如新 (NUS) 2018 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Q1 2018 Nu Skin Enterprises Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Scott Pond, Vice President, Investor Relations.

Thanks, Christine, and thanks, everyone, 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 Dr. Joe Chang, Chief Scientific 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 page at ir.nuskin.com for any required reconciliation of non-GAAP numbers.

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

Thank you, Scott, and good afternoon, everyone. Thank you for joining us on this call. As you read in our press release today, Q1 revenue was very strong at $616.2 million. That's up 24% year-over-year and approximately $117 million higher than the first quarter of 2017. This revenue improvement was driven by strong customer growth of 11%, with sales leaders up 16%.

We also delivered strong earnings per share of $0.64, a 25% increase over the $0.51 that we reported in the prior year quarter. I would highlight that our earnings per share of $0.64 included a negative impact of $0.12 from the early conversion of a convertible debt instrument and also a charge of $0.03 related to the amortization of intangibles associated with the recently announced acquisition. Neither of these 2 items was reflected in our previous guidance of $0.65 to $0.70. So I'm very pleased with these first quarter results, which were driven by strong revenue growth and a modestly improved operating margin.

Given our strong first quarter, we are raising our 2018 guidance, which Mark will speak to in a few moments. In 2017, we designed our strategy focused on growing our customer base through engaging platforms, enabling products and empowering programs. We are still in the early stages of the execution of this strategy. However, we are encouraged by the results we are seeing. Ryan will provide additional color in his commentary.

Our vision to grow this company is beginning to take hold. Our core Nu Skin business continues to strengthen, and I am also enthusiastic about the acquisitions we discussed on our previous earnings call, which solidify our supply chain and help us compete in a fast-paced marketplace.

While they added 3% to our revenue in the quarter, I am most encouraged about our improved ability to be more innovative and get products to market faster. These manufacturing partners have state-of-the-art facilities and are staffed with talent that bring the very best products to market. They have strong growth potential and will add to our success.

We also continued to make good progress on our indoor growing initiative. We believe this technology will enable us to produce higher quality and more pure ingredients in an eco-friendly and sustainable manner. We expect to see some of these ingredients added to the select Nu Skin products by the end of this year.

I will now turn the call over to Ryan for more -- provide more detail on the execution of our strategy, and then Mark will provide insight into the financial details of this quarter and our increased 2018 guidance. Ryan?

Thanks, Ritch, and good afternoon, everyone. As Ritch mentioned, we are encouraged by the early results of our growth strategy as we focus on its 3 key pillars: platforms, products and programs. This strategy is focused on expanding our customer base, and we're pleased with solid 11% year-over-year growth. This is key to driving sustained growth of our sales leaders, which increased 16% year-over-year.

Let me give you a little more color on our 3 strategic pillars. Regarding platforms, social sharing continues to be a powerful way to expand our customer reach. In markets where social sharing efforts are more mature, we're seeing strong improvements in customer acquisition. Our focus is to leverage our experience in these markets to support our sales leaders' social efforts with increased training as well as improved technology and tools to facilitate more effective customer acquisition and lifetime value. We'll continue to see these tools together with improvements in our technology roll out throughout this year and beyond.

I'm also excited about the execution of our product strategy, which is gaining momentum. ageLOC LumiSpa was launched to strong demand in most of our markets and was a key contributor to our results in the quarter. Mainland China is introducing this product in the second quarter. We are also launching several additional products ideally suited to support social sharing around the world. For example, EMEA enjoyed a very successful introduction of our new Powerlips long-wear lip line in the first quarter.

Finally, regarding programs, we initiated the rollout of Velocity, our enhanced sales compensation program, to our Pacific market in December. Velocity is intended to reward sales leaders for improved performance in a faster and more flexible manner, which is vital for entrepreneurs today. Its initial response strengthens our belief that Velocity will be a meaningful contributor to our business in the future. We initiated Velocity in Taiwan in April, and we'll continue to extend the rollout to North America in June.

Next, our strategy is enabling growth throughout the regions. Mainland China, we generated strong customer growth of 14%, with constant currency revenue growth of 22%. We saw a large increase in sales leaders in the fourth quarter of 2017 in connection with the global introduction of LumiSpa, and as anticipated, we had a post-introduction decline in sales leaders but are pleased with 41% growth year-over-year. We look forward to the full launch of LumiSpa in the second quarter as well as our sold-out Greater China convention that will be held this June in Hong Kong.

Next, the Americas/Pacific region also had a very strong start to this year with 32% constant currency improvement driven by a 29% increase in our customer base. Our emerging markets are performing very well with Latin America growing rapidly. Additionally, North America continues to be a leader in executing our growth strategy, and our Pacific markets are responding very well to the introduction of our Velocity sales compensation plan, as I stated.

Southeast Asia and EMEA regions are experiencing positive results as well from the execution of our strategy by expanding social sharing to effectively drive solid customer growth, with a 20% increase in Southeast Asia and a 15% increase in EMEA. We're encouraged with the double-digit local currency revenue growth we generated in Hong Kong and Taiwan as a result of LumiSpa and promotional activities related to social sharing.

Finally, we are seeing improving trends in South Korea and Japan related to optimism around LumiSpa and social sharing. Local currency revenue in South Korea was up 1% in the quarter, while Japan was down 2%.

So we definitely feel that we have a lot of positive initiatives to grow our business by empowering our sales leaders to expand the customer base and look forward to continuing to execute our growth strategy throughout this year. Also, we look forward to being with our top sales leaders from around the globe this next week at our annual strategy alignment and incentive trip. We will continue to partner with these great talented leaders as we grow our business.

And with that, I'll now turn the time over to Mark.

Thanks, Ryan. I'll take just a few minutes to walk through our first quarter highlights and update our guidance for the year. As a reminder, we provide additional financial information in our release and on the Investors section of our website.

First quarter revenue was up 24% at $616.2 million, driven by core Nu Skin global revenue growth of 14% in constant currency, 7% favorable foreign currency impact, 3% from recent acquisition and double-digit growth in both our customers and sales leaders. Our first quarter earnings per share were $0.64 compared to $0.51 in the prior year quarter.

As reported in an 8-K filed on February 28, we incurred a charge associated with the early conversion of our convertible notes, which was not included in our original guidance and negatively impacted first quarter earnings by $0.12 per share. In addition, due to purchase accounting, we incurred a $0.03 charge related to the amortization of intangibles from our recent acquisitions. We had a very strong quarter of earnings against our previous guidance when adjusted for these unanticipated charges and compared with the prior year.

You will notice that we have modified our segment disclosures to now include revenue from recent acquisitions in the other category. Additionally, our Pacific markets have now been combined with the Americas region.

Our gross margin for the quarter was 76.3% compared to 77.7% in the prior year quarter. Gross margin in our core Nu Skin business improved 20 basis points over the prior year to 77.9%. The gross margin profile of our recently acquired companies is significantly lower than our core Nu Skin business. We expect to see margin benefits from the products manufactured for our core business by these partners later this year.

Selling expenses as a percent of revenue were flat with the prior year, while general and administrative expenses as a percent of revenue improved 170 basis points due primarily to the higher revenue. Our operating margin improved to 9.6% for the quarter compared to 9.3% in the prior year. Our other income and expense line reflects a $1.2 million gain versus a $4.6 million loss in the prior year.

During the quarter, we paid $19.8 million of dividends and repurchased $17.4 million of our stock. Our remaining share repurchase authorization is $110.6 million. As previously guided, we anticipated an elevated quarterly tax rate due to a FIN 48 tax accrual in Indonesia. Our tax rate for the quarter was 41% compared to 34.1% in the prior year quarter. We anticipate the second quarter tax rate to be 33% to 34%, with the year at approximately 34%.

We recently completed a refinance of our debt through a new syndicated bank facility, which provides for a $400 million term loan and a $350 million revolving credit line. We used the proceeds to settle the convertible note and the existing credit facility. The new agreement puts us in a strong financial position to grow our business and increase shareholder value.

We are pleased with the results of the new manufacturing partners we acquired during the quarter. These companies generated higher revenue than anticipated and have strong growth plans. Under purchase accounting, various intangible assets are created, which need to be amortized over their anticipated life. The most significant impact to our financials will be in 2018, after which, the amount will decline significantly and will not be material to our financial results.

For the first quarter of 2018, we incurred a charge of $0.03. And we estimate amortization charges of $0.05 in the second quarter, $0.04 in the third quarter and $0.04 in the fourth quarter. Our previous guidance did not reflect these purchase accounting adjustments due to the timing of the acquisitions.

Our revenue guidance for the second quarter is $630 million to $650 million, representing 15% to 18% growth and includes an approximate 5% favorable foreign currency impact. We project Q2 earnings per share of $0.86 to $0.91. This guidance includes the $0.05 purchase accounting charge previously mentioned. For 2018, we are increasing our revenue guidance by $70 million. Our new range is $2.51 billion to $2.56 billion, which includes a favorable foreign currency impact of approximately 3%.

Earnings per share for the year are projected at $3.45 to $3.65, inclusive of the $0.12 charge related to the convertible notes and approximately $0.16 of amortization of intangibles from the acquisitions.

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

(Operator Instructions) Your first question comes from the line of Olivia Tong from Bank of America Merrill Lynch.

Well actually, first, just a couple of sort of housekeeping things. You talked about 3-point benefit from acquisition. Is there any seasonality to that? Or should we expect that to be similar for the rest of the year quarter-by-quarter? And also, is there any benefit to EPS from that?

Yes, Olivia, thank you for that question. There really isn't a lot of seasonality in the manufacturing partners' businesses. However, the first quarter only included about half the quarter because the acquisitions were closed in February. So the numbers will be a little bit higher going forward. Generally, any profit coming from these acquisitions in this first year will be offset by these amortization charges that Mark just highlighted. So we won't receive a real benefit this year in earnings per share. But going forward, in 2019 and forward, we should see really nice improvement there.

Got it. And why wasn't the purchase accounting embedded in the outlook up -- why before it wasn't included?

It really has to do with timing. After the acquisition is complete, we go through a valuation assessment. And that valuations determine how much of the acquisition goes to goodwill, how much of it goes to the unshipped backlog, the other items that need to be amortized. And included in that valuation is also the time line over which those items need to be amortized.

Got it, okay. And then the sales leaders now seem to be more closely aligned with sales growth. So what's your expectation for leader and customer growth going forward? Do you expect it to be fairly stable, more or less in line with your sales growth going forward? And also on Velocity, maybe can you compare and contrast performance in markets where it has launched versus those where it hasn't?

Yes, thank you, Olivia. Let me take the first step on this, and then Ryan can add anything. Our sales leaders, you're exactly right, trends generally quite closely to revenue. And frankly, when your customer number and sales leader number are close together, it's generally quite sustainable as well. So if you look market-to-market, you see that those markets that are really adopting our strategy as it relates to the social sharing and so forth, we see strong growth in customers that is then being followed by growth in sales leaders. And then in China, it's a little bit different, where we have a really strong uptick as people qualify for the LTL in the fourth quarter as sales leaders, and now we see that customer number coming up to support it. So really important that those 2 numbers trend together. And frankly, we like the direction we're seeing. And then finally, as it relates to your other question about the markets that have adopted Velocity, it's really only the Pacific market, which we put in, in December. So we've got 4 months of experience. We're encouraged by that. I think Ryan can speak to what we're saying with that, but that's really the only market that we have any experience in that. That's only 1% to 2% of our revenue. So Ryan, do you want to comment on what we...

Yes. Simply to address the Velocity question, Olivia, we're seeing positive results, as Ritch mentioned, in the Pacific. The model is really built to enable greater customer acquisition and empower our sales leaders to build more effective businesses faster, more flexibly. And that's really what we're seeing, improvements in customer acquisition trend, improvement in sales leader productivity. And so, so far, so good. It's producing what we'd anticipated.

Got it. And then just lastly, the consolidation of the Pacific into the Americas. Should we read anything into that in terms of like what's driving that? Is potentially America's the next market to -- where Velocity gets launched?

Yes, thank you. Actually, Velocity will be launched in the Americas, but the purpose for combining them is that's the way we're managing the business today. The head of our Americas region also oversees the Pacific region. They have a lot in common in terms of what they're doing to roll out their growth strategy and plans. So we adjusted that over to be more in line with how we're managing the business.

Got it. I'm sorry, one last thing. In terms of the $0.12 and the $0.03 that's in -- that were -- that are new today, where are those on the P&L?

Yes, the $0.12 is in the other income and expense line, and the $0.03 is split between revenue and G&A.

Your next question comes from the line of Tim Ramey from Pivotal Research Group.

The new product contribution, if you said that, I might have missed it. Is there a way to distill how much new products in total contributed to the quarter?

Yes, a great question, Tim, and the thing I'm most excited about the new products is I really see them contributing to our customer growth because that's much more sustainable than just getting revenue [pause]. So the ageLOC LumiSpa was only one that really had meaningful contribution in the first quarter, and that was around $40 million.

Okay. And it was -- was it $121 million in the fourth quarter? I'm trying to remember that.

It was about $130 million.

$130 million.

Yes.

That's right. And nothing else that really moved the needle in terms of new products for the first quarter?

No, I think we saw some excitement coming from products that we had launched, both in the U.S. and Europe. Those are kind of the first 2 that are introducing some of our socially shareable products like the long-lasting lip line that Ryan mentioned. That actually launched in EMEA in March and had a really nice response to that. Both the long-wear lip -- long-lasting lip wear line as well as our Dr. Dana nail product have both launched in the U.S. and are generating good -- I think, good excitement around that product as well.

Right. And Mark, just back to the other income line, we know there's the $1.2 million of FX. And now we know that there's about $7 million negative related to the convert, but it all sort of nets to 0 if we take those 2 things out. So there must be some other $7 million item in there. Can you shed any impact on -- or shed any light on it?

Yes, I can give you the puts and takes. There's a number of puts and takes in that line item. If you remember, our last earnings call, we highlighted the charge from Malaysia that we expected to receive in the quarter, and we did. So that is in that line item. There's a step gain from the acquisitions that is in that line item. There's the extinguishment of the convertible debt that hits inside of there. Interest expense, FX expense and then interest income. Those are main things, and they all, more or less, watch themselves out to the positive number that I shared.

See, we're all really consistent generally, too, with the guidance that we had provided with the exception of the convertible expense that we took when -- with the early converts. And that we filed an 8K on the 28th of February, and we expected the expense to be around $0.16. It came in a little bit lower than that at $0.12.

Right. And Mark, I think I heard you use the word step. In the release, you said amortization of intangibles. So was there an inventory step-up impact as well?

Actually, what happens -- let me jump in real quick. There's a -- we owned a minority interest in those businesses, and when we made the full purchase, it gets valued at the purchase on that date. And there was actually a gain created, and that's what Mark was speaking to that was in the other income expense.

Yes, and there was no step-up gain on the inventory.

Got it. Okay. Just one more quick one. Is there a D&A number you can provide for the 1Q?

Yes, I want to say about $20 million, I think, $19 million to $20 million in D&A.

Your next question comes from the line of Faiza Alwy from Deutsche Bank.

So I have a couple of questions. First of all, could you just talk a little bit about what's driving the growth in China? Sort of what drove specifically the growth in China this quarter? Because I know LumiSpa is not slated to be launched until 2Q. So were there specific products? Or just -- if you could just expand a little bit more on what you're seeing in the market there.

Sure, Faiza, yes, absolutely. We continue to be pleased with the growth in China, seeing our customers up and our sales leaders. Certainly, the businesses, looking better as a result of excitement around LumiSpa, anticipation of that. Our business incentives are really working well there as well. So generally speaking, kind of between those 2 elements, we're seeing a lot of positive growth there.

Okay. And then maybe if you could comment, historically, we've seen a very strong correlation between the growth in sales leaders and the organic growth in the business. Could you comment -- and we've always struggled with how much is this correlation because more of the sales leaders sort of qualify -- or more of your customers qualify to be sales leaders because the sales are higher or because -- the sales are higher because the sales leaders have increased. Do you have any sort of perspective on that, especially...

Why don't I and Ryan both take a shot at that, Faiza. I'll take a quick shot. The sales leaders really are still key to driving our business. And generally, they perform to a certain level each month to meet their requirement. Revenue will go up then based upon how many sales leaders we have, unless we also see a productivity improvement or increase from these sales leaders, which is driven by an increase in customers or excitement around additional products that they're selling. So it ties very, very closely. However, it's driven by a lot of different things, the excitement around the business, incentives that we have in place, momentum in the business where a lot of people are coming in to try a new product or existing product. So we have a lot of initiatives that move that number. Our focus is really move towards driving customer growth, which then supports the ability of sales leaders to become sales leaders but also to retain as sales leaders.

And simply to add to that, Faiza, is as you mentioned, I mean, all 3 of those metrics are critical when we look at revenue, sales leader and customer. And they do move a little bit independently based upon the initiative. So as we saw in Q4 with the product introduction, typically, our sales leader number will go up initially, followed by customer growth as that new product is -- moves through the channel, which is kind of what we're seeing today. And so they do move -- they're correlated, but they move -- the timing of the moves can vary based upon initiatives.

Okay. And then just perhaps, Mark, could you talk a little bit about -- the G&A was up significantly. So what drove that? And I know we talked about some accounting changes that were going to impact this year. So if you could maybe detail what that impact was. If I...

Sure, yes. So G&A -- first of all, the G&A as a percent of revenue was down year-over-year. So I'm happy with that. Secondly, we are -- we do continue to invest in our emerging markets, such as Latin America, that are showing high growth and high opportunity for growth. And then third, we did bring in the G&A expenses from our acquisitions. When you put -- include all of those items, that's really what made up the increase in G&A.

Your next question comes from the line of Doug Lane from Lane Research.

On the -- again, the 14% organic growth on the core business is really strong, and it sounds like it's better than expected. Can you just tell us basically what your expectations were at the beginning of the quarter and the 2 or 3 areas where you saw the upside?

Sure, let me speak to it, and Mark can also add anything. We were very, very encouraged about the way the business grew in all of our markets around the world. We virtually saw growth in every single region, with Korea being slight growth and Japan just slightly down. Outside of that, essentially close to double-digit growth or better in each of our markets. So it really came from everywhere. It was supported by strong customer growth, which again, I believe, is the most sustainable way to generate growth in our business. So I'm encouraged with that. Certainly, LumiSpa gave energy and health. It was about $40 million in the quarter. I would say overall, it was a really -- effort that was spread around the globe. Mark, would you add to that?

No, I would add to that as well. Versus forecast and where we expected the markets to come in, every market performed at or above our expectations.

And that's both the sales leaders and the organic sales growth?

Yes, exactly.

Yes, that's pretty strong. Looking at some numbers I had on the acquisitions where, I think, originally, I was looking for $60 million in sales and $0.06 added to the EPS. But obviously, with the amortization of intangibles, that probably goes to like a $0.10 dilution this year. But it sounds like the $60 million in sales should go up. Is it going to be something closer to $70 million this year?

Yes, I actually think it will be a little bit higher than that. We picked up about $15 million in the first quarter. We anticipate probably closer to $25 million here in this quarter and probably in the out quarters as well. So we're seeing really strong growth out of those entities and think they'll add meaningfully. Obviously, this year, we lose some in the purchase accounting. But generally, their operating margins are -- while they're on different line items, right, they're not -- we have a lower gross margin, but they still have an overall operating margin that's not too far off where our operating margin is. So going forward, they'll be very accretive to our business. But the most important thing is that it fits our vision to really grow this business, to be able to move quicker, to innovate faster. And we really think that provides us a competitive advantage down the road.

No, I understand the longer-term advantages. I'm just trying to get the moving parts here near term under -- in my mind, straight. So the sales number is bigger, so it sounds like the contribution -- the cash contribution is bigger. And then with the amortization, it's really kind of a push this year. I think that's what you said earlier, right? It's basically neutral to EPS this year?

Yes, it might even be a little bit negative, probably $0.04 to $0.05 negative with the...

Including the amortization.

Okay, I got it. And then the amortization steps down significantly next year and probably goes away altogether in a couple of years, correct?

Yes. It does have a relatively long tail, but the number's impact per quarter is insignificant.

Okay, good. That's helpful. Another question I had is with the convertible note. There was an amortization component of that interest expense in the convertible note. And I think that your document showed that it was an all-in payment of 7.1%, and I assume your new credit agreement is a lot more favorable than that. So do you have an accretion number from the refinancing of the convertible note?

We don't, but you can kind of do the math. The cost -- the 7.1% was higher because we are amortizing this note discount, essentially that took it for the 4.75% rate up to that. So with the new loan agreement, we don't have that note discount essentially. So if we'll save money, we end up taking the cost in right now if we settled it instead of spreading it over the next couple of years. But it will save us a little bit each quarter going forward.

Do you have, Mark, kind of an average cost of debt for those of us in the equity side that can't do all that math?

I mean, I can give you the basic terms of the new loan. We're at 2.25 above LIBOR. Depending on how LIBOR moves, that will affect us. Our prior debt was at 2.75 above LIBOR, so we got about a 50 basis point improvement there.

Oh, okay, yes. So that is meaningful, okay. And then I had one more. Oh, I know what it was. The accounts receivable were up a lot. I hardly ever worry about accounts receivable, but it was a big year-over-year gain. I'm assuming that's from the acquisitions?

Yes, that's the biggest impact.

Yes, also it was impacted a little bit by the way the quarter closed on a weekend, right around the holiday, the Easter holiday. So some of our credit card processes pushed it a day, but that -- but you shouldn't read anything into that outside of really normal business closing on a weekend.

(Operator Instructions) Your next question comes from the line of Beth Kite from Citi.

Terrific. If I could just circle -- if I could just please circle back to the couple of the preceding questions. Just to frame because I think for the guidance upgrade for sales, there are definitely a lot of moving parts that sounds favorable. But would you say the underlying sales growth expectation you had for your business in '18 is relatively the same as prior guidance? So ex-M&A and ex-foreign exchange?

No. I think we see the overall business looking really good. I think we're careful in terms of how we are going with our out guidance. Most of what we're building into that year increase is essentially the beat plus an increase in the second quarter. So we're being fairly conservative, I think, in our overall model. But the way we see the business trending today is very positive, and so that's coming really from growth in the core business.

Okay, perfect. And then for LumiSpa, it was great to get sort of sense of the $40 million in the first quarter. I assume the product -- I think I saw it for the U.S. and EMEA early in the quarter. I think you've spoken to some other regions later on the quarter. Can you help us to understand, because I just -- as we think about the year, so the second quarter -- obviously, now we have the guide. We know the full year, but just thinking about how to model the third and fourth. Do you have a sense for -- is there still a lot of pent-up demand in the regions where you did take LumiSpa already here in the first? Do you expect that sort of sales leaders will be enthused to continue to push that throughout the year? And then sort of related to that is the social selling products. As more of them hit more markets, is that relatively staged across the second, third and fourth quarters that like, sequentially, we should see if they sell well, increasing social selling contribution kind of quarter-to-quarter across the year?

Yes, Beth, a couple of comments on LumiSpa and then social selling. Certainly, Q1 was a good quarter for us. Really, the product did very well around the world where it was launched, with the exception of Mainland China in Q2. We saw really sellout numbers in several of our key markets. And so we will be continuing to ramp up production with the second facility coming along, and that will really help out. So demand will be solid throughout the year. Again, Q2, China comes online and then we'll continue to drive that product throughout the year. There's a lot of excitement and exciting news around that product that will sprinkle throughout the year. Regarding social selling products, we have those 4 key social selling products that we've discussed in previous calls. Ritch has mentioned Powerlips, Dr. Dana. We have Smile Pop and we have Tru Face Essence Ultra uplifting cream. Those 4 products are staged and timed for introduction in markets according to their launch calendars throughout the entire year. And so we will see positive product news throughout the year.

Okay, super. And then I suppose for Mark, or really anyone, but Mark, I know you and I talked so much, and I think investors have been focused on your gross margin trends. So I think the concept of the 77.9% would have been up year-over-year a bit as you added LumiSpa, which was quite a drag in the fourth quarter. Can you just help us to understand sort of some of the moving parts in the core business for gross margin?

Yes, that's a great question, Beth. Yes, happy with the 77.9% for the core business, especially as we mentioned, LumiSpa being about $40 million. And as we mentioned in our last call, it carries with it a slightly lower gross margin than our overall product portfolio. I think that we have a number of initiatives that are in place to work to improve our gross margins. We are working on our manufacturing process for LumiSpa to try to improve the margin on that product, and we're working basically across all of our supply chain to find opportunities to drive gross margin up. We do know that the acquisitions carry a lower gross margin, and if they overachieve in revenue, that will have a drag on our combined gross margin. And then the last thing to note is we have not received any of the benefit from the product that we buy from those acquisitions, and we only get the benefit from them when they fell through to the end user to our -- into our Nu Skin channel, into our distributor for -- to end users. And so it will be the second half of this year before we see the benefit on the gross margin line from our acquisitions.

Perfect. Okay, that helps a ton. And then I guess I have a last quick one maybe for Ryan or Ritch. Just in terms of Velocity, it's terrific that you're -- that it's going well, albeit in the spa market, that's going well so far and really now soon to the Americas. What -- do you see that as being a competitive advantage for you vis-à-vis other direct sellers?

Yes, we absolutely do, Beth. For us, business model or compensation plan is a key driver for productivity. And for us, particularly as we enter this new era of the gig economy, as some call it -- some would call it, having a more flexible and fast plan to compensate or reward sales performance is really, in our view, a competitive advantage. And so we believe that to be the case.

Your next question comes from the line of Mark Astrachan from Stifel.

I wanted to go back to the question on acquisition accounting. So I guess just first of all, so acquisitions are now anticipated to add, I don't know, $100 million-plus or so on a run rate compared to $60 million previously. Or maybe it's $90 million to $100 million. I guess what specifically is happening within these businesses that's resulting in such strong growth relative to what your expectations were?

Yes. I'm excited about these businesses. They have new facilities that really have a lot of capacity. I think they've brought on good, strong customers over the last while that is driving that growth as well. So there's a number of things driving their business, but I think they're just -- they're great businesses that have attracted a lot of new customers over the last several quarters, and that's resulting in strong growth right now.

And Mark, I would just add. Just to -- you did mention $100 million a year run rate. That's in line with what Ritch mentioned, but that's really not what's planned in '18. So we did about $15 million in Q1 and then -- so it would be somewhere between $70 million and $85 million is what we have modeled for the rest of this year -- or for the full year.

Okay. And what percent of those businesses is selling to external customers?

All the revenue that we mentioned in our guidance is revenue to external customers. So any revenue that they gain selling to us gets backed out, and we don't book that revenue in our consolidated results. So the numbers that we're giving are the numbers to external customers.

Okay. And what about the EPS benefit from the incremental sales from the acquisitions? How do we think about that?

Yes. I think the best way to think about it on an ongoing basis, Mark, is let's assume they have around a 10% operating margin combined, and that would be about the profit that they're going to generate. This year, it's different because we have about $0.16 of amortization that we'll be bringing through. But then after this year, let's say, in 2019, if they were to add somewhere around $80 million to $100 million or 10% operating profit, you'd be looking at somewhere around $0.12 to $0.15 of profit.

Okay. And I guess we can maybe talk a bit offline. I guess I'm trying to figure out why the 10% EBIT margin versus what you'd be offsetting on fixed cost that would sort of go away from running that like contribution margin, as you guys talked to, versus EBIT margin. I would imagine that EBIT margin would be higher as a result, but we can touch on that sort of...

Yes, happy to -- happy to walk you through that, yes.

I guess -- so just one more on the acquisition. So how big was the gain in other income from your prior accounting for this?

What? Sorry, I didn't hear that quite, Mark?

The gain, the other income gain on the acquisitions, how big was that in the quarter?

It was $13 million, $13.6 million.

$13.6 million. Okay, great. And then just lastly, to stay sort of on the acquisitions, back to a previous question. So on guidance for the year, so if you're adding $20-ish million more this year, $25 million more, depending on what you want to assume for acquisitions, I mean, that's a point and change relative to original FX, maybe a point better as well. So if you're raising guidance sort of mechanically 200 to 300 basis points versus previous numbers, wouldn't that then be all of it plus we get a little bit more upside from FX relative to what you're currently modeling? So how do you think about your conservatism on the core business versus reconciling what I just said?

Well, I think the first thing we started FX -- our original guidance for FX was 2 to 3 points. We're seeing closer to 3 points now. But then as you know, the rates have been moving around quite a bit over the last week or so. We guided 5 points for Q2. But for the year, we're not moving up our FX guidance that dramatically. And then the numbers that Ritch gave you for the acquisitions would be up 10 to 20, 25. So the remainder of that is core growth.

Got it, okay. And just one last question, back on the first question. Who are the external customers exactly for these acquisitions?

They range from customers all over the U.S. So there's a whole list of customers that they produce, some direct selling, many that are not direct selling. Some are direct marketing or QVC, just a whole range of customers.

Okay. That's the end of the questions, it looks like. We're really excited about this year. We appreciate everybody joining us today. And if you have further questions, feel free to reach out to us. Thank you very much.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.