Nu Skin Enterprises, Inc. (NUS) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Nu Skin Enterprises Q4 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Scott Pond, Head of IR. Sir, you may begin.

Thank you, Crystal. Good afternoon everybody. With me in the room today are Truman Hunt, President and Chief Executive Officer; Ritch Wood, Chief Financial Officer; Ryan Napierski, President of Global Sales and Operations; and Joe Chang, Chief Scientific Officer. During the call, comments will be made that include forward-looking statements. These statements involve risks and uncertainties and actual results may differ materially from those discussed or anticipated. Please refer to today’s earnings release and our SEC filings for a complete discussion of these risks. Also during the call, certain financial numbers may be discussed that differ from comparable numbers obtained in our financial statements. We believe these non-GAAP financial numbers assist management and investors in evaluating and comparing period-to-period results in a more meaningful and consistent manner. Please refer to the Investor Relations’ page of our corporate website at ir.nuskin.com for any required reconciliations for non-GAAP financial numbers. And I’ll now turn it over to Truman.

Thanks, Scott, good afternoon, everyone. We appreciate you joining us. As you saw in our release this afternoon, fourth quarter revenue came in at $572 million which represents continued sequential improvement and a slight uptick over the prior year in constant currency. Revenue was negatively impacted 7% by the strengthening of the dollar. Earnings per share of $0.62 were also affected by currency as well as a few other factors that we’ll discuss on the call. Frankly, this quarter was a frustrating one for us, and I think it's likely to be difficult -- a difficult quarter for investors to evaluate. So I hope to provide some clarity on what we’re seeing in the business and of course we'll be happy to answer questions as well. The quarter was frustrating to us because we saw really strong signals and results from product introductions in key markets such as the Americas and Japan, but on the other hand our December launch of ageLOC Me in South Korea generated only about half of the response that we had expected. So, first I'll touch on the positive signals that we saw in the quarter, and then I'll talk specifically about South Korea. As you know, we are early into what we believe will be a strong product cycle with ageLOC Youth and ageLOC Me. These products are the most compelling product innovations I think Nu Skin has ever produced. In fact, our consumer trials and the feedback we're getting from product users has been very favorable for both of these products, and importantly our sales leaders are now familiar with these products and are very enthusiastic about introducing them into their markets. So we feel confident about the quality of the ammunition we have to move the business forward. In November, we had a very strong LTO of ageLOC Youth in the Americas region. The LTO generated about $21 million in sales and we quickly sold through our available inventory. This launch generated a 16% year-over-year revenue improvement for the region and was a nice follow-up to the third quarter LTO of ageLOC Youth in Southeast Asia which led to a 44% constant currency growth rate in that region in the third quarter. So the first two introductory launches of ageLOC Youth have gone very well. ageLOC Me, as you know, is our new customizable skincare system. In December, we introduced ageLOC Me in the North Asia region using two different approaches. First in Japan, we offered the product only through high-level sales leaders. And not only did the product sales in Japan meet our expectations, but we were also very encouraged with strong growth in the number of sales leaders in Japan. After several years of some fairly tough sledding there it was nice to see Japan come to life with the introduction of ageLOC Me. In South Korea, we tried a different approach. As you know we have heavily promoted our product subscription programs over the past several years. We found that these programs augment the lifetime value of a consumer. AgeLOC Me is ideal for a subscription program because it comes with a 30 day supply of serums and moisturizers in measured doses. So our Korea team decided to offer ageLOC Me and a slight discount in exchange for a 12 month product subscription to obtain the discount. And as it turns out, that 12 month commitment seemed to be a stumbling block for many consumers. As a result, we ended up selling through about half of what we had included in our model for guidance purposes. And on the positive side which is the subscription component we've seen high level of follow-on purchasing in January and February and it's encouraging to see that the opportunity to customize one's skin care regimen is working well as the vast majority of those reordering are in fact customizing their order. So the subscription offer appears to be a nice retention mechanism, but it obviously didn't work to maximize initial sales. These insights from the initial launch events will be valuable as we leverage them in 2016 and now have the opportunity to roll out two very compelling products globally. You'll note from our report today that we generated growth in sales leaders in the fourth quarter in nearly all of our regions. The two standouts during the quarter were South Asia Pacific and the Americas with improvements of 24% and 17% respectively. We also saw double-digit gains in sales leaders in greater China which is a healthy indicator. But we are being cautious about guiding China because of economic conditions and uncertainty there. And we are also cautious in our guidance with respect to South Korea, as we sort out the extent to which the December softness was an execution misfire on the LTO or whether there are other factors causing general softness in the market. From a financial perspective we continue to generate healthy cash flow and continue to enjoy a strong balance sheet. As reflected in our release, we repurchased $60 million of shares in the quarter, and about 5% of our shares outstanding for the year. Our Board of Directors also today increased our quarterly dividend for the 15th consecutive year. Currency has obviously had a huge impact on revenue over the past few years. In fact, if we had the same exchange rates, we did in 2012 our reported revenue would have been over $400 million higher in 2015. Our updated guidance for 2016 is reflective of continued strengthening of the U.S. dollar. So while it's prudent to revise our guidance for 2016, this revision does not dim our optimism for the business nor our prospects for the future. Our team is fully committed to growth and we're focused on maximizing the impact of these new products on growing our channel and our consumer base and on executing with excellence. So with that, I'll turn the time over to Ritch.

Good afternoon, everyone. Thank you, Truman. We closed 2015 having made consistent sequential improvement on our top line as well as in our balance sheet and having generated a good year of improved cash flow. We used our cash to repurchase more than 5% of our outstanding shares during the year, and currency negative impacted our top line by approximately $200 million dollars and continues frankly to be a headwind to us. Our fourth quarter results finished a bit softer than we expected, and as Truman mentioned, our results were less than anticipated primarily because of the lower than expected LTO sales in Korea. While we're getting good feedback from the field related to the launch of the ageLOC Me product, we believe initial sales results were influenced by the way we bundled the unit with the annual commitment of consumables. Overall, we enter 2016 with strong product initiatives, with our primary launches planned for the second and fourth quarters of 2016. Critical to our success will be growth in sales leaders and consumers throughout the year. Operating margin for the fourth quarter was 10.8% compared to 15% in the prior year period. Gross margin was 78.8% versus 82.5% in the fourth quarter of 2014. We continue to experience pressure on gross margin from the strength of the U.S. dollar. Also consistent with the first three quarters of 2015, we reclassified the cost of sales, certain inventory related expenses from general and administrative expenses. While this reclassification has no impact to operating income or earnings per share, the $7.9 million which was reclassified during the quarter negatively impacted gross margin by 1.4% when compared to the prior-year. In the current quarter, gross margin was also negatively impacted by approximately 50 basis points from expedited shipping charges related to product launches during the quarter. We anticipate our gross margin will return to 79.5% to 80% range in 2016. Selling expenses for the fourth quarter were 41 5% of sales compared to 42.1% in the prior year. General and administrative expenses for the quarter as a percent of revenue were 26.5% compared to 25.4% in the prior year period. We held our global convention in the fourth quarter of 2015 at an expense of approximately $7.5 million with no similar expense in the prior-year quarter. We incurred a loss of $3.3 million in the other income expense line item compared to a loss of 16.1 million in the prior-year period. Both periods were impacted by foreign currency losses related to the translation of our balance sheet and in our company accounts while the prior-year also included a $7.4 million expense due to the prepayment the fee associated with refinancing our debt. Our income tax rate for the fourth quarter was 38.7% compared to 38.1% in the prior year. We anticipate the income tax rate for 2016 to be in the 36% to 36.5% range. In summary, our revenue was at the low end of our guidance, but we missed our earnings per share due primarily to the lower gross margin. The FX charges and other income in a slightly higher than anticipated tax rate for the quarter. During the quarter, we paid $19.8 million of dividends and repurchased $60 million of our outstanding shares. Cash provided from operations for the quarter was $80.1 million. Since the time we provided our initial 2016 guidance in December, the U.S. dollar has continued to strengthen and we've adjusted this trend into our updated guidance. Based upon January rates and estimating the Chinese RMB and Korean Won may continue to weaken against the dollar. We now estimate a negative 7% impact on the strength of the U.S. dollar in 2016, compared to our initial forecast of 4%. It's possible that this currency guidance might be conservative, particularly with the weakening of the dollar against the yen in the past few days. All things considered, we've updated our estimates for 2016. We're now forecasting even local currency revenue in North Asia and EMEA versus 2015 and mid single-digit growth in each of our other regions. These forecasts combined to a consolidated local currency revenue growth projection of about 2% for the year. At this revenue level we forecast in operating margin range of 10.5% to 11% for the year. I'd like to provide further detail on how I currently model 2016 on a quarterly basis. For the first quarter, there are no significant planned LTO events. We estimate revenue to be 450 million to 470 million and earnings per share of $0.35 to $0.38. By the way, that reflects a 6% to 7% negative currency impact. In the second quarter, we introduce ageLOC Me in the greater China region. We also have a follow-on launch of ageLOC Me in Japan. These launch events should result in double digit local currency growth year-over-year in Q2. In the third quarter, we don't have any significant plans for product LTOs. And we'll compare against a successful LTO in South Asia Pacific in the same quarter of 2015. And then finally, there are several product introductions in Q4, which should produce low to mid single-digit local currency revenue growth in that quarter. When factoring the currency impact of 7% to our revenue, we estimate 26 revenue to be 2.1 billion to 2.15 billion, with earnings per share of $2.40 to $2.60. So with that background, we will now open up the call for questions.

[Operator Instructions] And our first question comes from Bill Schmitz from Deutsche Bank. Your line is now open.

Hi, good afternoon guys.

Hi Bill.

So can you talk about the confidence level you have in guidance because it seems like there is like a new opacity in the business that didn't exist before. So I'm wondering you think you're still getting good information from some of the country presidents and some of the bigger distributors in those markets? When I kind of go through the pieces it seems like there is a fair bit conservatism across the board but I'd love to hear some of your thoughts on that?

Yes, I think, Bill, where we land on guidance today is reflective of the some conservatism. We just don't want to miss. And I think that with respect to the feedback in the input we're getting from our geographic managers, I think there also obviously feeling that pressure and they may be overly conservative in the way they are guiding the business right now, but the issue in Q4 was the LTO event in Korea. And otherwise, our LTO events have gone really well and in fact we had such a strong November particularly with the U.S. LTO and sales in greater China that we actually went into our Investor Day meeting and early December thinking that we could potentially even raise guidance for the quarter. So, it was really a South Korea issue, and I think that our team there is being a little bit conservative given the fact that the December LTO did not hit actually anywhere close to what we thought it would. So, yes, there's a measure of conservatism here. But I think we're getting good input from our management teams. Ritch, don't you?

Yes, I agree with that, Bill and I think the fact of the matter is when you miss -- you just try to recalibrate to the point where you don't miss again and that's reflected in the way we put our numbers today. I think everything leads to guidance.

That's helpful. And is there any macro contingent on the consumer side from China to Korea? Do you think it was purely just a change in the launch strategy that impacted or do you think consumption was strengthened? I'm wondering why those guys launched with a bundle after the essential oils bundle didn't work before. What I mean? Because like you sort of had the data point that maybe there wasn’t a great deal of demand for like a broader bundled offering that trying to get so it’s not possible…

Yes, let me give you a little color on that. We're trying to evaluate the extent to which economic or other general issues might be weighing on Korea little bit. And frankly, it's hard to know. We're not hearing that from our field leaders or from our management team in Korea right now. Like, we are hearing it from our management team in China, in particular. Some concern over economic conditions. So, that's one of the reasons for conservatism here. As we mentioned our remarks, it's just the desire not to be overly aggressive about the Korean environment in the event there are other macro factors that play. The bundle was not borne out of ignorance on our team's art. I mean, what they were trying to do was make the product proposition a little bit more attractive from a consumer pricing standpoint. So, the discount that was offered was designed to lower the effective monthly cost of purchasing the system. And I think they just underestimated the impact of what a 12 month commitment means. And we think that's what muted the response. So, what we've heard from them is that, is their belief and our belief today, that it was LTO programming that really impacted December’s results in Korea. But we’ve moderated, our guidance for the market and we’ll obviously monitor that going forward so that we give ourselves a little bit of a cushion in case it’s something more than that.

Okay, great. Thanks very much.

Thanks, Bill. All right, we have no other questions in the queue right now. So we're just going to conclude by thanking you for being on the call again today. And as always we will be available to answer any questions that you may have that we're able to answer. Okay, we do have another question in the queue, so operator, can you go ahead with the next question.

Yes. Our next question comes from Mark Astrachan from Stifel. Your line is now open.

Yes thanks, and good afternoon everybody. Thanks for squeezing me in. I wanted to ask about the revenue expectations. I appreciate your comments early about wanting to be a bit conservative and your commentary about North Asia, but you did look – it looks like you lowered your local currency revenue expectation for every geographic region across the world. So I guess I'm curious how much of that is macro versus sort of what you're hearing from your folks and what your expectations are in the business itself?

Yes, thanks, Mark, for the question. I think generally, the big reductions in guidance came from greater China and South Korea. We made some minor modifications overall. Just again, I think when you miss you try; you try and get conservative everywhere to make sure that doesn't happen again. But the primary reductions in guidance, the big dollar items all came from Greater China and from Korea.

Got it. Okay and then on operating margin, that came down as well. I guess I’m trying to sort of put that together, so little bit I guess is gross margins that you talked about, but it seems like it’s more G&A expenses the level of fixed costs on the lower revenue base, obviously offsetting selling expenses. I guess A is that correct assessment and then B, it sort of broadly -- how much does it reflect a view that maybe you've got to do more the business whether it's from a G&A standpoint or gross margin were that still little bit lower, even with the they are actually shipping relative to what you expected this during discount product -- deliverability lower even with the expedited shipping relative to what you expected the discount trying to stimulate considering partly the macro piece?

Yes. The primary factor impacting operating margin is, as you stated, a mostly fixed level of G&A on a lower revenue number. So in fact we have had debate as a management team and the best way to manage this going forward. We still feel more optimistic probably then some reflected in our guidance of our ability to grow the business this year. So, making significant disruption or cuts to the business doesn't feel at this time warranted. We are committed to being profitable and making sure that we remain very profitable going forward, but at this point in time believe that we should keep a lot of our programs and so forth in place that are meant to generate growth in the business and support these product launches which we think will be positive, and then we can kind of monitor it as we go forward. But the primary factor is, as you mentioned, a sort of fixed level of G&A on a lower revenue number.

Got it, okay. Thanks.

Thank you.

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

Hi, thank so much. Ritch, you mentioned that the biggest kind of wax were greater China -- and yet it didn't look to me like its performance was significantly out of expectation in the fourth quarter. Was it -- to you, is that where you felt -- I mean, you talked about Korea but that's North Asia. Why would you single out greater China for the most reduction in outlook?

Yes. Thanks for asking that so I can clarify my feelings related to that as well, because actually fourth quarter was decent in greater China. We saw an uptick sequentially in sales leaders. We saw a slight uptick in actives. So we entered the year and certainly a better position than we entered 2015. Where we were sort of on a soft trend. So, that was pretty good. What I did was back out some of our expectation of the LTO in the second quarter given the softness in the LTO in Korea, I kind of reflective that throughout the year also in greater China, although we continue to hear very, very positive responses. We did in the fourth quarter, a leader preview of about 5,000 units that was right towards the end of December which we received really good feedback on and our leaders feel really optimistic. So, probably the impact of the Korea LTO is sort of affecting my forecast for greater China when the indicators would point to some good stability in that business with an opportunity to grow going forward.

Then, just taking a step back and not meaning to be tough on you, but I think about this time last year we also had a similar sentiment where we didn't want to be -- we didn't want a misguidance. We wanted to be conservative about the outlook and it’s pretty stunning -- the difference in outlook today versus December 4. So, what assurances can you give us that this is different than kind of the level of conservatism you employed on December 4 or perhaps at this time a year ago?

Yes, I think Tim – this is Truman – I think we're programmed both Ritch and me to be fairly conservative in the way we guide, and we always have been. I think we always try to guide to what we think is a realistic level and we did that on December 4 and we're doing that again today. And unfortunately in the interim between these two dates, we laid an egg on our LTO event in Korea and that's it. That's what happened. And let me just add a little more color to perhaps our China sentiments. The first of almost every year in China is just really hard to read the business, because China is typically a soft month globally and this year January rolls into Chinese New Year almost immediately when essentially the country just rolls up and disappears, and so it's hard for us today to have really aggressive expectations for China when we can't get a very clear read on it year-to-date. And I think that's what's feeding [ph] into our guidance today as well.

Okay. Thank you.

Yes.

All right. We have no other questions in the queue. So again, we appreciate you joining us and are available to answer other questions that we can. And as I mentioned we remain optimistic and enthusiastic about our prospects for 2016 and beyond and maybe that's because we're familiar with the product ammunition that were bringing to the market which we are very enthusiastic about and probably even more so, if you knew the sales leaders that we have around the world as I do and the level of their capability and the level of their optimism for the future, I think it would be hard for anyone to be anything, but optimistic about our potential. So, we'll get back to work and do our best to make shareholders proud of what we accomplish in 2016. Thank you everyone.