over to Ryan.

Thanks, Ritch, good afternoon, everybody. I'm going to take a couple of minutes and just talk about market results for the quarter, give some additional details on our plans to grow the business. First starting with mainland China, we had a strong quarter, although our year-over-year comparisons were impacted by the ageLOC ME LTO. Nevertheless, our underlying business metrics continue to move in the right direction. Performance in China is largely related to both products and program initiatives. AgeLOC Me has been a strong complement to the Galvanic Spa and to our proprietary device platform, helping us to improve customer acquisition and retention.

Additionally, new sales programs have helped sales leaders to more effectively grow their businesses. Japan and Korea both continue to be a bit soft for us in part due to environmental factors. But we're optimistic that we'll gather momentum in our growth -- around our growth strategy to move the businesses forward. I attended the conventions last quarter in both markets, and I'm encouraged by the sense of optimism amongst our leaders, as we build towards the fourth quarter and the introduction of LumiSpa.

South Asia and Pacific met expectations for the quarter, though year-over-year comparables for that area of the world skewed -- were skewed due to prior year LTOs. Social selling is driving favorable customer acquisition results in several markets in the region, and is the primary growth driver for Pacific. We're confident in our growth prospects in this region as well. As Ritch mentioned, one of the stars of this quarter has to be the Americas, as we posted solid gains in nearly all metrics, but most importantly, a 27% year-over-year increase in customers. We've been able to renew momentum in a market that has been fairly stagnant, as our sales leaders have embraced social selling platforms to drive new growth. This is a great example of how we as a company can align with our sales leaders around our growth strategy. This performance in the Americas gives us confidence that we can see similar results in our more mature markets as we execute our growth strategy around platforms, products and programs. We were also pleased with the results in EMEA, where our social selling continues to expand throughout the region. This platform has been a game changer in the Americas and in certain EMEA markets, and will continue to be a focus -- or continue to be as we focus on implementing the strategy in all markets. So all in all, we're very pleased with the continued improvements we're seeing around the world.

Now let me quickly talk about a couple of key strategic initiatives related to the growth strategy that Ritch described previously. First, regarding our platforms. Social selling continues to be a key factor for our current and future success, as we've been discussing. We're focused on providing our sales leaders with empowering tools to support their social selling business activities, including improving customer acquisition, retention and development. We'll be rolling out new tools around the world throughout the second half of this year and into 2018. Regarding our products, we're very focused on developing products that are attractive to a broader range of consumers, who purchase via social mediums. These products must provide visible results, be demonstrable, moderately priced and socially shareable. One such product is LumiSpa, which we'll be introducing at our upcoming LIVE! event this October. Additionally, at LIVE!, we'll be introducing several other products that are optimized for social selling to empower our sales force to attract a broader demographic. I don't want to give away all that we're doing, but you will begin to hear some noise about a new and innovative Longwear LIVE product line and other demonstrable products in the coming weeks.

Regarding our programs at LIVE!, we will also introduce our vision for the future of our sales model. For more than 30 years, Nu Skin has been a leader in empowering entrepreneurs to build an independent business and meet their personal and financial goals. The world is changing at a rapid pace, and in our favor, we believe. As part of the commitment to being the world's leading opportunity platform, we're working to refine our sales model to more quickly and effectively reward our sales leaders for their efforts. We provided some high-level direction to our top sales leaders in May, to an overwhelmingly positive response and are excited to offer more details to our existing and potential sales leaders in October. We will begin to roll out this new program following our LIVE! event and anticipate a full implementation over the next several quarters. So I think it's safe to say that we're excited about the future and confident in our ability to drive improvement throughout the markets.

I would also like to personally invite each of you to join us at Nu Skin LIVE! in Salt Lake or online, this coming October 11 to 13, to get a sense for why we are so confident in the future.

So with that, I'll turn it over to Mark.

Thanks, Ryan. Let me walk you through some of the second quarter highlights and provide my perspective on how we see the balance of the year. As a reminder, we faced a challenging comparison to the second quarter of 2016, which included $106 million from lifetime -- or from limited time offers.

For the quarter, our revenue declined 8% year-over-year and was up 10% sequentially, to $550.1 million, and was negatively impacted 2% by foreign currency fluctuations. Our quarterly earnings per share came in at $0.77 compared to $0.79 in the second quarter of 2016. Our current period earnings were positively impacted $0.04 by a favorable tax rate, which occurred due to the exercise of employee stock-based compensation. As we look at year-over-year comparisons, our operating margin came in at 11.8% compared to 13.3%, while gross margin was 77.9% compared to 78.7%. Selling expenses for the second quarter were 41.5%, up slightly from 41.4%. General and administrative expenses were 24.6% compared to 24% in the prior year. We incurred an expense in other income/expense of $2.7 million compared to $11.1 million in the prior year that was largely due to the translation of yen-denominated debt.

Our income tax rate was 32.2% compared to 35% in the prior year. During the quarter, we paid $19 million of dividends and repurchased roughly $15 million of our stock, leaving $178 million remaining in our share repurchase authorization. Our guidance for the third quarter is revenue of $540 million to $550 million with earnings per share of $0.71 to $0.76. Similar to last quarter, we face a challenging year-over-year comparison in Q3. The prior-year period included $56 million in LTO revenue, while our product launches are planned for the fourth quarter this year.

We expect third quarter revenue to be negatively impacted 2% by foreign currency fluctuations. As we look to the year, we reiterate our previous annual revenue guidance of $2.26 billion to $2.30 billion, and have raised our earnings per share guidance to $3.20 to $3.30. This assumes a negative foreign currency impact of 2% to 3%. We also remind you that we anticipate approximately $100 million in revenue in Q4 2017 from the introduction of ageLOC LumiSpa.

Finally, we will hold an investor and analyst luncheon and webcast in connection with our Nu Skin LIVE! event on Thursday, October 12. This event will take the place of our traditional Investor Day event this year. And we invite you to attend in person or participate on the webcast. You will be receiving a formal invitation to this event from our Investor Relations team shortly.

We will now open up the call for questions.

(Operator Instructions) Our first question or comment comes from the line of Frank Camma from Sidoti.

The cadence in the back half, I don't expect that it's heavily Q4 weighted, but a little more than, I guess, I had even modeled. So -- you called out the $100 million from LumiSpa. Is there any other LTOs in Q4?

Frank, thanks for that question. We've been consistent with our guidance really from the beginning of the year. Q2 and Q3 generally are similar in revenue with all our -- real planned product launches in the fourth quarter. And generally, we see fourth quarter larger than third quarter as well. So we have the big LumiSpa. There are several other smaller products. We don't anticipate significant revenue from each of those individually, but we do anticipate to continue to build momentum and we're excited about fourth quarter. There's some really good things coming together.

Okay. Revenue obviously came in pretty nicely here. But can you give a little more color on the sales leaders trends? I mean, is this mostly because people aren't qualifying versus like last year because of the LTO revenue, or are people dropping out of the network? That's kind of what I'm trying to figure out.

Yes, no. Frank, this is Ryan. I think you hit the nail on the head. It -- really sales leader growth typically follows customer growth. We're built really this year for sales leader growth in the second half leading up into Q4. So what you're seeing is the increase in customer acquisition and customer growth will -- we anticipate will lead to sales leader growth in the second half, especially, as we get closer to LumiSpa and the introduction then.

Right. So they'd have to qualify before the LTO launch of LumiSpa? Is that basically how you're going to allocate it, or...

They typically qualify prior to, but the actual sales leader number then is reflected towards the -- or within the quarter.

Okay. And my last question is just on the other income since it was a pretty big swing here. I mean, obviously, that's usually a difficult number to model. But was -- when you said the yen, was that the yen from last year creating the $11 million loss? Or in this quarter the $3 million loss?

No, it was for last year. Last year in the $11 million was the yen.

Okay, so $3 million is sort of this compilation of all other translation adjustments?

Correct.

Our next question or comment comes from the line of Tim Ramey from Pivotal Research Group.

I wondered if you could comment a little further on China. I understand the impact of the LTO last year. And that, I guess, likely means that you showed good organic growth ex that? Can you talk a little bit more about what's going on, on the ground in China?

Let me just take real quick, Tim, and then I'll pass it over to Ryan. But we're actually really encouraged with the things we're seeing in China. We had a really solid quarter in mainland China specifically, and saw a really nice uptick in our customer numbers and our sales leader number sequentially. So the year-over-year comp is difficult, [seal] in the prior year, really inflated, particularly the sales leader number. But we really like the trends we're seeing. And Ryan can kind of talk about what's driving that.

Yes, I absolutely -- as I mentioned, previously, the customer growth in China, which is something we've been acutely focused on over the last several quarters is really playing out nicely. So for us, we're very, very happy with that. Other metrics are really moving in the right direction. So there is, for us, we really are pleased with how China is shaping up from -- in all areas. Really looking forward to second half in order to bolster our sales leaders following the customer growth.

Great. And one for Mark. The -- I know the ETR is very difficult to forecast in this new age of expensing options through the new accounting treatment. Would you still think that 36% is kind of your baseline ETR, or would you modify that? We've trending above -- or below that for 7, 6 quarters now I think?

Thanks, Tim. I think 36 is the right number to use for our model. To the extent that we do have exercises that number will be impacted and we'll likely have opportunity against that number. But we can't estimate how many of those shares will be exercised. So I think best case is for -- is to model it at 36%. And there will be opportunity against that as people exercise shares.

And you weren't too aggressive on share repurchase, given that there was a lot of really interesting initiatives launched this quarter. Can you chat relative to that, was - were there periods where you couldn't buy in shares or is this just how the chips fell?

Yes, let me just comment on that one, Tim, too. We really remain consistent in our desire to repurchase shares, it's a great use of cash and this quarter was exactly the same. We're consistent throughout the market -- or throughout the quarter. Our stock actually traded pretty strong through the quarter. So that obviously influences the way we're thinking as well. But you can always count on us to be in the market, and when we have excess cash, we'll deploy it buying back shares. So yes, we weren't way off, it was a little bit less maybe than what you'd expect but consistent with how we're thinking about it going forward.

Okay. And just one more quick, if I could. Gross margin performance was good. And probably less of a FX penalty there. Is there anything we should be thinking about relative to gross margin for the remainder of the year?

I think, as you saw gross margin increased this quarter with revenue. I think you should plan on that continuing, I think gross margin will continue to expand as our revenue grows. Q3 is expected to look pretty close to Q2. So that's where I would model my Q3 number. But looking out to Q4, you would expect an uptick.

It's a nice leverage there.

Yep.

Our next question or comment comes from the line of Faiza Alwy from Deutsche Bank.

So I just wanted to ask a little bit more about the cadence of sales in 3Q versus 4Q. So it looks like even outside of LumiSpa, some of these other products that you are launching are expected to be a big contributor? Are these going to be more sort of global products? Are they going to be concentrated in a particular region? Or any further detail that you can provide on that would be really helpful.

Sure, thanks, Faiza. It's Ritch, again. We expect to launch several at the LIVE! event. There'll be limited sales opportunities that really give us a chance to evaluate the product, and how it's accepted and then they will, from there, be rolled out globally, according to our -- really our strategic plans to grow the business. And we don't have those all finalized at this time. While the products in and of themselves, there is not significant quantities that are going to drive large amounts of sales, together, they'll make a nice little pop in sales. And then generally, what we would anticipate being the key driver, obviously, LumiSpa, but we really believe that growth in customers and growth in sales leaders in the back half of the year will also really support a strong fourth quarter. So it's partially coming from the launch of new products. It's partially coming from the fact that Q4 is generally a stronger quarter than Q3. And then finally, it's coming from growth in our core metrics, which is really determined -- it determines the health of the business. I mean, I think that's where I will keep my focus, is really what's happening to the customer and sales leader number.

Okay. And then just quickly, if you could talk a little bit about where you expect the customer count to be by the end of the year particularly in China?

It's a little tricky to try and project that. We saw a really nice uptick Q1 to Q2. And then would anticipate holding mostly steady from Q2 to Q3. But Q4 should be really strong. The LumiSpa will preview, we'll have an introduction of the LumiSpa in China in the fourth quarter. And depending on how that is accepted into the market, which we think will be really positive, we anticipate a nice step forward in the fourth quarter from where we'd be at in the third quarter.

Our next question or comment comes from the line of Olivia Tong from Bank of America.

I just want to follow up a little bit more on the outlook, because your -- obviously, your guidance seems to suggest an incredibly heavy Q4 quarter, which makes sense given the convention, but the delta is now even higher than what you had suggested before. And also assumes that the launch of LumiSpa is completely additive. And as we've seen with LTO activity this year versus last year, sometimes that can have sort of detrimental impacts in the forward year. So, I guess, maybe can you just unpack that a little bit more, the fact that #1, such high expectations from LumiSpa and that it'll be completely additive, nobody is going to cut back on their sales of other things even with this big launch? And then helping me understand sort of how you have sufficient visibility to confidently call Q4, particularly when more recently the nearing quarter outlook on, particularly in sales, has come in significantly below what the Street has expected at least on a quarter-to-quarter basis?

Yes, I'll turn this one over to Mark. But first, let me just say, that this is, we have always modeled the way -- this way, our year following out this way. So this is the first time, we've actually put out our model for Q3, but since last year, this is really how we've modeled the year to land.

Yes, I would add to that, that if you take our guidance for Q3, $540 million to $560 million. And you assume some sequential growth into Q4, and then you add on top of that $100 million for the LTO. I think you can get to our annual number relatively easily. It does imply pretty significant sequential growth, but we have that planned in. And then we also have assumed in that $100 million some level of trade-out of other products. So we would expect, we sell more than $100 million of LumiSpa, and we have some offsetting non-sales of other products, cannibalization, I guess, is the word I was looking for, that would get us to land at the $100 million we're calling out.

Thank you for that detail. I guess, my -- what I'm trying to understand is like your Q4 number that you imply from your outlook, obviously, you've got Q3 guidance, you've got a full year, so we can figure out Q4, which is just about a $150 million in year-over-year growth in sales, a $100 million of that coming from LumiSpa. So, I guess, perhaps can you talk about prior launches and help us understand like when you have big launches, if I remember correctly in the past, you have seen cannibalization in terms of other parts of the business as your distributors and your leaders focus more on the big product at hand, and perhaps take a little bit of their eye off of -- and refocus that energy on the big product, and that results in lower sales of other products. So that's what, I guess that's my question is, why this time would you expect that other products also grow in addition to the big product that you have planned for Q4?

Yes, maybe I can just make a quick comment, and Mark feel free to add to this one as well. Looking at the business on a year-over-year basis in Q4 is not very easy to do. I think it's best to look at it from really Q3 going into Q4. But if you look at the previous LTOs that we did last year, we did $106 million in Q2. And that was concentrated in 2 regions, it was just greater China and Southeast Asia. In Q3, we also had LTO revenue and that was primarily coming from Korea. So as we look at the way we're doing the introduction this year, we're really spreading it out wider across to all the markets. We're limiting essentially the amount of sales that we're having in this introduction and we have a very heavy focus on customer acquisition. And so, I'm pretty confident we can get to the $100 million because it's spread out over the entire globe. And frankly, there is a lot of excitement surrounding this product that we're seeing. People are familiar generally in our business with devices because we've been focused on that. And this product, while it's a new product, it fits really nicely into the device platform that we have. So well-understood, to a wider demographic, priced in a position where we think it will have great uptake. And I think getting to the Q4 number, certainly from our perspective, when you take Q3, you add the fact that we generally go up a little bit from Q3 to Q4 just with the normal cyclicality of the business, add a $100 million from this product, the LumiSpa. It really -- for us, it makes a lot of sense and it's the way we've modeled the year from the beginning.

Our next question or comment comes from the line of Doug Lane from Lane Research.

You talked about a slight currency hit in the third quarter and for the full year. Have you talked about what your expectations are for the fourth quarter specifically on currency?

We didn't call out the fourth quarter specifically. I think the number is implied in there. There is a lot of uncertainty still in how the dollar is going to move. And our original guidance was 2% to 3%. I don't think we have enough information now to move off of that guidance. We feel pretty good about where we have forecasted Q3, and we kept our annual guidance in line with what we said before.

Do you think currency will be neutral or even positive in the fourth quarter?

Well, if you look at -- if rates stay exactly as they are today, we will likely have some opportunity against the numbers we gave you.

Okay. On the new products associated with social selling initiatives. They tend to be, I guess, lower priced. Are they the same gross margin? Or is there going to be a margin impact as well we have to think about?

I'll take that one as well, Doug. Yes, the margin impact will be very consistent. And the way we're looking at the margin is more on the contribution margin front. So we really look at the selling price, which will be a net selling price less the cost of sales and less the sales incentives that we pay on that. But we'll remain fairly consistent in terms of how the margins work. We will be pricing these generally at a retail price and capturing some of that retail profit. So in terms of how we account for it, there is a couple differences to how we account today. And that is, if it's somebody selling it to another person and pulling in that retail profit, it's treated as a selling expense. So what does that mean? A little bit higher gross profit, a little bit higher selling expense. In terms of how it would work, if the sale is happening to myself, if I'm buying it for personal use, then it really is treated as a contra revenue and looks exactly the same way we book everything today when we sell at the wholesale price. So there will be potentially some slight adjustments in the term -- in terms of how this is accounted for. But the margin on an apples-to-apples basis will remain consistent...

From a dollar perspective.

From a dollar perspective.

And at the contribution level?

Correct.

Correct.

So it might move between selling and gross margin depending upon the type of sale that's done?

That's right, Doug.

Okay. And can you just step back and -- we hear a lot about social selling among direct sellers these days. What -- how do you look at social selling? What's different than what you normally do? And how are you going to keep your sales leaders engaged? Or how are you going to keep your client engaged with your sales leader?

Hi Doug. Yes, yes, social selling is becoming a bit of a buzzword, I think within the industry and certainly impacting -- social is impacting virtually every consumer-facing industry out there. For us, we look at social as very much a much bigger opportunity for us to reach an expanded market much more effectively, and that's what we're seeing in our data to date. We're very focused on -- I think if you step back to your point, looking at social selling, as a -- it's really an extension of some of the natural principles, or underlying principles, of direct selling, which is really consumer to consumer, a transaction based upon consumer-to-consumer interaction. And that's really social selling with the added layer of technology on top of that. And so what we're seeing in our business is, a very effective transition from the traditional direct sales model into the social sales model, which leads to your second part of the question of how do we keep our leaders and our sales force engaged in this. Generally speaking, we are seeing a good migration of sales leaders, who are socially networking already through various platforms. As they learn how to leverage those platforms to reach an expanded audience, we're finding that process to be fairly natural to some, some more than others, of course, younger demographics tend to do a little bit better because they're a little more familiar with it, but we're seeing acrost [sic] [across] our demographic span, leaders of all types trying it out and seeing good success as they do it.

Our next question or comment comes from the line of Beth Kite from Citi.

I was wondering if we could focus for a couple of minutes on the Me cartridges. And just understanding if you are able to give some examples of retention rates in various either geographies or a couple of countries? And also are those cartridges one of the main drivers of the higher customer numbers you're seeing in various markets?

Yes, let me just quickly comment, and then maybe have Ryan add to this. We really like the way ageLOC Me fits into our business. And it's getting traction. It had a good quarter. The sales are really moving, at about a $200 million per year rate right now, which is a very good product for us. About 80% of that is cartridges, with the other portion being the actual devices themselves. So we love the uptick on the cartridges. It is a big purchase up front. So we -- people have to think about it before they actually engage and commit. So we're thinking about ways to continue to simplify that decision and help it out. But there's no doubt it's having a positive impact on retention. And specifically in China, China has been our most successful market with the ageLOC Me product. So Ryan, what would you add to that.

So simply to add, Beth that, to the point, the cartridge sales, they do -- they're fairly retentive. We're finding that customers really, really do like them, also with our sales programs and promotion plans around it. It encourages people to really remain committed to the product. And so it is helping us in our numbers, you referenced the customer number in China, in particular. Yes, certainly we're benefiting from improved retention as a result of the product.

One of the things, Beth, I was real encouraged about in the quarter, was the fact that we saw really strong numbers with the Galvanic Spa as well, and -- this is an area where we think we have a really differentiated offer. And then we add LumiSpa to it, so we really have cleansing, we have the daily customized regimen and then the treatment in the Galvanic Spa. And so we think there is a lot of room for us to continue to learn and leverage this opportunity. But -- really encouraged with the way things are developing on the ageLOC Me.

Terrific, great. That's really good to hear too, about the Galvanic Spa, obviously. For LumiSpa, I guess I'm a little bit confused still, I know historically, some of your LTOs have kind of been, like I remember use in the U.S., November, a year ago I want to say, right, it was kind of like this really condensed, was it a day or couple of days that you sold through them all, all your units? I don't exactly understand quite yet, is the LumiSpa launch, are a certain number of units going at the LIVE! event, and then throughout the rest of the quarter in various countries? Or can you just help us understand sort of, is it a -- really intense over couple of days? Or is it sort of like a full quarter focus in the fourth quarter for the LumiSpa?

Great question, Beth. And we really have it broken out. So at our LIVE! event or right around the LIVE! event, we will enact a global preview for those attending the event. They'll be able to participate in that. It will then be followed by a sequence of market previews that will occur throughout the entire quarter. So we have various markets going in late October, all the way through the end of December. And so those market previews are really based on that and based on the quantity we're able to produce in the fourth quarter.

Got it. Okay, super. I have one question too. Just thinking about, we obviously just think sort of more about Greater China rate, and Hong Kong and Taiwan have just fallen off so much. It's wonderful that Mainland China is so strong right now. But what's the dynamic in those 2 places right now? And might you be able to rejuvenate some sales growth there?

Yes, no, it's a great question, Beth. And I'll go back to some of my comments earlier on this. Yes, there's no question that Hong Kong and Taiwan are not experiencing the same level of growth as China. These are 2 markets for us that we've been in for a long time. They're relatively small markets in terms of population size. We've all -- we've had very good market penetration there. For us, we believe there's a great opportunity with social selling to reach new demographics in those markets. There are emerging groups there that are young, that are vibrant, that are very socially plugged in. And so our focus is really on -- strategically to leverage, just as we have done in the U.S. and we've done in some of our EMEA markets and Southeast Asia/Pacific, leverage social to really go after a new market. And so that's really our focus, our primary focus there.

Got it. And if I could squeeze in just 2 more, one I think is a quick 1. Herbalife yesterday cited the fact that the National Congress was occurring in China this fall, and so ahead of that, certain commercial meetings were having limited approval, if you will? Are you -- is that impacting your business here in the third quarter at all?

We're accustomed to these events happening there in China. And they certainly do impact us to some degree in terms of how many meetings are able to get approved and held, but generally, I think we're accustomed to working through it, and we don't anticipate a significant impact -- negative impact to our business.

Okay, terrific. And one last one. I thought the packaging changes looked so sharp at the Investor Day last December. Where are you in phasing in certain of those new packages?

Yes a great question. So at the LIVE! event, we'll be previewing new products, several of our new products that will contain the new packaging. And then they'll be sequenced throughout the portfolio globally from that point forward according to inventory levels, market opportunities for us as we restage product, et cetera. So it'll begin in October and will continue for quite a while.

(Operator Instructions) Our next question or comment comes from the line of Mark Astrachan from Stifel.

I wanted to ask about the conversion cycle from customers to sales leaders, your commentary about customers leading to sales leader growth. Anything changed in what you're seeing or expecting given the increased focus on social selling? Anything notable you've seen by region, and -- just sort of any direction would be helpful.

Thanks, Mark. Let me take a quick shot at that and turn it to Ryan to give more detail. We have, as we've really looked at how to get the business picking up in its pace and move it quick. Our focus has really turned to customer acquisition. And as we've done a lot of research on our numbers over the last 20 years, we see that there is a pretty consistent flow-through from those who actually sign up as a customer, move on to a distributor, submit an LOI to become a sales leader, and then eventually become a successful sales leader. So as we've determined what our strategy is, we've really focused around how to widen the funnel and bring in more people into our business starting really at the customer level. So that's been our focus. We believe that's the strategy that'll help us drive sales leaders is to really get a healthy customer base. And Ryan can speak a little bit more in terms of what we see with social selling.

Yes, to that point, Mark, certainly social selling is enabling us as we see it applied market-to-market. We're seeing the ability to increase our customer base fairly sizably relative to the past or the more traditional approach. The key for us will be focusing on progression from that base consumer level to a repeat consumer and moving into then the sales network over time. Although, we're very focused on ensuring that consumers of the product, that we're able to provide them with the experience that they're looking for in the business or, excuse me, with our products. So we are seeing some progression dynamics that differ from the past with social because of that widening of the funnel that Ritch talks about. However, in the markets that are really doing well with social, applying it according to kind of the way we see the strategy playing out, we are seeing the sales leader lifting together with customers. And so we're optimistic that as we continue to refine our programs around -- to support this platform we'll be able to migrate and progress them effectively.

Got it. And so thinking about that then, sales leaders are still the driving force of sort of real leading indicators of revenue growth in the business? Is that the way to think about it that the customer acquisition will lead into that? And so ultimately we should still focus on those more important distributors or more impactful distributors than other? Is that a good way to think about it?

Yes. I think we would refer to it as sales leaders are the economic engine for the model. However, from a regression standpoint, correlation-wise that customer base is critical for maintaining or sustaining revenue. So both metrics are critical. We continue to focus on our sales leader growth. I think what we're trying to message here and to Ritch's opening comments, it all begins with customers and bringing in larger numbers of customers, and then effectively transitioning them into the sales network as -- for those who do. So our focus remains consistent, but we add to this, or I guess, we're emphasizing the growth of customers.

Yes, let me just complete that thought, Mark, with this. While sales leader number ties probably closest to revenue, the retention of our sales leaders is highly impacted by the number of customers they have. So we believe that it will help sustain and support growth in our sales leaders better than what we've seen in the past. When we've had an LTO, we've seen a nice uptake in sales leaders, but if we didn't see the customer acquisition happen at the same time or immediately after, we'd oftentimes see that sales leader number come down. So the goal is really to grow both, obviously in a healthy way, but starting with the customer. One other point I would just make around social selling, is that, in the past, and the way our systems are really set up, we didn't capture a large amount of the actual customers who were purchasing from a distributor. We think with technology that we'll be introducing, it'll make it a lot simpler for our sales people to hook their customers directly with the company, which will give us a lot of access to customer information and also be able to introduce those customers into loyalty programs and so forth that hopefully will help retention rates. So those are things that we'll learn as we go. The technology should support us being able to capture a lot more customers, really beginning here in the next few months.

Great. And just lastly, how do you think about the differentiation or how do you differentiate these products that you're bringing to market to push through the new social selling focus, lipsticks, toothpaste, things like that? How do you differentiate those products? Or how do you position them in the market to make the customers ultimately want to buy something that's a bit more expensive than what's already out there?

Yes, great, great question. We -- and -- our focus as we go, we absolutely believe differentiation is critical, as any company I think believes. Our focus really is going back to some of these core principles of demonstrable. So as we price them correctly or effectively, they need to have a demonstrable difference to them. And we differentiate in multiple ways, I mean formula -- from a formula standpoint, as we look at our Longwear lip line that I mentioned briefly, great opportunities to differentiate in that space from a formula standpoint. Great opportunities to differentiate from a -- from finding -- new ingredients that are not yet on the market but that are still -- again, socially conducive. So we are very much focused on differentiation. I think where it differs a bit from our anti-aging positioning in an extreme high science scenario as we've discussed with ageLOC Me and some of these premium products. We're really looking at making these innovations more accessible. But differentiation is critical.

Okay. I think that is the end of the questions. Thank you all for spending time and joining us, we're really encouraged with the second quarter. It gives us confidence coming into the third quarter. But our real optimism circles around the plans that we have all coming together in the fourth quarter at the LIVE! event. So hopefully, many of you'll be able to make it to our investor portion of that LIVE! event. And then get a chance to feel the energy of our sales force at that time. Thank you very much, and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.