Nu Skin Enterprises, Inc.
Q2 2018 Earnings Call Transcript

Published: 3 Aug 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q2 2018 Nu Skin Enterprises Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions for how to participate will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Scott Pond, Vice President of Investor Relations. Sir, you may begin.

[Scott Pond:]

Thanks, and welcome, everybody. Thank you for joining us. 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 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 our Investors page at ir.nuskin.com for any required reconciliation of non-GAAP numbers. With that, I'll turn the time over to Ritch.

[Ritch N. Wood:]

Thank you, Scott, and good afternoon. Thank you all for joining us on today's call. Let me start by reflecting on the great privilege it is for me to [Technical Difficulty] (00

[Ryan S. Napierski:]

Thanks, Ritch. Good afternoon, everyone. As Ritch mentioned, the continued implementation of our growth strategy focused on engaging platforms, enabling products and empowering programs is driving this accelerated growth around the world. This is [Technical Difficulty] (00

[Mark H. Lawrence:]

Thanks, Ryan. Let me take a moment to walk through our second quarter highlights and provide an update to our revised guidance for the year. As a reminder, you can find additional financial information in our release and on the Investor section of our website. Second quarter revenue came in very strong at $704.2 million, up 28% and consisted of core Nu Skin revenue growth of 24%, which included a 4% favorable foreign currency impact and 4% growth from our recent acquisitions. Second quarter earnings per share were $0.90, improving 17% year-over-year. Quarterly earnings per share were [Technical Difficulty] (00

[Operator:]

Thank you. Our first question comes from Tim Ramey with Pivotal Research. Your line is now open.

[Timothy S. Ramey:]

Thanks so much. The foreign currency translation impact should – I know that's going to be impossible or very difficult to forecast that should we see that likely go to zero in the third quarter based on current rates or it's hard to know as an outsider based on where the rates were on the close of the quarter. Do you have any thoughts on that?

[Ritch N. Wood:]

Yeah. Let me take a shot at that, Tim. Thank you for the question, hopefully you can hear us, okay, we're understanding that there is some breakout in the line as we speak. So, I apologize for that. The rate at the end of Q2 for the RMB was just over $3.6, it has moved closer to – I'm sorry, $6.6. It's moved closer to $6.85 at this point in time, and it just really depends on where it finishes at September 3. And that's what's hard to project. We have a really hard time [Technical Difficulty] (00

[Timothy S. Ramey:]

Great. And again, the charge for the purchase accounting is non-cash. And I think, as I recall, maybe related to your inventory step-up, or what was the direct reason for that?

[Mark H. Lawrence:]

Yeah. There is two pieces of it. It's the amortization of intangibles, and it's the backlog that we had not shipped, and a split roughly $2 million to revenue and $1 million to G&A.

[Timothy S. Ramey:]

Sounds great. Thanks so much.

[Ritch N. Wood:]

Okay. Thank you, Tim.

[Operator:]

Thank you. And our next question comes from Steph Wissink with Jefferies. Your line is now open.

[Stephanie Wissink:]

Good afternoon, everyone. Two really quick questions. The first one is on the LumiSpa Acne treatment product. I wonder if you can talk a little bit about just the market size potential for an acne product, and what that might mean to some of your younger sellers within your network. And then, our second question is, this is related to some of the social or the viral and digital tools that you've created. Can you talk a little bit about the deployment of those around the world? How many markets have that full package, or full suite of tools, and maybe give us some sense of utilization with the different markets of the world? Thank you.

[Ritch N. Wood:]

Let me take the quick shot and then Ryan will finish up the question. What we really like about what we're seeing with LumiSpa is the fact that it really touches a broad demographic. The benefit of the acne line, which you mentioned is something we really think applies to the millennials and the younger demographic. So, we like that a lot. In terms of the other social selling product, it's primarily two different products, Powerlips, which is a long-lasting lip-wear, as well as Insta Glow, and most of those have now rolled out to the Americas and Europe, and will be then rolling into our Asian markets in the fall. Let me turn it to Ryan to speak more specifically on some of these.

[Ryan S. Napierski:]

Yeah. No, no great question, Steph on this. For LumiSpa, to your point we're excited about the product because of its reach across demographics that we [Technical Difficulty] (00

[Stephanie Wissink:]

Thank you and congrats on a great quarter.

[Ritch N. Wood:]

Thank you.

[Ryan S. Napierski:]

Thank you, Steph.

[Operator:]

Thank you. And our next question comes from Faiza Alwy with Deutsche Bank. Your line is now open.

[Faiza Alwy:]

Yes. Hi. Good morning. Sorry, good evening.

[Ritch N. Wood:]

Hi, Faiza.

[Faiza Alwy:]

My first question is on China. Are you seeing any – I know you had a great quarter. Maybe you could quantify how much of it was LumiSpa? If you might have said it in prepared remarks, I missed that. And then, if you're seeing any change in trends there just given the movements in the renminbi, like in the most recent sort of weeks or month?

[Ritch N. Wood:]

Can you repeat the second part of your question about the renminbi?

[Faiza Alwy:]

Yeah. Just given, like there's some concern that – just given the movements in the renminbi like sort of spending in China is going to get impacted or the Chinese – like just the consumer confidence in China might get impacted. So just – like what kind of trends are you seeing in the last few weeks?

[Ritch N. Wood:]

Yeah. We really [Technical Difficulty] (00

[Mark H. Lawrence:]

And then total LumiSpa sales were roughly 14% of our business, about $95 million.

[Faiza Alwy:]

Okay, okay. Great. And then, could you talk a little bit about the acquisition sort of the manufacturing facilities that you recently acquired. Sort of what was the sales impact from that because I'm curious how it's going to impact the selling expense ratio going forward?

[Ritch N. Wood:]

Yeah, perfect. Thank you. We really acquired these businesses because we think it allows us to get product innovation to market quicker than we have in the past and really give us some additional capability to grow. And they're very good manufacturing partners that are doing business [Technical Difficulty] (00

[Faiza Alwy:]

Okay. And then if I may just one on TR90 it's the first time that we've heard about TR90 in a number of years. So, maybe if you could talk a little bit about how the product might be different, it sounded like the positioning is a bit different. Anymore color around that would be helpful.

[Ryan S. Napierski:]

Yes. Sure, Faiza. In fact as we discussed – mentioning it here, we wanted to include it because we continue to be pleased with the nutrition side of our business. The last couple of years we've been very focused on the device platform, predominantly in the personal care space. So, we wanted to indicate that our nutrition business continues to do very well. TR90 being a key lead product there, it is very playing in the sports nutrition category, which is the largest and well, the fastest growth category in nutrition. It speaks very well to trends in Asia and the rest of the world in terms of consumer demand. And we see that playing out with TR90. As far as new formulae and such, we continue to enhance the offering in various markets with different product complements. We have not changed the core focus as a body shaping and weight [Technical Difficulty] (00

[Faiza Alwy:]

Okay. Great. Just one last one for Mark. Mark, do you – can you talk a little bit about how much of the share repurchase do you expect will be – will happen this year and maybe if you could give us a cash flow guidance for the year?

[Mark H. Lawrence:]

Sure. Our use of cash will remain consistent with what we've done in the past. We always look to see what is the best use of cash to fund the business first and then we look as – does it make more sense for us to pay down debt or repurchase shares. We historically bought between 1% and 2% of our shares back. I would believe that we will continue along that same path.

[Faiza Alwy:]

Okay. Thank you.

[Operator:]

Thank you. And our next question comes from Olivia Tong with Bank of America Merrill Lynch. Your line is now open.

[Olivia Tong:]

Great. Thank you. First on the quarter. Can you help me just understand the flow-through because sales was clearly quite a bit ahead of your expectations, but EPS was plus or minus within the range. So, what were the surprises to you irrespective of obviously the FX impact, which I assume was higher than you had anticipated, but you had probably expected some FX impact? And how much of that sales – how much non-commissionable revenue contribute to the top line this quarter? Thank you.

[Ritch N. Wood:]

Yeah. Great question, Olivia, and thank you for that. Really, really strong quarter. And in fact the $704 million we had projected actually a 5% benefit from currency that actually only came in at 4% due to the strengthening of the U.S. dollar, primarily in the last few weeks of the quarter. So, it was even stronger I guess in the $704 million. The operating income of the business was very strong, particularly when you factor in the $12 million or $13 million of convention expense that we have this quarter in Korea and China. So generally, the operating [Technical Difficulty] (00

[Olivia Tong:]

I forgot to unmute myself. The – classic problems. First, the G&A being higher, you mentioned the conventions, were there conventions in the year ago. And then is there any shifting in expenses between the two line items or is that just the non-commissionable revenue, obviously you don't get selling expense on that. And then the conventions that are kind of causing that shift this quarter between G&A and selling expense?

[Mark H. Lawrence:]

Yeah. Thanks, Olivia. I can take that one. So, there weren't any significant spend in conventions in the prior year. I think that was the year that we had our global convention. So, that $13 million is largely incremental. There will be shifting in the line in the P&L. We mentioned that we had $22.7 million of non-commissionable revenue from our manufacturing partner. So, you would see that and you do see that impacting our selling expense line. And then you see the inclusion of our manufacturing partners and part of the increase of the G&A line.

[Olivia Tong:]

Got it. And then, one sort of housekeeping or clarification actually. On the gross margin when you say improved modestly in second half, could you be – could you just give a little bit more color on what do you mean by that? Do you mean it will be actually up year-over-year, up sequentially or just less of a decline on a year-over-year basis relative to what you saw in first half?

[Mark H. Lawrence:]

Yeah. It will be up sequentially from what we saw in the first half of this year, both [Technical Difficulty] (00

[Olivia Tong:]

Got it. And then just lastly the guidance, you obviously have Q3 outlook and then we can figure (00

[Ritch N. Wood:]

Good question, and you're right, as we forecast [Technical Difficulty] (00

[Olivia Tong:]

Great. Thank you.

[Ritch N. Wood:]

Thank you.

[Operator:]

Thank you. And our next question comes from Doug Lane with Lane research. Your line is now open.

[Ritch N. Wood:]

Doug, we can't hear you. Are you on mute?

[Operator:]

Once again, our next question comes from Doug Lane with Lane research. Your line is now open.

[Ritch N. Wood:]

Maybe we go to the next one and see if Doug can come back in.

[Operator:]

Understood. Our next question comes from Beth Kite with Citigroup. Your line is now open.

[Beth N. Kite:]

Terrific. Hi, everyone.

[Ritch N. Wood:]

Hi Beth.

[Beth N. Kite:]

Hi, Hello. Hello. I was wondering if we could chat a little bit more Ryan, with (00

[Ryan S. Napierski:]

Great. Yeah, Beth, great question. So, to maybe give a little more clarity on [Technical Difficulty] (00

[Beth N. Kite:]

Yes, perfect, very much so. And actually when you mentioned LumiSpa reminded me of one in particular for China, you had such nice growth of sales leader quarter-over-quarter in Mainland, China. I assume in part as LumiSpa launched in June – pardon me, in April. Do you sort of feel good about the momentum of maintaining that level sales leaders because obviously we've seen a rise in the fall in the December to March quarters from the previous years?

[Ritch N. Wood:]

Yeah. We really do see encouraging trends in China. And I think generally the one thing a little bit different about China from some of the other markets is that it seems to be a sales leaders led growth, and then customers follow on after that. So, we anticipate as we go in the back half of the year that we'll see strength in the customer number particularly. We get a tougher compare in the fourth quarter with our sales leader. But really Q3 we'll anticipate strong growth rates still in China in Q3 as well. So overall, we see really strong trends there and anticipate that to continue.

[Beth N. Kite:]

Excellent. Thank you. Thank you. And so, if I could just go to Mark briefly, can you (00

[Mark H. Lawrence:]

Yeah. Great question, Beth. And thank you for asking that. We are continuing to invest in the areas that we think will drive growth. Specifically, focusing on Latin America and China are areas of investment for us. As far as infrastructure, we continue to invest in IT and building out our digital initiative and core infrastructure to support the growth that we're seeing. And then, lastly, we are investing in new technologies such as Groviv, our indoor growing initiative because we believe it will yield great returns for us and grow our business. So, there is a large amount of investment, but we are committed to increasing our operating margin as we invest.

[Beth N. Kite:]

Perfect. And I guess then – I'm sorry. If I could (00

[Mark H. Lawrence:]

Yeah, it's happening right about in line with what we expected. As you know, we started that effort right as soon as the product launched and once we saw the success (00

[Beth N. Kite:]

Perfect. Thank you all very much.

[Ritch N. Wood:]

Thanks, Beth.

[Operator:]

Thank you. And our next question comes from Mark Astrachan from Stifel. Your line is now open.

[Mark S. Astrachan:]

Yeah. Thanks, and good afternoon, everyone.

[Ritch N. Wood:]

Hey, Mark.

[Mark S. Astrachan:]

Wanted to ask, so $22.7 million from acquisitions in the second quarter, I want to verify if I heard that correctly. And then, what are the assumptions for the acquisitions over the balance of the year since I think I recall the number was increased last quarter like $30 million. So, if you could give a little bit of clarity there that would be great.

[Ritch N. Wood:]

Yeah, sure. The $22 million was correct for the second quarter, I think it was $22.7 million. We anticipate that to be fairly consistent in Q3 and maybe a little lower than that in Q4 as generally with manufacturing coming into year-end, it's a little bit softer. So, yeah, right about that same level for the next couple of quarters, and then we do anticipate some slight growth of that coming into next year in 2019.

[Mark S. Astrachan:]

Got it. Okay. And if you back that out of the revenue base and try to get to the selling expenses per your commentary on the non-commissionable revenues, I still get something like 40% of sales, so that's down, I don't know 150 basis points year-on-year, 180 basis points sequentially. So, I guess, it still seems like there is a lot of levers there. So, what is specifically going on within that selling expense line, and then how should we think about that core selling expense on a go-forward basis?

[Ritch N. Wood:]

Yeah. That's a great question too. Let me speak to that. The selling expense fluctuates for a couple of reasons. China partially has the biggest influence on that and also the number of qualifiers that are qualifying for our sales incentive for us (00

[Ryan S. Napierski:]

For core Nu Skin business for sure.

[Mark S. Astrachan:]

Got it. Okay. And then also just one last clarification, so on the acquisitions, I think you had said historically the operating margins would be roughly in line with company averages, so you're talking about something very low-double digits, is that kind of a good way to think about it?

[Ritch N. Wood:]

Yeah, that's correct, Mark. So, right now as Mark mentioned, it's about $3 million a quarter, that was dropped just slightly as acquisition accounting expense or purchase accounting expense. So right now, we're not showing a lot [Technical Difficulty] (00

[Mark S. Astrachan:]

Got it. Okay. Thank you.

[Ritch N. Wood:]

Thank you.

[Ryan S. Napierski:]

Thanks, Mark.

[Operator:]

Thank you. And once again, we have a question from Doug Lane with Lane Research. Your line is now open.

[Douglas Calder Lane:]

Hi. Sorry about that. Good afternoon everybody.

[Ritch N. Wood:]

Hi. Your sound is clear right now, so that's good.

[Douglas Calder Lane:]

Oh! Good, all right, so already an improvement then. Just a couple things, on the social selling initiatives, we're about a year into the program here Ritch, and we've had very successes with AP-24 and Powerlips and Insta Glow and Clear Action, and can you give us a feel for how does the lifecycle for these initiatives fold out? I mean, was any one of those particularly big in one quarter, and then it moved to another one in another quarter? How does the lifecycle for these initiatives play out?

[Ritch N. Wood:]

Yeah, when we really move to social selling, and I give Ryan a lot of credit for his vision around this move towards social selling, the first product [Technical Difficulty] (00

[Douglas Calder Lane:]

Oh, that's interesting. Okay. So, will we look at the group as a portfolio or do you have to keep feeding it with additional new products to keep the excitement there because of how short the sales cycle is for these particular kind of products?

[Ritch N. Wood:]

Yeah. The [Technical Difficulty] (00

[Ryan S. Napierski:]

[Technical Difficulty] (00

[Douglas Calder Lane:]

Okay. that's helpful. And just shifting gears, the top line numbers are impressive and they keep going up, but it's really driven by three quarters of your business. Can you talk about Japan and Korea, which is still a quarter of your business and really haven't done much in the past couple of years, and it doesn't sound like your outlook is for much to change there. Can you just give us a little color on what's going on in the markets, and what should we see going forward over the next six, 12 months.

[Ritch N. Wood:]

Yeah. These are very important markets to our ongoing success. What I'm most encouraged about is we're just [Technical Difficulty] (00

[Ryan S. Napierski:]

And I would just add to that that point regarding the importance of social sharing in both of those markets. These two markets are very advanced skin care and anti-aging markets because of the demographics in both markets. So, we've done very well historically in that anti-aging category. As we go more into social sharing, as we open up more with products like LumiSpa that are more millennial-oriented and reach a broader demographic than what we've historically focused upon, we really feel that to Ritch's point that we will be better positioned in those markets to drive future growth. So, this social sharing element is key to expanding our demographic reach.

[Douglas Calder Lane:]

Okay. That's helpful. Thank you.

[Ritch N. Wood:]

Thank you very much, Doug. And it looks like that's the end of our questions. So, let us pause for a moment to thank you all for joining us today. I'd just let you know that in my 14 years as a CFO and now 18 months as a CEO, I've never been as positive and confident in our strategy and the future of the business. So, we look forward for continued growth and progress in the business and thank you all for being part of our call today. Have a great afternoon.

[Operator:]

Ladies and gentlemen, this does conclude your program for today and you may all disconnect. Everyone have a great day.