Nu Skin Enterprises, Inc. (NUS) Q1 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Nu Skin Enterprises First Quarter 2019 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 will follow at that time. [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, Vice President of Investor Relations. Sir, you may begin.

Thank you, Joel, and good afternoon everyone. 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. On today’s 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 this call, certain financial numbers may be discussed that differ from 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 I’ll now turn the time over to Ritch.

Thank you, Scott and good afternoon everyone and thank you for joining us today. I wanted to begin by thanking all of you who made time in your schedules to visit us in Utah earlier in the quarter at our Investor Day. We appreciate that you made the effort to come and hear and experience our vision for the future. It was a great way to start the year and great to spend the day here with you at our headquarters. We also appreciated the extra effort many of you made to tour our indoor grow facility and CR developing technology, as well as visit one of our recently purchased manufacturers. So, thank you for coming. And by the way, if you weren’t able to make it and would be interested in visiting, we would love to host you in October during our Global Live Event and show you why we’re so excited about our future. We’re encouraged with our start to 2019, which was in line with our expectation. Our 7% local currency revenue growth was negatively impacted 6% by unfavorable foreign currency fluctuations leading to our 1% reported growth. This is particularly impressive given that we were comping against a 24% reported growth in the prior year quarter as we introduced LumiSpa in many of our markets. Earnings per share for the quarter improved 20% to $0.77, compared to $0.64 in the prior year. The EPS growth is benefitting from improved profitability, driven primarily by gross margin improvement, despite a negative impact from foreign currency. We anticipate these improvements will continue to benefit earnings through the balance of the year, while we stay on focused on investing in key initiatives such as technology and business expansion opportunity. We’re driving efficiencies throughout the business as indicated by the 140-basis point improvement in operating margin. Our growth strategy, which is focused on customer acquisition and retention generated customer growth of 10% for the quarter. We also drove local currency revenue growth in nearly every reportable region with Mainland China generating 12% local currency growth and Southeast Asia posting 5% local currency growth. Our manufacturing partners continued to generate strong gains, which also benefitted our reported revenue and we are now seeing the benefit of products purchased from these partners flowing through our gross margin. I’d like to take a minute to provide an update on our perspective regarding the increased media and regulatory scrutiny of the health products and direct selling industry in Mainland China. As we discussed in earlier communication, in January the government announced a 100-day campaign to review and inspect these industries. In connection with this review, restrictions were placed on holding meetings. As is our practice, we have been fully cooperating with these reviews, inspections, and increase. Because the government review is largely focused on the health products market, we elected to focus our consumer initiative on the personal care side of our business, which accounts for approximately 70% of sales in Mainland China. These consumer initiatives contributed to our growth in the quarter. The 100-day review period was recently completed, and yesterday the State Administration of Market Regulation or SAMR and 12 other government agencies held a joint press conference to report the results of the 100-day campaign. The report identifies the thorough nature of the review surrounding improper health claims and unauthorized business practices. We believe the regulatory efforts of the government will provide for the long-term sustain sustainability of these industries. As we all know, China is one of the largest and fastest-growing direct selling markets in the world, and it is a very dynamic business environment. We believe we have an amazing future in this market. Moving forward, we will continue to follow the guidance we received from Chinese regulators as we have done now for more than 17 years. We anticipate that there will continue to be a heightened level of media and regulatory scrutiny of these industries, particularly in the near-term. However, we are hopeful that we will see some loosening of the restrictions on meetings in the second quarter of 2019. Our guidance reflects our understanding of this current situation, including the mortified timing of our initiatives and our current expectations for our Mainland China business. Ryan will provide more details on the performance of China and our other markets in a moment. Moving to our vision for the future, we continue to make progress in our automated controlled environment agriculture initiative or automated CEA vision. We are building and refining technology that will allow us to develop solutions for pure effective and sustainably produced ingredients that will drive product transparency and traceability for our customers and product innovation for our company. We will begin introducing this vision with two products later this year that include ingredients growing in a controlled environment. We are also developing this technology for use with other possible applications that we believe have significant potential. Overall, I believe the first quarter results put us on pace for a healthy 2019 continuing to build on our strong performance in 2018. I will now turn the time to Ryan to walk through our Nu Skin business highlights.

Thanks Ritch and good afternoon everyone. As Ritch mentioned, we continue to execute our growth strategy focused on empower and sales leaders to acquire and retain customers through our engaging platforms enabling products and empowering programs. Looking back at the quarter, we’re pleased with the revenue and customer growth that we saw. I like to take a few minutes to give you a brief update on each piece of our strategy and then give some color on each of our reportable regions. On the platforms front, we continue to focus on social sharing to empower our sales leaders to attract, acquire, and retain more customers. The power of social medial to expand the reach of our sales leaders as they promote our products has helped drive customer acquisition in many markets around the world. While we have made progress, we believe we are still in the very early stages of reaching our potential to better leverage social sharing, including providing the best customer experience for our consumers and the right tools for our sales leaders. Our platforms will be powered by multi-cloud-based technology infrastructure. We’re now well into our migration to the cloud, which we believe will accelerate our ability to become a more customer obsessed by expanding our scale, capacity, and flexibility to better service the needs of our customers around the globe. We anticipate that this migration will be largely completed by the end of this year. Looking at our enabling products, we continue to build on our successful ageLOC LumiSpa brand, which has further enhanced our position in the global beauty device system space with the introduction of the new LumiSpa Accent by detachment, an idealized treatment serum. We introduced Accent and idealized in select markets during the first quarter and we’ll continue to introduce it throughout this quarter in China. We anticipate this franchise will remain a key growth brand for us moving forward into the future. Additional product introductions and restages are planned for the second half of the year in conjunction with Nu Skin LIVE, our biannual sales leader event in October. Finally, with our empowering programs, we have now largely transitioned our global sales force on to the velocity sales compensation program except Mainland China, which operates under a different business model. You may remember that velocity focuses on accelerating rewards to sales leaders for acquiring customers, while also providing flexibility to appeal to a broader entrepreneurial demographic. We’re seeing key growth behaviors improve in our sales force, including increased customer acquisition as evidenced by our 10% customary growth over the prior year. Velocity is also designed to drive and reward increased productivity of our sales leaders with adjusted requirements for qualifying and maintaining sales leader status. With these adjustments, we saw some variability in sales leaders across markets, but our overall sales leader count was consistent with the prior year. We will continue to focus on optimizing velocity to increase customer acquisition, improve sales leader productivity, and enhance the over quality of sales force around the world. Now as we look across the globe, we’re pleased with the constant currency growth in each of our segments during the quarter with the exception of slightly down South Korea. In Mainland China, we grew 12% on a constant currency base or 6% reported and also experienced strong customer growth of 36%. This growth can largely be attributed to customer focused promotions and retention programs, which began in the fourth quarter of 2018 and continued through this quarter. Our sales leader count remained steady year-over-year as activity was limited in the quarter, primarily due to the industry wide meeting restrictions advised by the government during the 100- day campaign that Ritch mentioned, which also let us to postpone some our business initiatives to later in the year. I just returned from Mainland China few days ago where I was able to meet with various government officials, members of the media, and our market leadership team. It was a productive week and I was once again reminded of our great potential in this great growing market. We anticipate further growth in 2019 as we navigate the dynamic China business environment just as we have for more than 17 years. In Hong Kong and Taiwan, we posted positive year-over-year constant currency revenue growth of 2% or 1% negatively reported. While our sales leaders grew slightly, we saw a slight decline in our customer growth due inpart to a challenging comparison in the prior year’s order from the LumiSpa introduction. Nevertheless, business fundamentals there remained strong. South Korea, revenue was down 1% in local currency, while we saw a slight increase in customers. This remains a key market for us and we will continue to work with our sales leaders to regenerate growth through refinements to our strategic initiatives. In the Americas and Pacific, we grew 2% in constant currency or negative 6% in reported. The 8% foreign currency impact and the decline in sales leaders and customers were primarily due to macroeconomic issues in Argentina. During the quarter, we successfully opened Peru, adding to our potential in the mostly untapped Latin America region. We remain very optimistic about growth throughout the Americas and Pacific. In South East Asia, we continue to perform well with Q1, up 5% in constant currency over the prior year or 2% reported, which included the introduction of LumiSpa. These markets were aided by a 17% increase in customers due in part to the impact of Velocity. In Japan, constant currency revenue was even with the prior year, and down 2% reported. While the direct selling environment in Japan remains challenging, we have continued to see sales trends stabilize with the launch of Velocity, our focus on social sharing and new production introductions. Finally, in EMEA, we were pleased with our customers and sales leader growth, which both reported up 14% year-over-year. Reported revenue was up 1% in constant currency or negative 8% reported. The growth of sales leaders and customers related to a strong start of the year. EMEA holds significant potentials. We further learn and optimize our business around social. In summary, we look forward to being with our top sales leaders in the coming week as we celebrate their success and further align around our vision in growth plants for the future. We’re making progress in our technology capabilities. We have major product initiatives slated for the back half of this year and we continue to work to optimize Velocity throughout 2019 and beyond. In summary, we look forward to a very bright future with confidence in optimism. And with that I’ll turn it over to Mark.

Thank you, Ryan, and hello to everyone on the call. I want to walk you through the details surrounding our first quarter results and give second quarter and full-year guidance. As a reminder, additional and financial information can be found on the investor page of our website. First quarter reported revenue improved 1% to $623.6 million or 7% in constant currency. Our quarterly reported earnings per share were $0.77, compared to $0.64 in the prior year, an increase of more than 20%. Gross margin for the quarter improved 20 basis points to 76.5%, compared to 76.3% in the prior year period. The growth margin of our core Nu Skin business improved 80 basis points to 78.7% as a result of a favorable product mix, cost reductions, and benefit from product sourced through our owned manufacturing entities. We’re very pleased with these improvements given the substantial currency headwind, which put pressure on our gross margin. Selling expense as a percent of revenue improved to 40%, compared to 41.8% in the prior year quarter. This was largely due to non-commissionable revenue associated with our manufacturing entities. Nu Skin selling expense was 42%, compared to 42.9% in the prior year period. General and administrative expenses as a percent of revenue were 25.4%, compared to 24.9% in the prior year. Operating margin for the quarter improved to 11%, compared to 9.6% in the prior year. We anticipate that we will continue to see operating margin improvement throughout the year. The other income expense line reflects a $2.8 million expense, compared to a $1.2 million gain in the prior year. During the quarter, we paid $20.5 million in dividend and repurchased approximately $1 million of our stock, and have $470 million remaining in our share repurchase authorization. We also paid down our debt by $29.5 million, which provides an interest rate reduction on the remainder of our debt. The tax rate for the quarter was 34.7%, compared to 41% in the prior year. The prior year's rate was inflated, due to a FIN 48 tax accrual. Our revenue guidance for the second quarter is $660 million to $680 million, and includes a 4% to 5% currency headwind. As a reminder, in Q2 of 2018, we introduced LumiSpa in Mainland China, which helped us generate approximately $95 million of LumiSpa sales in the quarter, creating a challenging revenue comparison as our major product initiatives are scheduled for the latter half of this year. We anticipate Q2 earnings per share growth in the $0.91 to $0.98 range with a tax rate of 33% to 36%. Based on first quarter results, our revenue range for this year is anticipated to be $2.76 billion to $2.81 billion, a top line growth of 3% to 5% or 5% to 7% in constant currency, consistent with our previous guidance. This guidance assumes an approximate 2% to 3% currency headwind. Our projected 2019 earnings per share remain unchanged at $3.80 to $4.05 with a projected tax rate of 33% to 36%. With that, we will now open up the call for questions.

Thank you. [Operator Instructions] Our first question comes from Faiza Alwy with Deutsche Bank. Your line is now open.

Yes. Hi. Good evening. So, just a little bit more color Ritch on the regulatory environment in China. Do you anticipate that you will be allowed to hold meetings? I know you said at some point in the second quarter, I guess I'm trying to figure out in your guidance for the second quarter, is that dependent on meetings being allowed again or not?

Yes. It's a good question Faiza. Thank you for that. We're not certain how soon the government will be comfortable allowing meetings to begin. So, we've been cautious in how we've guided our business in China particularly. We don't count on a lot of meetings in Q2 as what we've factored into our guidance.

Okay. And then it looks like overall there hasn't been much impact or there wasn't much impact in 1Q from you not being able to hold meetings. But I know you talked about different promotions and changing sort of the structure of the promotions or the type of promotions that you ran. So, maybe you could provide a little bit more detail around that and if these promotions are going to continue in 2Q?

Yes, certainly. And Ryan and I have both been over there in the last three weeks here spending time to really make sure we understand what's happening. I would say that we're really pleased with the way our consumer base has reacted based on promotions that we provide and so forth. But there's no doubt we're impacted by not being able to hold meetings and I think we see that a little bit in our sales leader number, which was flat year-over-year. Our sales leaders are energized, they're excited to work and anxious to continue to develop our business there. So, we're anxious to get it back going, but overall, we feel like we're really happy with the fact that we're able to continue to grow at the base of our business, which is really a great consumer business continues to be steady and solid. And we'll look forward to taking some of the promotions that we've delayed a little bit and rolling those out later in the year probably mostly in Q3 and going forward from there.

Okay. So, it sounds like, so there were incremental promotions in 1Q that maybe you weren't planning on doing, which impacted the customer number is that right? So, we should expect to the customer number to maybe fall off in Q2?

Not necessarily Faiza, I think what I would say is that our – we focused our promotions around customer growth as opposed to around business opportunities where we're talking to potential sales leaders. The sales leader’s promotion, particularly we have pushed those back and we'll continue those at a point in time where things have settled down and we have a good understanding of how the government starts to loosen up some of the regulatory issues.

And Faiza maybe just to add to that, as I mentioned, the customer promotions Ritch is describing began in the fourth quarter of 2018 prior to this activity happening, those will continue on moving forward. This isn't something we're planning to pull apart. It's part of our long-term customer retention strategy. Also, I think from a personal care standpoint, our personal care business remains to be a focus for us around our beauty device systems. And then maybe the last point is just online promotional activity continues and it was planned in Q1 and we’ll continue in Q2 etc. So...

Okay. Maybe – sorry, to keep asking about this, but it might help if you could give us like the growth rates in Mainland, China by personal care versus nutritional supplements. I think that might help us sort of size or quantify the potential impact from not being able to hold meetings?

Yes. We really don't break it out in terms of that level of granularity personal care and nutrition and it will really depend on how the year develops. But what I can say is that we initially guided China to a 7% to 10% growth rate for the year. We anticipate that to be fairly in-line with our expectation today, I do believe in Q2 what's factored into our guidance is a slight decline in China versus Q2 of last year, which included the launch of LumiSpa's. We had a really strong quarter in the prior year that we're comping up again. But we still see the 7% to 10% growth rate for China for the years as being part of our guidance and something we feel good about today.

Okay. Thank you.

You bet. Thank you.

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

Great. Thank you. First, just a point of clarification. I think you had said in the past that Accent would roll out primarily in Q1 and Q2 and I think you said that you just have started rolling it out in China, but then you also said that a lot of the launch activity is second half weighted and I thought Accent was the biggest thing coming in 2019. So, can you just help me understand that a little bit better?

Let me speak quickly to Accent and I'll have Ryan talk about some of the other product initiatives that we haven't by the way, we haven't fully rolled out the product initiatives to our sales force. So, we'll be somewhat cautious in terms of what we're able to disclose here, but as it relates to Accent that product rolled into, again it's a line extension for LumiSpa and it rolled into most of our markets in the first quarter except for China. China will receive the product in Q2. And then again Ryan why don't to speak to our other product initiatives for this year.

Yes. To Ritch's point in fact, and as I mentioned we'll be meeting with our sales leaders next week and further discuss second half plans with them. But we do have multiple product initiatives planned throughout second half that they are really related to our beauty device systems, including Galvanic Spa and, the LumiSpa of course that we've just been talking about with Accent. So, you'll continue to see those things rolling out. We'll be able to provide a little more color maybe at our next earnings call.

Yes.

Got it. Okay. And then, in terms of Q2, if we try and strip out LumiSpa from the base for Q1 and Q2, it looks like Q1 growth maybe a point higher than what your local currency growth would have – was, but if we strip it out in Q2, it looks like you're looking for a pretty big acceleration in sales growth on a sequential – year-over-year growth on a sequential basis. So, can you talk about what's driving that, especially given some of the things, it sounds like – Q2 maybe is a little bit tougher just given the restrictions that are still in place and just being measured in terms of the way that you’re moving about that market. So bigger picture, if you could help us understand that acceleration in growth that you’re looking for in Q2?

You bet. Q2 is generally historically a stronger quarter as we come off Chinese New Year another sort of historical issues or I would say seasonal issues that happened in the first quarter. So, what we factored in and Mark can speak further to his guidance specifically is really a consistent historical quarter Q2 to Q1, with a little bit stronger quarters in the back-half of the year because of these product initiatives we have.

Yes. I think the only thing I would add is that, in Q2 of last year, we sold about $95 million of LumiSpa. That number won't go to zero, right? We've got a very healthy run rate. LumiSpa performed as a number one product in Q1. We would expect it to be our number one product again in Q2. So, while it may not lap the $95 million, we did last year, from a constant currency perspective, we're really guiding Q2 to be close to flat slightly down.

Got it. Thanks. And then switching over to the manufacturing revenue, is there any way to get visibility around that? Clearly, you guys had said something in the 8% to 10% for the year at Analyst Day more or slightly ahead of – in Q1. So perhaps could you give a little bit of color in terms of how we get any visibility into that and what your full-year expectation is for that line item?

Sure. Thanks, Olivia, for that. We did have a good first quarter, which was partially due to the fact that we had a stuff period in the prior year. So, our reported growth was about 70%. The core business growth in both of those are in the three entities was closer to about 20%. So, it's actually tracking a little bit of head of what we had forecasted in our initial earnings. I think, generally, the 8% to 10% is fairly conservative. We do have a little bit more difficult comps as those businesses grew really strong last year, and so we'll be comping up against those. But generally, I think, what was maybe 10% that we provided a little bit earlier in the year may increase just a little bit maybe 10% to 12%, 12% to 15% in that range. So, we see those businesses continuing to provide a real benefit, partially from a revenue standpoint, but particularly on our gross margin line, which we're now starting to see roll through our gross margin benefit.

Got it. Thank you.

You bet.

Thank you. And our next question comes from Tim Ramey with Stifel [sic] Pivotal Research Group. Your line is now open.

Well, not Stifel, still Pivotal Research, but thank you. Although Stifel might be great, I don't know.

Sure.

The – yes, I sort of had a similar question on the manufacturing revenue growth. Thanks for clarifying that kind of core was in the 20% range. How should we think about that? I mean, it looked like when we toured the facility, you said there was a lot of activity and a lot of ability to ramp up capacity utilization and low double-digit might be conservative. I guess, you're probably not going to contrail what you just said a minute, a moment ago, but my takeaway assumption from the tour was there was a lot of steam there?

Yes, these are really nice businesses as you were able to see. And by the way, thanks for coming out. I think it gives you a different perspective when you can walk through the facility. By the way, both of our key manufacturing – manufacturers [indiscernible] and Elevate will be expanding their facilities here in the second quarter and give them more capacity to grow. So, we do anticipate, they'll continue to grow. At the same time, they're producing more product for news as we go forward, too. So that number we don't report in revenue…

Right.

…benefit when it rolls through our gross margin, but great businesses with great opportunity. We want them to go continue to find third-party business that they can benefit other customers continue to find efficiencies, get better and better with their innovation and we benefit from all of that. So, yes, we see good opportunity for them. They make up approximately 5% of our overall revenues. So, we won't spend a lot of time focused on that, because it just doesn't move the needle quite as much as some of the other businesses today, but we do see them very additive to what we’ll do.

But the real organic growth when you count the Nu Skin businesses is much greater than 10% or 12%...

Yes, that’s right.

…that's what I should take away? And then on the 36% customer count growth in China, I assume that was because you could continue to do what you were doing on social selling in online. But should we say, I mean, how should we think about that? Is that an average number? That was really pretty terrific.

Yes. Tim, I think there are really obviously two inputs into that into the number, and one is on the acquisition side and the other is the retention side. So, what we mentioned with Faiza around our customer retention programs that began in Q4, we're certainly seeing added benefit of the compounding effects of running that retention program over time quarter-by-quarter, so that's helpful. We also have a good customer acquisition happening in the market continuously. So, I mean, both of those things together producing that 36% growth.

Right. And then Mark on the tax rate for the full-year still quite a bit of variability there and kind of higher range than I might have guessed. What's the big variable there? Is it currency? Is it employee comp, tax benefits that you have a hard time predicting? Can you give us anymore clarity there?

For sure. Yes, with tax reform the biggest driver for our rate is where our profit is earned. And so, again, one of the reasons why we acquired our manufacturing entities is, because U.S. profit is that such a favorable rate to our average that it brings down our overall average. So, if we continue to grow our U.S. profit, our tax rate will go down. If profit happens in another higher-rate market, tax rate will move up. And so therefore, we had to give a broader range, because our tax rate will fluctuate quarter-to-quarter depending on where profit is generated.

Yes. Thank you very much.

Thank, Tim.

Thank you. And our next question comes from Linda Bolton Weiser with D.A. Davidson. Your line is now open

Hi, thanks. So, in terms of thinking about Mainland China, again, you explained the situation with the discrepancy between the customer growth and the sales leader growth. But I guess, when I think of just some of the things about direct selling, I guess, I always think that if there was a flatness or a decline in sales leader growth, that is a leading indicator of slower revenue growth in the future. So, can you just address that? And if that's something we should be concerned within future periods as we see the situation in China continuing with maybe not so many meetings? Thanks.

Yes. Thanks, Linda, that's very perceptive and usually that is the case. The growth in sales leaders and customers tend to average out and be similar one without the other. In China, it's a little bit exacerbated because of the customer promotions that we're running at the same time our business leaders are not able to do the business the way they always have. What will happen as we go forward; I think it really depends on how soon we can continue meetings and get back to sort of normal – more normal business activities. But I would say this, I think, in China specifically, we continue to really focus on a long-term substantial business. And as we go from quarter-to-quarter, we're not super worried about getting back to activity really quickly. We've been through these ups and downs before our sales leaders are somewhat accustomed to times, where we have to slow activity and then pick it back up. And I think they've – they're very resilient and have learned to work through issues like this. So, I do believe as we work throughout the balance of the year, particularly in the latter half of the year, we will see our sales leader number grow. It will be supported by growth in the customer number, and those two will work together to continue to grow our long-term sustainable business.

Thanks, and that's helpful. And then, sorry if I missed it. But did you actually say how much in LumiSpa sales they were in the first quarter of 2019?

We didn't say it, but it was just over $75 million, and it was, as Mark mentioned, it was our number one product in that quarter. So real good result, we're happy with that.

And I would say, that number is inclusive of Accent sales.

Okay. And then I try to just ask you the – I guess, the Southeast Asia number even though there was growth there, the constant currency revenue growth was 5%. I guess, maybe I thought it would be a little higher for some reason. And I noticed that comparisons get really hard in the second and third quarters in Southeast Asia. So, is that another market where we may actually see actually down revenue perhaps in the second quarter because of the hard comparison?

Well, we actually like the way our Southeast Asia business continues to develop. You noticed in our key metrics that customer growth number, sales leader number continues to be healthy. But you're right, the first three quarters of last year as a whole, we reported approximately 25% growth in each of those first three quarters. So, the comps are a little more difficult, but we also see the health of the business looks good. We see continued strength in markets like Vietnam, Thailand picking up, Indonesia continues to be steady. So, we feel like Southeast Asia will continue to perform well. Although it won't report its high of a growth rate because of the comps being higher. But generally speaking, Southeast Asia is that continues to look healthy to us.

Okay. Thanks very much.

Thank you, Linda.

Thank you. And our next question comes from Steph Wissink with Jefferies. Your line is not open.

Thanks. Good afternoon, everyone. I'm going to ask the China question in a slightly different way, if I can. I'm curious if without the opportunity to host meetings, if you found that any of your other strategies or tactical opportunities in that market actually performed better than what you expected. Was the lack of ability to host meetings, did that actually open up opportunities to explore other ways to drive leader retention and customer growth that maybe you hadn't emphasized in the past?

It's a great question, Steph, and we really do appreciate that there's a lot of questions around China, because this is sort of the biggest variable in what the year is going to look like. So, let me just say that really proud of the way our teams have continued to find ways to engage with customers. And frankly, the move over the last couple of years to really use WeChat and communicate through social mechanisms has been a great benefit. Maybe, Ryan, you can speak further.

Yes. No, I think precisely there to Rich's point around new – and your question around newfound strategies, we certainly have had some advancements and improvements, including this customer retention program that we've been able to continue to develop and focus our business around, as well as an online Expo model that actually the business has been working on for over a year now. But this came in very handy as it came to this quarter. So, the online Expo model was something that we learned through this process and the customer retention programs in particular.

All right, that's great. And then just a question on LumiSpa and the numbers have been consistently strong. I’m curious if you can talk a little bit about the repeat purchase activity than just sequentially quarter-to-quarter. Every time you talk about LumiSpa, you talk about it as a system. So, I'm curious if you can share with us a little bit about how the retention metrics have developed?

Let us tag team on this one as well, because it impacts each of us. First of all, from a vision standpoint, you're exactly right. We believe that one of the areas we can really compete as a company is in this beauty device market, which includes LumiSpa, it includes our Galvanic Spa, which by the way we're really excited about from product launches later this year with that. And again, we'll tell more about that coming forward, but also ageLOC Me. So, we have these devices that work very, very well together, and we believe it's a place we can really differentiate.

Yes, and to add to that stuff, one of the – and you mentioned the word systems, that's a very important word and the reason we call it beauty device systems, because I think one of our competitive advantages really are in our traditional heritage in terms of solutions or products solutions that then are coupled with devices. And so, we believe this is a very unique and competitive position to be in to not only be in the device space, but in the – be in the device system space. So LumiSpa as a franchise will continue to grow at the system as well Galvanic with the second-half initiatives as a system. And then to Rich’s point, they come together to form a much more holistic or comprehensive approach to skincare. But I think the system nature of this is really significant and important.

And Steph, I’ll chime in. This is Mark. As we talked about our gross margin for Nu Skin improved 80 basis points, and is really driven by a number of things, one of which being the flow through from our manufacturers. But one of the big drivers was, we're starting to see the consumables flow through for these beauty devices systems and those consumables carry a higher margin than the devices themselves.

That's great. You answered my last question. Thank you.

All right. Thank you.

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

Yes. Hi, everybody. Just want to focus on a couple of numbers. And we touched on the customer growth versus the sales leader growth, and it's a pretty wide disparity, the 10 points there from up 10% in customers and flat in sales leaders, and you talked about China and I get that. But five of your seven regions posted better customer number than sales leaders. And I wonder if that's more of an ongoing trend now with your focus on customer acquisition?

Yes, let me - Ryan and I will take that one, Doug, thank you and I appreciate your question. We clearly thought part of that impact being in China, because the issues of not being able to hold meetings there. But I would also say and Ryan mentioned this in his script that as we transition to velocity, which does focus on customer acquisition, it's also focused on sales leader productivity. And so particularly in markets where we haven't had as strong of growth, let's talk about Korea, for example, specifically. We've seen some consolidation in our sales leader number, where the sales leaders have actually become a little bit more productive and at the same time built a larger customer base to their credit. So, it's somewhat impacted by velocity. Most of that impact has pretty much flowed through at this point in time, as our sales leaders actually had an ability to opt in sooner versus later to the plan. And at this point in time, the vast majority of our sales leaders have opted in, so we see that impact of some consolidation in sales leaders. But overall, that the sales leader number feels quite healthy that I think the health of our organization continues to look really strong.

Yes. And just to reiterate, Doug, in – my point in my comments previously, in velocity to build on Rich's point that the sales leader requirements were adjusted to focus more on productivity as opposed to quantity. And so that – that's really the dynamic that's playing out that you're seeing from a sales leader gap. And to Rich's point, we're transitioning through that as most markets are now in the model and has been running with it for, in some cases, more than 15 months now, so.

Okay, great, that's helpful. The other number I want to touch on was the selling expense and I get the manufacturing part of it. But the 90-basis point improvement in the core Nu Skin, is what also a function of velocity or – and again something that should be sustainable, maybe not at that rate, but sustainable for the rest of the year as we anniversary the acquisition of the manufacturing companies?

Yes, thanks for that question, too. Doug, I think generally, there's going to always be some fluctuation in our sales expense – selling expense from quarter-to-quarter. What we saw in the first quarter was not really an aberration. I think, also as we look to go forward, it's going to be fairly consistent with where we've been here in the first quarter.

Okay. Thank you.

You bet. Thank you, Doug.

Thank you. And our next question comes from Beth Kite with Citibank. Your line is now open.

Terrific. Thanks very much. Hi, everyone.

Hi, Beth.

I’d love to talk just a little bit more about Accent, if I may. One, just context for the first quarter. I believe it rolled out late in the first quarter, for instance, in the U.S. So, with it – with your commentary that it rolled out a lot of markets in the first quarter ex-China in the second, what customer response were you getting so far? What's the sort of rep appetite for it? And did you really have a full quarter, I would say? I guess, my question is do you like to have a full quarter benefit yet, or is that something more likely here in the second quarter, especially inclusive of China?

Yes. Beth, we really like Accent. We really like LumiSpa. They're both really good product. I would focus though on LumiSpa, because that’s really the franchise we’re trying to build. The Accent brings us a nice product that continues to drive LumiSpa interest. It has a good margin on it. It has a specific need. When you say late in the quarter you're exactly right. I think in the US it was like two days before the close to the quarter. So, we certainly didn't get the full benefit of the quarter in most of the markets that we rolled it out and what's happened April and March, I think a couple in February. But what we see is a good appreciation for both the new product, but also the LumiSpa continued focus on that LumiSpa. But we think LumiSpa is going to continue to be a driver for us as we go throughout the year.

Great. And then I want to be respectful, I know that you want to be cautious or commentary on the product launches in the second half until you've had a chance really to entertain, I suppose with your sales force, but at the same time, I think you can appreciate that just been giving confidence in our full year – in the full year numbers and thinking about our models. Is it just Galvanic Spa that we're talking about and sort of the teaser that you gave us at the Investor Day, is it more than that for Galvanic? Like, how big is the change I would say, or just any kind of framing you could help us to understand or to sort of think about in terms of the second half launch activity would be great if you're able?

Yes. All good questions and I wish I could – I wish I could bring you in and let you use some of the new product that would get you really excited. I think when we talk about the Galvanic Spa franchise, it really is a most significant franchise that we have built over the last 15 years. So, that's a big initiative for us. And there will be several products meant to build that initiative that we’ll be rolling out. So, that's bigger. We'll have a couple of products that have incorporated our new technology on controlled environment agriculture, where those ingredients are grown indoors. We think, while those products may not be significant and again, we haven't announced them to our sales leaders, but at the end of the day, they put forth a vision that we believe is going to be really impactful to our sales force. So, we like those, we'll have additional social selling products that we're looking at. So, we have a really good suite of products.

Yes. And only to add onto that Beth, I mean as we continue to focus on these foundational brands like LumiSpa, like Galvanic, what's so powerful about these is that our sales leaders know how to sell them. They're not having to learn new product models and that's what we really like about this strategy. So, we'll continue to build it and provide solutions like Accent is to the eyes or the acne solutions in LumiSpa, we have a very large submarket opportunity in terms of servicing consumer needs with these. So, that's why we're excited about them.

Perfect. And then I guess the question I would like to talk about the technology changes that are underway. I, personally here in the US, the customer facing website at least seems a lot much improved and a lot more usable if you will sort of where are you then with some of your deployments for mobile technology for your reps in given markets that matter. If you could just sort of talk us through what you did in the first quarter and what you might be trying to do for the rest of the year from sort of a rough interface perspective?

Yes. So, I would maybe divide into three pieces. One is, on the team side, so we've really been a strong transformation of our leadership and are making very good progress there in terms of bringing on the capability that we need to transform and to offer our customer solutions that we need. On the migration itself very much on track as I mentioned, we hope to finish that or complete the migration to the cloud by the end of this year and then it's all about optimizing when in the Cloud. So, the work never stops, but at least the migration two will be good. And then the third bucket, as you're describing or the customer facing solutions. We've identified our seven priorities to go after first one of which contains exactly what you're describing, which is the customer interface on the Web and our sign up and our shopping processes there. We also have rep tools that are out there currently that are being redeveloped. I would say, with using cloud technology to make those enhancements more effective both in terms of customer acquisition and then servicing ongoing. So, but our focus this year really has been on stabilizing the systems, getting the leadership in place, migrating to the Cloud, and making some of these minor improvements that we've seen with and our next stage will be all about optimizing and these tools for our sales reps and providing a better customer experience to all.

Terrific. Alright. Thanks very much.

Thank you, Beth.

Thanks, Beth.

Thank you. [Operator Instructions] Our next question comes from Mark Astrachan with Stifel. Your line is now open.

Thanks, and afternoon, everybody.

Hi, Mark.

Wanted to ask not about specific new products or LTOs, but just what is embedded in sales guidance for the back half of the year from a new product from LTO standpoint?

Yeah. We haven't really disclosed what that number is and frankly, we're not launching them in an LTO fashion. So, we wouldn't anticipate the spikes that we've seen in past years with LTOs, but rather we'll just launch the product and make it available generally. So, but I would anticipate as a more consistent flow of our revenue through the back half of the year as opposed to one quarter that's going to stand out substantially from the other.

Okay. Switching back to China, so I just wanted to ask some of the questions maybe in a different way as well. Expectations from a sales leader customer standpoint, so sequentially both decelerated from 4Q, I guess your one, to what do you attribute that and two, what will the expectations be from both of those in 2Q and for the balance of the year?

Yes. Good question. The first question as it relates to the sequential from Q4 is a typical sort of response that we normally have Q4 to Q1. Q4 is generally the strongest quarter of the year, and then followed by Q1, which is a softer quarter. So, I think what we saw there is generally typical, and then you factor in some of the effect of not being able to hold meetings. As we go into second quarter, I think we would anticipate that Q2 is going to be stronger than Q1, which it generally as again historically how much impact will the fact that we haven't been able to hold Q1 meetings and how soon we'll be able to hold Q meeting will impact those numbers. But generally, I would say that they will trend somewhat with revenue, so we would see a little strengthening from Q1 going into Q2.

Okay. I thought you'd said that you expected sales to decline slightly sequentially in China or if I guess, sounds quite sequentially, but year-on-year, maybe related to that. So, how does the fact that you're rolling out an Accent and then play into the expectation for the sales decline. But also, what you said about the leaders and customers?

Yes. Correct that it is a year-on-year comparison will be slightly down. We do anticipate sequential improvement in revenue in China, which would be typical by the way from Q1 to Q2, so that would be normal. As it relates to Accent, we think it'll be a solid product in China, which will continue to drive LumiSpa sales, particularly so. And that will be part of the improvement that we see from Q1 to Q2. But we again, we don't anticipate necessarily a pop from Accent. It's more a refocus around the LumiSpa franchise and continuing to drive that has really been our focus around that line extension.

Okay. Thanks. And just lastly for Mark, can you give any sort of update on cash flow in the quarter or working capital CapEx kind of expectations going forward as well?

Yes, for sure. Q1 is traditionally our lowest cash producing quarter. But we're still in line to produce roughly $300 million of cash from operations for the year. And I think that's basically what I would share with you from a cash perspective. We did pay down our debt $30 million in the quarter. We had large tax payments due in the quarter, which is part of the reason why our tax – our cash position is where it is.

Yes. And I would just add from our CapEx side that's remained quite consistent with where we've been. It was, I think $13 million or so for the quarter. And we continue to anticipate around $70 million to $80 million for the year. The only change in that would be our China manufacturing facility, which we are excited to begin going on, but we don't know exactly the timing of how soon we'll start to build that out. But generally, it's going to be a good year for cash flow and Q1 with typical with what we generally see in Q1.

Okay. Thank you.

I think, that's all the questions. Thank you all for joining and for your questions today. We really appreciate your interest and look forward to a great year as we move forward. Have a great day. Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone, have a wonderful day.