如新 (NUS) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Nu Skin Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I'd now like to introduce your host for today's conference, Mr. Scott Pond, Head of Investor Relations. Sir, please go ahead.

Thank you, Liz, and thanks to everyone for joining us. On the call with me today are Ritch Wood, Chief Executive Officer; Ryan Napierski, President; and Mark Lawrence, Chief Financial Officer.

During this call, comments will be made that include some 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 the comparable numbers obtained in our financial statement. We believe these non-GAAP financial numbers assist in comparing period-to-period results in a more consistent manner. Please refer to our Investor Relations page at ir.nuskin.com for any required reconciliation of non-GAAP numbers.

I'll now turn the time over to Ritch.

Thank you, Scott, and good afternoon, everyone. Thank you for joining us today. As you read in our press release, Q4 was a very strong quarter with revenue up 25%, solid profit margin and positive earnings per share growth. Our revenue for the quarter was $666.2 million, which was boosted by strong sales of our limited offering of ageLOC LumiSpa.

Earnings per share for the quarter were $0.33 or $1.20 when excluding a noncash tax reform impact that Mark will address in a few minutes. For the year, we returned the business to growth with revenue up 3% to $2.28 billion and earnings per share of $2.36 or $3.23 when excluding this tax reform impact.

I'm most encouraged, however, with the growth in our customer base, which has been a focus for us all year long and was up 8% over the prior year. I'm confident that the strength in this key metric positions us well for future growth. Our business is simple: to become the world's leading opportunity platform by empowering our people to improve lives.

Over the past year, we've talked with you about our strategy to grow the business through our focused effort to expand our customer base. We've identified 3 key components of this strategy that are best summed up in what we refer to as our 3P strategy: Platforms, Products and Programs.

After laying the groundwork for this strategy throughout 2017, we're now beginning to deliver and execute on this plan. And while many of the initiatives associated with our growth strategy are in their early stages, I'm pleased to report solid growth on all 3 fronts, which Ryan will address in more detail in a moment. For example, our focus on utilizing social selling programs to increase our reach and expand our customer acquisition contributed to a healthy 8% growth in our customer base.

In addition, on the products front, we expect our successful LumiSpa preview will lead to continued strong demand for this product as we begin rolling it out globally this year.

And finally, we're excited about our enhanced sales program called Velocity. We implemented this program in our Pacific markets during the fourth quarter, and we're encouraged with our early results.

Before I turn the time to Ryan, I want to provide a few more details about the acquisitions that we recently completed. As noted in our release, we acquired 2 manufacturing companies in which we previously held a noncontrolling equity interest. One is a manufacturer of personal care products and the other a manufacturer of nutritional supplements. In addition, we acquired a product packaging company. We believe their collective solutions and facilities enhance our business by enabling us to bring product innovations to our customers more rapidly and more effectively. These businesses are also accretive to shareholders. In short, our future is bright. We are aggressively pursuing our growth strategy and expect to see the growth rate of the business accelerate in 2018.

I'll turn the time over to Ryan to provide more detail on the execution of our plan and then to Mark, who will cover the financial details of the quarter and our initial 2018 guidance. Ryan?

Thanks, Ritch, and good afternoon, everyone. As Ritch mentioned, we are making good progress as we begin to execute on the 3 pillars of our growth strategy, all focused around empowering our sales leaders to accelerate customer acquisition. Specifically, I'll provide you with an update on our engaging platforms, enabling products and empowering programs.

As we've begun to see -- or implement this strategy in 2017, especially during the fourth quarter, we are encouraged by improvements in several of our key growth metrics, most notably with customers growing by 8% year-over-year and sales leaders growing by 33%. While we're pleased with these results to date, we recognize that it's just the beginning and we have much more work to do.

On the platform front, we have continued to make progress in our use of social platforms to help our sales leaders acquire new customers. Our growth strategy is centered around customer acquisition, and we've used social selling and creating a positive customer experience as key platform accelerators for our business.

In 2018, we will continue to focus on developing platform technologies to enhance our sales leaders' ability to build a socially enabled business. As our sales leaders become more adept at using social media effectively, some of our markets, including Japan and South Korea, are still in the early stages of adopting social selling. In 2018, both of these markets will be focused on implementing social selling training and tools to better empower sales leaders to acquire more customers.

Our product strategy is gaining momentum as well. We previewed LumiSpa to our sales force at our global LIVE! event in October last year. LumiSpa was a strong contributor to the healthy results generated in nearly all of our markets during the quarter with Mainland China, the Americas, EMEA and South Asia/Pacific all up double digits year-over-year. We were also pleased with modest growth in Hong Kong and Taiwan. And while results in South Korea and Japan remain soft, we're encouraged by the early demand generated by our LumiSpa previews. We sold all of the units on hand and have received positive feedback on the product from customers around the world.

Every market will roll out LumiSpa in the first half of 2018, and we anticipate it will be a strong product in our portfolio. In addition, several of the socially shareable products introduced at LIVE! will also be made available throughout '18 -- 2018, providing us with great ammunition to continue our momentum throughout the year.

Finally, regarding our programs. We initiated the rollout of Velocity, our enhanced sales leader compensation program that Ritch mentioned, first to our Pacific market in December. Velocity is intended to reward our sales leaders for improved performance in a faster and more flexible manner, both vital for our entrepreneurs today. Early reaction from our sales force strengthens our belief that Velocity will be a meaningful contributor to sales leader growth in the future. Our plan is to execute the global rollout of these enhancements over the next 24 months as we continue to monitor, train and implement this program.

As an update on the results in our various reporting segments, I'm encouraged with continued progress in China. The number of sales leaders jumped with the preview of LumiSpa and a strong response to our local business incentives. We're very encouraged with this growth. We note that consistent with the seasonal trends and our experience with previous product previews, sales leader counts are expected to decline sequentially for the first quarter. We will continue to focus on customer growth in China and anticipate the LumiSpa rollout as well as continued promotion and attention around our innovative beauty device platforms, including ageLOC Me, Galvanic Spa and now LumiSpa, will drive customer growth in 2018.

The Americas, South Asia/Pacific and EMEA are all successfully implementing the growth strategy and using social selling effectively to drive solid customer growth with customers up 34% in the Americas and 24% in South Asia/Pacific. We see Hong Kong and Taiwan showing improvements in Q4. We feel our growth strategy will continue to drive better results with these important markets as well. In Japan and South Korea, we are focused on driving customer acquisition in 2018, with particular focus on social selling.

So in summary, we're laser-focused on growing our business by enabling sales leaders to drive customer growth as we move fully into the execution phase of our 3P growth strategy.

I'll now turn the time over to Mark.

Thanks, Ryan. Let me walk through some of our fourth quarter and annual highlights and provide initial guidance for 2018. As a reminder, we provided additional financial information in our release and on our IR website, including GAAP reconciliation tables.

Fourth quarter revenue was up 25.4% at $666.2 million, benefited by a strong LumiSpa introduction. Annual revenue was $2.28 billion, a 3.2% improvement over the prior year, with a negative foreign currency impact of less than 1%.

Our fourth quarter earnings per share were $1.20 or $0.33 when including the impact of U.S. tax reform, which I will touch on momentarily. This compares to $0.69 in the prior year quarter, which included a negative $0.10 impact related to the enactment of the 987 tax regulations. Earnings per share for the year were $3.23 or $2.36 when including the tax reform impact.

Let me highlight a few items on the income statement. During the fourth quarter, LumiSpa sales accounted for approximately 20% of our total sales. In alignment with our focus on driving customer acquisition, we priced LumiSpa such that it carries a slightly lower product margin and commission rate than our average product portfolio. LumiSpa was also introduced with a sharing bonus that is recorded as a rebate when it is purchased for personal use. These factors reduced both revenue and selling expense. Quarterly gross margin moved to 77.7% and selling expense as a percent of revenue was 39.8%. Our operating margin improved to 14.9% from 11.4%.

During the quarter, we paid $19 million of dividends and repurchased $23.9 million of our stock, finishing the year in a net cash positive position. Our remaining share repurchase authorization is $128 million. We announced in a separate release that we increased our quarterly dividends for the 17th consecutive year.

With the recent tax reform, our Q4 tax rate was impacted. Our tax rate for the quarter was 81.5% but would have been 33.1% pre-reform. This compares to the rate last year of 38.5%. The elevated rate this quarter was due to a noncash $47.7 million write-down of net deferred tax asset that was inclusive of 3 items: first, a $52 million write-down against our foreign tax credit carry-forward; second, a $7.3 million charge relating to a tax on permanently reinvested foreign earnings that have not been repatriated to the U.S.; and third, an $11.6 million benefit related to the remeasurement of U.S. net deferred tax liabilities at the lower statutory rate.

Our revenue guidance for the first quarter is $550 million to $570 million or 10% to 14% growth, which includes a 4% to 5% positive foreign currency impact. Our projected Q1 earnings guidance is $0.65 to $0.70. This assumes a 40% to 42% provisional tax rate for the quarter.

In the first quarter, we have received, but have not finalized, a tax [assessment] from Indonesia that drives our tax rate above our expected 2018 rates. We also anticipate a onetime gain from the acquisition of the 2 entities that we previously held a minority interest in, which we believe will offset the EPS impact of the higher tax rate in the first quarter. For 2018, we project revenue growth of approximately 7% to 9% at $2.44 billion to $2.49 billion with a 2% to 3% positive foreign currency impact.

Earnings per share for the year are projected to be $3.45 to $3.65. This 2018 guidance includes a positive impact of our recent acquisition, which we anticipate will add approximately $60 million in revenue and $0.06 of EPS from ongoing operations in 2018.

Our 2018 guidance includes the following assumptions: Gross margin, 77% to 78%, negatively impacted approximately 1% by the recent acquisitions; selling expense, 41% to 42%; general and administrative expense, 24.2% at 24.6%; operating margin, 12.0% to 12.4%; tax rate, 34% to 35%, excluding discrete items. Note that our tax rate may fluctuate throughout the year due to the recent U.S. tax reform and the geographical mix of our pretax income; weighted average shares, approximately 56.5 million shares.

With that, operator, we will now open up the call for questions and answers.

(Operator Instructions) Our first question comes from the line of Faiza Alwy with Deutsche Bank.

So I guess my first question, as you saw a lot of growth in the sales leader number, but the [actives] -- or the customers grew 8%, can you talk about what drove the increase in sales leaders and why that didn't translate into [active]?

Faiza, thank you for that question. Yes, we're really encouraged with both numbers and particularly the fact that we've seen improvement in our customer number. The sales leader number was impacted significantly by the LumiSpa launch. So those who were able to participate in the launch or the preview, we'd call it, were people who qualify as an executive. And so there was a strong push in the fourth quarter for people to qualify so that they can actually participate in this LumiSpa launch. So going forward now, we would anticipate that we'll build up the customer number as the product actually rolls out and becomes fully available.

Okay. Great. And then just if you could comment a little bit on your outlook by region for 2018 and if there's any other sort of LTO spend or anything else that we should keep in mind. And any other comments you can make on the quarterly cadence beyond Q1 with respect to organic growth and margins.

Yes, yes, that's correct. Mark can comment a little bit more on the breakdown of the revenue. But let me just mention a couple of things that I think are important. First of all, we don't have any plans of LTO activity in 2018. So while the LumiSpa will roll out in the first half of the year, we don't anticipate any spike from the revenue. We will be comparing against a real strong Q4 in 2017 where we had $100 million approximately of net benefit we estimate from the LumiSpa launch. So the quarters will play out more consistent in 2018 than they have in 2017 with the LTO. Mark, you want to give a bit more detail?

Yes. The only thing I'd add is just to echo what Ritch said around Q4. We won't have the $100 million LTO in Q4. As you look out the rest of the quarters, you would expect us to have nice year-over-year growth in Q2 and Q3. Q2 is generally a stronger quarter for us, and then Q4 is where we'll face the challenging quarter as we compare it year-over-year.

Okay. Anything else on the regional outlook?

We didn't gave that detail specifically, but what we anticipate is basically where the trends are going today, we see China continuing to be strong, offset a little bit by Taiwan and Hong Kong, which are showing improvements but a little soft. Japan and Korea continue to be a little soft. So don't anticipate a lot of growth in 2018 around those markets. Where we see really strong indicators would be in the Americas region, some good indicators in the South Asia region, which will provide much of the growth that we've built in for 2018.

Okay. And then just one last one for me. I know you talked about this accounting change with respect to revenue recognition for fiscal '18. Is that included in your guidance? Or does the guidance exclude that at this point?

Yes, it's included in our guidance. You do see that we are forecasting sales expense to be up over where we ended in Q4. I think that is just a mix shift of how many people buy our product for personal use, which generally is higher in the quarter where we introduce the product.

Our next question comes from Olivia Tong with Bank of America Merrill Lynch.

I guess let's start a little bit with the acquisitions because you typically had a very asset-light business. I'm curious why you chose to acquire manufacturing partners and a packaging company because other than markets like China where the laws dictate it, you haven't typically done that. One, has your view changed in some way? Or are they manufacturing and packaging just for you or others, too? Like is there -- because you mentioned there was a revenue component now. And I'll start there.

Yes, thanks, Olivia. The manufacturing partners that we acquired, we've actually held a minority interest in both of these companies for a period of time. So we know them well. They manufacture for other companies. In fact, we make up approximately 20% or so of their volume. But we believe it gives us some competitive advantage in terms of getting the product to market. The other thing I would mention that we didn't highlight very much on the call yet is our ability to utilize our indoor growing capability. This is something we've mentioned lightly, particularly to our salespeople, but we believe it's an opportunity eventually to really differentiate our sales growing ingredients in an indoor environment where we can guarantee its purity and -- in a very efficient way. So while that's in the early going, we believe that adds to this ability to have ingredient that we produce and then manufacture and control all the way to our customers. So you'll hear more about us talking about this indoor growing capability as we get closer to the end of the year. I think at this point in time, our goal is to have somewhere between 5 and 10 ingredients that we're producing, using this indoor growing technology by the end of the year in our Nu Skin products.

Got it. And then you mentioned they are 20% -- you're 20% of their volume. The other 80%, will you be continuing that business, selling to others?

Absolutely. Yes, absolutely.

Got it. Okay. And then in terms of the gross margin, obviously, LumiSpa, gross margin dilutive. These acquisitions, also gross margin dilutive. And so far, looking relative to where you peaked, we're down about 600 basis points. I mean, is that an okay business model going forward for you in terms of the impact that your business -- the changes that you made and the gross margin impact that they've had, are you comfortable with the fact that the gross margins have come down this much? And what are you -- and can you talk about some of the offsets that you're making in order to get margin improvement when we get to the operating margin line?

Yes, let me speak to the bigger picture, and then Mark can add any detail that he feels like. Over the course of time, the last several years, there have been a few things that have brought the margin down. Certainly, there's been a lot of headwinds from currency. We also went through an accounting change probably 3 years ago or so, where some of our commission expense actually gets booked up as a contra-revenue, and for that, adjusting a little bit as well. And then finally, I think the message I will say is the focus we have is really on our contribution margin, which is the difference between sales less -- cost of sales and commission expense. So as we adjust a little bit in how we pay that commission expense, maybe we share some of that sharing bonus, which Mark has mentioned in his script, which has been -- some of that is booked up as a contra-revenue as opposed to down in our selling expense line. I think as these things move a little bit, where we focus is on that contribution margin. I believe we continue to have a very healthy contribution margin from around 37% to -- 36% to 38%, and that's a healthy area where we can be -- have a strong overall operating margin.

I think the only thing I would add is that we are focused on customer acquisitions. And you will see us be a little bit more aggressive in our pricing of our products, and that comes with some impact to gross margins. I think we're comfortable with that strategy. I think it's the right strategy for us to go after customers around the world and give them products in a range that they find affordable and attractive. And then you'll also see that from an operating margin perspective, for the year, we are expanding our operating margins from a guidance perspective where we will grow operating margin this year.

Got it. And then just lastly, a little bit more housekeeping. I mean, I realize the majority of your business is done overseas, but why doesn't your tax rate move off a little bit further off of that 35%? And then also, that 34% to 35% full year outlook on tax, is that inclusive of the 42% that you're looking for in Q1?

Yes, that's a great question. With the U.S. tax reform, there's a lot of confusion about this subject. The issue that we face is that the vast majority of our revenue and all of our profit, virtually all of our profit, is overseas. Therefore, we're subject to the tax rate in those markets. You take a country like China, for example, has a tax rate of 25%. But when we return our cash, we pay a withholding amount, a withholding tax of 10%. So the net impact is the 35% tax rate, our average international rate is about 34%. That's really what impacts us. Where we can get better at that tax rate is as we grow our U.S. profit, the acquisitions will help but they're very, very, very small at this point.

Got it. And then, I'm sorry, one last question in terms of the accounting changes, the revenue recognition changes. Can you just tell us how much of that impacts the top line and how it flows through to P&L? Sorry, that's my last one.

Yes. So with the product introduction of LumiSpa, we saw about $12 million more rebate this quarter than what we saw in prior year. And that rebate was booked as a contra-revenue, so it took revenue down by that amount.

And then next year, how much of an impact will that have in your 2018 outlook?

The impact won't be as severe into next year because we won't have a big product introduction or an LTO. And what we see is that personal consumption goes up during those periods. And that personal consumption is what causes it to be a rebate versus a selling expense.

I think generally, it runs around 2% to 3% is what we would anticipate. And this quarter was a little bit higher, ran closer to 4% to 5%. So I think going forward, in the guidance that Mark has given, sales tend to be more consistent in that sort of 3% range.

Yes.

Our next question comes from the line of Tim Ramey with Pivotal Research.

Drill down a little bit more on that tax rate. The last questioner asked if that 42% was -- in the first quarter was in the full year number, and I assume it is since you normally give guidance on a GAAP basis.

Yes, Tim, thanks for the question. It is included in my 34% to 35% range.

Okay. But we sort of expect you'll call that out in the first quarter. Is that a fair expectation?

Yes, that's correct. We have to give an estimate now because we haven't finalized on what the exact amount will be, which is why I gave that 40% to 42% range. That number could fluctuate depending on where we finally settle, but we'll be able to give you that exact number once it's finalized in Q1 earnings.

And similar, I guess, probably to USANA's situation, the challenge for you is to probably shift cost to your non-U. S. markets, which you can do in a variety of ways, I assume, by licensing the brand names or other strategies. You didn't talk about that at all as something that you might do in 2018, but is that on the to-do list?

Yes. I would say, everything's on the to-do list with regard to tax. With the tax reform, there's a couple of things that we're working through. The law is out, but all of the clarification from the IRS are continuing to trickle out, and I suspect that they'll trickle out throughout the course of the year as to how we are supposed to interpret the law and how that law applies to us. As those come out, our rates may or may not fluctuate depending on how we interpret that. And we are actively going through, as we receive those guidances, looking at our tax planning strategy and understanding what we might need to change.

Okay. And then, Mark, as you were going through some of the outlook projections and percentages, you were going fast. I think you said operating margin of 11% to 12%. It wouldn't necessarily be up from 2017. I calculate the operating margin at 12%. Did I get that wrong or...

Yes. Either I misspoke, but the answer for operating margin is 12% to 12.4%, is our forward guidance.

Okay. I just -- you were going fast. And again, your guidance includes no share repurchase for 2018 as well?

Yes. I think with share repurchase, we'll be in line with what we've done in the past. We're going to be -- hope to be -- again, I'll just speak to kind of our intent to use cash next year. Obviously, our first focus is going to be on operating the business. The second focus is we're going to pay our dividend, which I announced that we did increase our dividend for the 17th year in a row. Third, we're going to buy back shares, and we're going to be in the market to buy back those shares. And we look to be in that 1% to 2% range that we have been for the last couple of periods.

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

Just want to go back to the China sales leader number. I know Ryan touched on it in his comments, but with, I mean, almost doubling year-over-year, it sort of gets into a situation where you wonder really how sticky those new sales leaders are. So can you talk about really what drove that growth? I guess it was all the LumiSpa, but just mechanically, how did people come into it? And how much of a deceleration do you expect in the first couple of quarters as that sort of fades into the distance?

Yes. No. That's a great question, Doug. Maybe to try to provide a little more clarity on that is as you know from years past, the product introduction of these previews or LTOs tend to really drive the sales leader number up, and then they settle within the coming quarter. And we would expect that to happen in our own models. We do expect the settling to be moderate but still up fairly well in Q1 on a year-over-year basis. So the trends are healthy. It just was an abnormal jump, so to speak, in that Q4. So it'll settle but we expect a good Q1 settling.

Yes, I mean, so you -- go ahead, Ritch, sorry.

Yes, sorry. Thanks for -- let me just add one additional thought. The customer number was 10% up year-over-year. And I think as we look at things, those 2 generally are going to settle together. So we're encouraged with the 10% up. If we can continue to drive that number, that's going to sustain a larger sales leader number going forward. But I think you kind of keep your eye on both of those. Watch what happens to both of them. They'll tend to settle in alignment with each other. So now we really move our focus, as Ryan mentioned in his call script, to really drive that, successfully drive the customer number up, which will allow us to sustain and retain more of those sales leaders.

And basically, Doug, just by way of going back to the discussion earlier, as we look to the LumiSpa rolling out and actually launching in the first half of this year, that will be a good contributor to the customer growth as well, to really stabilize or to enforce the sales leader growth that we'll retain.

So I mean, to your point, Ritch, the customer number should go up as the sales leader number comes down just as the product gets put through the system. So we should see those numbers maybe not converge but move closer in the first 2 or 3 quarters of this year, and then the fourth quarter, of course, will have a tough comparison?

Yes, that's well said. And I think there's a couple of differences that we've executed this past year that I should highlight. Number one, we sized our limited offering up. So in the past, we've had $200 million to $300 million LTO. Secondly, we've closed the gap between the time we did the preview and the time we're actually rolling the product out. We believe that will help sustain the customer number and hopefully, sustain the sales leader number better going forward. So again, this is a little bit of a new initiative that we're kicking off. We'll monitor it very close to as we go forward, but our intent is really to grow that customer number. And through doing that, we anticipate that we'll be able to retain more of our sales leaders.

Okay. And just one last thing. I was noticing on the balance sheet that working capital numbers looked really, really good considering the kind of growth that you're posting with the receivables and inventory turns heading in the right direction. So there's a lot of crosscurrents with the tax rate and the acquisitions and what have you, but is it safe to say that the underlying business performed just about as you expected in the fourth quarter and that the whole rollout of the LumiSpa here in 2018 is pretty much on target?

Yes. This is Mark. I would say that yes, the quarter performed very much in line with where we guided and what we expected to happen in the quarter.

Yes. And really, the whole year, Doug, we're encouraged with the way things trended throughout the year. I got to tell you, last year, when we started the first quarter 2017, we were coming off a very soft Q4. And so it felt like we were starting the year with not a lot of wind in our back. We feel differently as we come into this year, and I hope that sends the optimism of how we feel about the business today. But we finished the year with a lot of encouraging and excitement amongst our sales leaders. So at this point in time, we want to build on that and execute our plan. We're really in execution phase this year as opposed to trying to develop the momentum, which is where we were at a year ago.

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

I was wondering if we could talk a little bit more about China. Obviously, north of 50% growth was strong. Can you help us understand how much of that was LumiSpa and if any other new -- existing products contributed in a meaningful way this past quarter?

Yes. Let me add a first comment and then ask Ryan to contribute anything else about China. We have seen throughout the year really good response to our business incentives and a lot of excitement that was building for LumiSpa. We knew it was going to be a strong launch. And so frankly, we're doing all we could to build as many units as we felt like they could sustain. There was quite a limitation on what the sales leaders were able to purchase. So we feel like there's still good demand in the market. But clearly, the jump in sales leader shows that there was a lot of excitement around the LumiSpa and also around just the normal business incentives that we've had in place, which were not necessarily different than what we've had in the past but continue to get traction with our sales force. Ryan, what would you add?

Yes. No. To your point, Ritch, and maybe one other point that you've highlighted on previous calls is ageLOC Me and what we call the beauty device platform. That continues to be very strong. AgeLOC Me, Galvanic Spa and now LumiSpa together make a very good trio combination. So throughout 2017, ageLOC Me was a very strong contributor to innovation, and now putting LumiSpa together with that and Galvanic Spa just continues to be really, really positive for the business in China.

Got it. And then are you able to share whether LumiSpa will be a 1Q or 2Q event in China?

Oh, yes, we certainly can. So it's both, to answer that. In China specifically, it will go probably in April. So it'll be in 2Q. Most of the other markets will be in the first quarter, and then majority, closer to the end of the first quarter as opposed to the beginning.

Got it. Perfect. And then to a couple of other countries, for South Korea and Japan, I look at those numbers, and they look fairly weak on a year-over-year basis, maybe not so much. I'm just looking here sequentially. But what else besides LumiSpa here to start the year? I know you talked about maybe some social selling, I believe, potentially picking up in those markets and some training. But sort of what's your degree of focus on those 2 markets at this point? Because on a growth rate basis, they surely pulled results down in the fourth quarter.

Yes, yes. Let me take a first shot and then Ryan after this. No doubt, those are the 2 markets that were concerning to us as well. They've been challenged throughout the year. We like the response actually we've got to LumiSpa. Both markets sold out of the LumiSpa that we had built, and we hear real good feedback about the demand that the markets are feeling. So we expect that to be a key contributor to help in the -- improve the business. But the focus really will be on customer acquisitions as we go forward. So Ryan, maybe you can address what we're doing there?

Yes, absolutely. And Beth, just to reaffirm our commitment to getting the customer growth there and working really with social selling to enable that growth. We watch the competitive landscape closely in both markets, the environmental factors, and we believe that social selling will enable us to improve our customer acquisition and stay some of the declines there. Certainly, both markets are very strong, personal care markets, beauty markets, and so we'll continue to put focus on it. But we expect that social selling together with LumiSpa this coming year will be very helpful for us.

Perfect. And maybe that's a nice entrée then into my next question, which is for those 2 markets or others where you're enhancing your social selling portfolio where -- or sort of focusing in, if you will, in some markets, which products that came out at LIVE! and that we saw here in the U.S. in the kind of November, December months? Can you talk to us the beyond Powerlips? Because I think we talked about that in the past, but what other ones were maybe upside surprises and /or you're encouraged by that you're going to take to other markets this year?

Yes, absolutely, Beth, yes. There were several, as you know, that we're anxiously awaiting, Powerlips, of course, being one that is going to markets quickly. In fact, in Q4, we had a little bit of that activity in the Americas. Also, we have a product Dr. Dana, which is that nail product you may recall that we'll be rolling out in various markets throughout the year. They're all sequenced and staged according to the local market launch plans throughout the fourth quarter. And so we have Dr. Dana that we're looking forward to. We have Tru Face Essence product extension that got very good reviews at LIVE! as well. We also have a -- it's called AP 24 Smile Pop, which is a complementary product or a line extension to AP-24, which has become a very strong social selling product that also will be, again, sequenced across the markets at various times throughout the year. So a lot of good ammunition there to really further the social business.

Perfect. And one more, if I may. I think one of you alluded to Velocity and the test, the pilot phase, in Australia and I think New Zealand maybe and that it has gone well recently since it started in December. What metrics are you using to assess that, that you would speak to and say it's tracking in a positive direction or it's creating positive results so far?

Let me, first of all, speak to the vision around Velocity. We really believe that we can increase the quickness of how fast we pay people. So really, when people share products, we're paying quickly on a daily basis. When they start to build a group of customers, we reward them on a weekly basis. And then for the monthly, it's really about -- around building sales leaders. And what we believe will happen is it will increase -- as we reward people more quickly, it will increase the behaviors of finding new customers and so forth. So that's the vision. Ryan, maybe you can speak to what we're seeing.

Yes. And precisely as to the metrics that you're asking, what do we watch exactly, as Ritch talked about, our daily pay mechanism, we are focused on watching the recruiting or the customer acquisition metric. And so we can track that very closely, very optimistic in the Pacific about what we are seeing there. We also look at progressing our sales force. So it's on the consumer side. On the sales force side, how do they move through and progressing the sales leadership? And so we watch the progression metrics as well as the productivity metrics per sales leader. Fortunately, at this stage, all 3 metrics, these 3 key metrics, are all faring favorably. Obviously, very early in the stage of the test.

And then I'll just add that the final thing we do very closely is work with our sales leaders there. So we're getting feedback from them on how they're feeling, what they're hearing and monitoring as we go. And so far, we're getting good feedback from our leaders there. And obviously, we'll stay very close to them. And as we prepare to roll this into the next market, we'll begin doing more and more training, working closely with our sales leaders in the other markets to make sure we're prepared and ready. And this is going to be successful. We'll make sure that it's successful as we roll it out.

Our next question comes from the line of Mark Astrachan with Stifel.

I wanted to ask you a few housekeeping questions. I guess first back to a previous question. I guess I'm trying to understand what happened in 4Q to gross margin and selling expenses. I recall from the last earnings call, you talked about seeing both of those metrics being up sequentially and they obviously turn out to be different. So LumiSpa was a little bit stronger than you anticipated. How much of that made a difference? And sort of what else happened there?

Yes, thanks, Mark. This is Mark. I'll go back to the way we expect sharing bonus to behave in the normal quarter and the way it behaved during a product introduction quarter. When -- in a product introduction quarter, a higher percentage of our sales are purchased for personal use. And when that happens, the expense of the sharing bonus gets rebated back to the person who bought the product. So it shows up in our books as a contra-revenue. If it's not bought for personal use, what would happen is we'd see an increase in revenue and we'd see an increase in selling expense. And so we saw the opposite impact of that this last quarter, which is why it behaved a little differently than what we'll see in the future.

And just to quantify that, our rebate amount was about $12 million higher this quarter than it was a year ago. So that impacted both the revenue number well as showing a lower selling expense.

So you were surprised that more folks bought it for their own consumption than to resell it, I guess?

I wouldn't say we're surprised. Clearly, this is the first time we're introducing a sharing bonus to a product. We've had other similar mechanisms that have sort of proven out that this is the way we believe we can drive customer acquisition, but it's the first time we've really rolled product out with [sharing bonus]. So I don't know that we are surprised at all. It's -- essentially, the business performed as we would have expected, but it shows up in our numbers as being lower selling expense and a little bit lower revenue than in normal periods.

Got it. Okay. And then sort of related to that, I guess, and thinking about social selling or the move to that direction, I was under the impression that sales would get a benefit from the change where you're recognizing gross as opposed to net sales in certain cases. Is that the case? And if so, what would be the impact to sales going forward?

I think generally with social selling, it doesn't impact us too much necessary until we start rolling out our Velocity compensation plan and pieces of that enhanced plans. So as we begin rolling out social selling products that have a sharing bonus attached to them, then you're right. It impacts revenue. Revenue is a bit little bit higher, and then our selling expense will be a little bit higher as those products are sold to customers. But Mark...

And then lastly and maybe most important for us is the contribution dollars are the same. Whether it comes back in rebate or whether it shows up in higher revenue and higher selling expense, contribution dollars are neutral, and that's really what we're measuring our business on as we make these shifts.

Got it. So is there any of the Velocity sales in your 2018 sales guidance?

Most of the Velocity impact is latter part of 2018. We don't have -- it'll start to roll out later in the year, but we have not built in a significant impact to our financial this year.

Got it. Okay. So there are some but not a lot. And then just lastly, on the acquisitions, are they gross margin accretive in the sense that you're sort of vertically integrating?

No, it will -- we get a little benefit for the small piece of revenue that is generated for Nu Skin -- for products that are built for Nu Skin. But for the most part, it's about 1% negative impact for our gross margin by the time we add the third-party business that they're doing.

(Operator Instructions) We have a follow-up from the line of Tim Ramey with Pivotal Research Group.

Just on gross margin again, it might be too hard to do on the fly, but I wonder if you can kind of give us a bridge on margin from '17 to '18. If we are going to end up slightly down, presumably FX is positive. You just mentioned that the acquisitions might be about 1% negative and the change in the selling accounting will be negative. How should -- is there a quick and easy way to kind of give us a bridge on that?

Yes, I can start. So at the highest level, our gross margin for 2017 was 78%, and we guided 77% to 78%. We think we'll have a negative impact of roughly 1 point due to the acquisitions, and we'll get a little bit of benefit from FX. That's the most simple bridge that I can give you.

Okay. And then there were kind of 2 numbers given on 4Q LumiSpa. Mark, I think you mentioned 20% of sales, might have been rounding. But if that was true, that would be $133 million. Ritch gave us $100 million. Is there any more granularity you can give us on what LumiSpa meant in the fourth quarter?

Yes, you're right in the range. We kind of estimate the benefit to be about $100 million, which would basically include some cannibalization of the sales that, that product that took away from ageLOC Me or some other products that are similar. So we estimate a net benefit probably in revenue from the quarter of around $100 million with the gross numbers you mentioned closer to $130 million.

Got it. And then curious, Herbalife has made some noise about these China growth payments, sort of a tax credit or a rebate from municipalities that have to be reinvested in China. I assume that got your attention as well. Is there anything that's afoot in your world where that might come to pass as well?

I would just highlight the importance of China to our overall success and the fact that we are aggressively investing in our own business in China. There's different ways to go about it. Probably the biggest investment that we'll be looking out over the next 3 to 4 years is some additional manufacturing capacity that we're in the process of putting in place right now. And there's different ways to go about, obviously, investing in the market and getting benefit from doing that. So those are things that we've done in the past and we'll continue to do going forward.

Thank you, Tim, and thanks to all of you for joining us today. You can see that we're very optimistic about where we're going. We feel like we entered this year with a lot of energy and excitement coming off a fourth quarter that was very strong. It was the high point for our year. We feel like we have good ammunition. We're focused on our strategy, and it's clear to us that we're going after customers and growing our customer base. So we look forward to a great year and appreciate you taking time with us today. Thank you very much.

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