Good afternoon, ladies and gentlemen, and welcome to the Q4 2019 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 will follow at that time. As a reminder, this conference call is being recorded. I'll now turn the call over to Scott Pond, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Lee, 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 the 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. I'll now turn the time over to Ritch.

Good afternoon everyone and thank you for joining us today. With everything that is going on in the world right now, we appreciate you taking time to participate in today's call. Before I speak more about the broader global issues, let's take a couple of minutes and go over our Q4 and 2019 results. Our fourth quarter finished in line with our expectations with revenue of $583.4 million and earnings per share of $0.72. Our markets generally performed as we have models; although in Mainland China, we continue to feel the effects of the medium restrictions and negative media from earlier in the year. For 2019, our revenue was $2.42 billion, down 10% or 7% in constant currency when adjusting for the 3% currency headwinds throughout the year. Earnings per share were $3.10. Overall, our business results were greatly impacted by the events in China, which caused our China business to retreat 15% in local currency for the year. However, we are confident in our long-term position and our future opportunities in China, and we have strong product and digital initiatives lined up for 2020. Early in the fourth quarter, we held a global convention in Salt Lake City with leaders from around the world in attendance, and 10s of thousands more participating via live stream. During the event, we aligned our sales force around upcoming initiatives and outlined our product strategy for 2020, generating energy and enthusiasm among our sales leaders and setting the stage for the upcoming year. We're also pleased with the performance of our manufacturing entities, reporting 24% growth in the quarter and 35% growth for the year. These partner companies are contributing to improvements in our revenue, operating margin, cost efficiencies and product innovation; and we anticipate continue growth in 2020. Before we discuss our…

Thanks, Ritch, and good afternoon everyone. We've spoken in a length in the past couple of years about our long-term strategy. We grow our business by empowering sales leaders to grow customers by providing engaging technology platforms, enabling products and empowering programs. We remain committed to this strategy and are actively refining our plans as we navigate a change in global environment. I want to spend the next few minutes talking about what we accomplished in the fourth quarter and how we plan to execute in 2020. Before I walked you through the highlights of our reporting segments for the quarter, I think it would be helpful to provide you with broader context on the full year of 2019, as Q4 was effectively a result of the full year's performance. Significant negative media coverage of the health, food, and direct selling industries in Mainland China and the result in government restrictions on meetings throughout the year had a cumulative impact on our ability to create and retain sales leaders. Our meeting strategy plays a significant role in creating, training and developing new sales leaders. However, we've learned a lot through our experiences in 2019, which will benefit us into 2020 and beyond. For instance, we have accelerated our transition to a digital first approach, including online product expo and promotions, which helped us to drive continued customer activity and increased sales leader productivity. We also began the development of a new digital training platform, which would begin rolling out this month. We believe this platform will help reduce our reliance on beatings in the future as it is fully implemented, which I'll speak to more in a moment. In general, the remainder of our segments performed largely in line with our expectations. A few of the highlights or insights into…

Thanks, Ryan. I will walk through our financial results for the fourth quarter, the full year of 2019 and provide Q1 and full year 2020 guidance. As a reminder, you can find additional financial information in our release and on the Investor section of our website. Fourth quarter revenue came in above the midpoint of our guidance at $583.4 million and was negatively impacted 1% or approximately $6 million by unfavorable foreign currency fluctuations. For the full year, our revenue was $2.42 billion and was negatively impacted 3% or $82 million by foreign currency fluctuations. Fourth quarter earnings per share were $0.72 compared to a negative $0.32, which included a $1.37 impact from impairment and restructuring charges in the prior year. Earnings per share for the year were $3.10, compared to earnings of $2.16, which was inclusive of the impairment in restructuring charges. Gross margin for the quarter was 75.9% compared to 76.3% in the prior year quarter. The difference comes primarily from our manufacturing segments, making up a larger percentage of revenue. Nu Skin gross margin improved to 78.5% compared to 77.9% in the prior year. Selling expense as a percentage of revenue was 39.1% compared to 39.4% in the prior year. Selling expense for the Nu Skin business was 41.3% compared to 40.9% in the prior year. General and administrative expense as a percentage of revenue was 27.4% compared to 23.9% in the prior year. As expected, general and administrative expense, was impacted approximately $11 million by our global life convention during the quarter. The other income expense line reflects a $1.1 million expense compared to a $4.3 million expense in the prior year. During the quarter, we paid $20.6 million in dividends and did not repurchase any stock. Our tax rate for the quarter was 25.1%. As…

[Operator Instructions] We have a question from Faiza Alwy from Deutsche Bank. Your line is now open.

So, my first question is just on the revenues in China in the quarter. I'm curious, if that was in line with what you were expecting going into the quarter because it seems like there was a bit of a sequential decline from 3Q and you didn't miss, at least what I was expecting. So I'm curious, how you think about just that revenue number in the quarter?

Thank you, Faiza. The revenues really for almost all of our regions were in-line with our expectations for the quarter. So, we had it modeled China about where it came in and we were not surprised or it was according to what we have planned.

Okay. And then as we, I'm curious, how you thought about your guidance for next year and potentially how that changed as the coronavirus news spread and impacted your business in January? So if we could, may be disaggregate -- I know you talked about China being 20% to 25%. Could you say how much of that impact is coronavirus related? And how much of it is still lingering impact from 2019 regulatory disruptions?

Yes, thank you. Let me take a shot and Mark can add some more detail to this. As we were preparing our guidance at the beginning of the year and before coronavirus had really broken out, we anticipated about a flat year, is what we would have guided to, slightly down to slightly up. So, you can see that this coronavirus impacted two things. One, the dollar has strengthened during that time. So, there's an additional about 1% of FX headwinds that we're anticipating. Secondly, most of the decline, although, coronavirus will impact more than just Mainland China; most of the decline is coming from Mainland China, which we would have projected being close to flat for the year to down about 20% to 25%. So, you can see most of the impact and the revenue line is coming from Mainland China, which definitely has an impact on our profitability as well.

The only thing I would add is, as Rich mentioned, we believe the coronavirus will have impact in other regions of the world, in particularly our other Asian markets. And so, we did also reduce our guidance models for Korea, Japan and Southeast Asia. We expect all of us to grow slightly below what our historical averages are.

Okay. So, at this point, so I know you gave the guidance for 1Q, are you expecting that a normalization as we get into 2Q? So, I know, you're not specifically guide into 2Q at this point, but, if we think about China being down 20% or 25% in the first quarter. At this point, how are you thinking about? And I know you said growth at 4Q, like how should we think about 2Q and 3Q?

Down in China will be more severe in the first half of the year and 20% to 25% was our annual guidance for that market, but we would anticipate what we built into the model is really a more severe impact in the first half of the year. We do believe will have a strong product launch in the fourth quarter specifically, where we anticipate we'll actually see growth by that point in time. It should grow both revenue, but more importantly, sales leader and customer growth, which is really the fundamentals to continue to see consistent growth going forward. So, the impact is primarily in the first half of the year. It will carry a little bit into the third quarter and then the fourth quarter will benefit from a strong product launch.

Your next question is from Olivia Tong from Bank of America. Your line is now open.

Great, thanks. Good afternoon. I want to still build on talking about the cadence to the recovery because it does seem like you're looking for a pretty meaningful increase from the device launch. And I guess, can you sort of just parse out a little bit more if there's -- if there's anything that you're seeing right now. I would imagine that there's not a ton of activity, but these categories, like is there -- is there anything that can get picked up, like just a little bit more like on the ground of what's happening now with anything?

Thanks. It's a really good question, Olivia. Thank you for that. And we will certainly be transparent as we go throughout these first couple of quarters and talking about what's happening specifically with customer and sales leader growth. But, I'd like to have Ryan just take a minute and talk through, how we align our leadership around the Hero product launch and generally how we see things trend during the year.

Olivia, as you may recall, we have really a long run model that we use called our alignment and launch process here, where we work to align our sales force globally around these types of new Hero products. You can think back to the LumiSpa being the most recent example in 2017. That process is really an annual process that began in January this year. And we continue to align our sales force from our top leadership, on down through the broader sales force throughout the year with the execution of the global premium in Q4. And then local launch has come in the first, the following two quarters of Q1, Q2 next year. And so, we look at this one from a device innovation perspective and a system perspective to be very similar to LumiSpa. So if you look at the comparisons back in 2017 that's really where our planning is based from there. In terms of China specifically and working through that with our leaders, obviously as Ritch mentioned the disruptions locally in terms of how we meet with our leaders and such does will have an impact in terms of getting that full alignment earlier. But to my points and my comments, we're leveraging our digital technology in Newtown, specifically to provide the adequate training that we need to build towards that Q4 event.

Got it. Okay. And then you also mentioned investment, and I'd love to a little bit more detail on what you're spending behind or what you believe is still mission critical. Presumably you have to hold your sales leaders at their current levels even though they clearly there's an impediment to reaching those levels right now. So, what else is going on that -- that's going to continue to be a cost? And where can you make some mitigating maneuvers in order to offset some of the overall cars?

Yes. Good question, Olivia. We believe this is not a sort of foundational issue. It's sort of a temporary issue that we have to work through. So, we'll continue to hold our sales leaders. There'll be some expense around selling expense for sure. We're investing in brand building opportunities there in China specifically that we think are important at this point in time, and then we continue to invest in our digital initiatives that we think will be really valuable going forward. So those are the three primary investments in China. There are some additional expenses, obviously to the coronavirus that will impact us slightly. But if it were more foundational would be much more aggressive and saying we have to adjust the foundation of the expense structure. We do believe this is temporary, we believe our sales force is anxious to go to work as soon as the environment improves, and we'll see the business come back.

And then just lastly, the 335 million in cash, could you just talk through a little bit where it's domiciled?

Yes. So, we have made progress and moving our cash, particularly out of China. So in China, we have about $75 million in cash. The rest is relatively evenly dispersed around the world with a large chunk care in as well.

Your next question is from Steph Wissink from Jefferies. Your line is now open.

Thank you. I want to follow up on the digital training. Can you just remind us how many markets today have access to that platform? And give us a sense by the fourth quarter new product launch, how many of your global markets will be onboard and using that platform?

Steph, we have really two platforms that we run globally. One is in China with our Alibaba partners. The other is here located for the rest of the world with our AWS partners. So, we do have that platform and NU TOWN that I was specifically commenting on. He is, as I mentioned, began to roll out at the end of last year and earlier this year on the training side. We do have LMS or learning management system support on our global platform as well, that actually is running today. The content is lighter than it needs to be long-term, but we continue to invest in that content globally. So, effectively all markets have a learning management system. The new town, one in China specifically is a little more robust, based on the local technology ecosystem and our partnership there. We're utilizing those learnings through our global technology organization to benefit usually both platforms by taking key learnings and practices and spreading them across both of them.

That's great. And then my second question is just on customer account growth or lack of growth embedded in your 2020 guidance. Can you help us think through the balance between leaders and customers? Because you've had some improved performance in your customer account. Wanting you to understand how you're thinking about those two key inputs in to the sales growth guidance for the year?

Yes, great question, Steph. We have a real focus around customer growth and we did that when we rolled out our Velocity compensation programs. So, it was really meant to provide a faster and more flexible opportunity for sales leaders, helping them to be more productive, and really focusing on driving customer growth. So, we actually had good success generally in driving customer growth and seeing those initiatives working fairly well around the world. The key to our customer growth this year will really be around a rock a strong product launch. And a strong product launch to us equals growth in the customer base and in the sales leader number. So, we believe as we go throughout the year, we'll see particularly in the back half of the year, stronger numbers in both customers and sales leaders. It's being led initially by customers I think, and then it will transition to the sales leaders as they build out a stronger base of customers. Our plan would be to see a good steady growth throughout the year with strengths, particularly in the fourth quarter.

So your next question is from Doug Lane from Lane Research. Your line is now open.

Yes. Good afternoon, everybody. I'm just staying on the whole concept of sales leadership, where your sales leaders are down, a lot since that LumiSpa launched in 2017. They've down about third and I get there a lot of that's China with what's going on over the past year or so. But, if I look at the numbers, all the regions are down from that peak at the end of 2017 when you launch LumiSpa. So, you've done a lot with the social media and the Velocity and what have you, but really is getting away from the LTO model maybe a mistake here?

I think, I would answer. Thanks for the question, Doug. I'd answer first of all that since that Hero product launched we haven't had a strong product launch since then, which typically is what drives strong customer growth. The end of 2017 was spiked little bit particularly, if you look at the numbers in China. We had a number of incentives running throughout that year which had spiked our sales leader numbers. So, I think the better comparison, obviously 2018 was a strong year. We grew the business 18% that year. And then as we hit China and the disruption with the lack of meetings and so forth has really impact about sales leader number. Around the rest of the world generally, even though China, the issues were in China, certainly had a hangover effect on a lot of our other markets where we have strong Chinese contingents that drive our business as well. So in the wake of sort of a headwind with the business situation, we didn't have a strong product launch and that's why we see the other markets stopped in terms of sales leader account as well. We feel like we have good plans this year to help drive that. The LTO model or what we've referred to here as an alignment approach to launching a new Hero product is really critical to that effort. And Ryan spoke about it, but it's a constant training and preparation for nine-months before we actually start selling the product and we're inside that window already and moving forward. So that should help drive that sales leader number. Your question is right on because at the end of the day that will be the key to our success this year, is seeing growth in that sales leader number. I think we've got good initiatives that will drive that.

Your next question is from Linda Bolton-Weiser from D.A. Davidson. Your line is now open.

Hi. I was wondering if you could provide a little more information about China and the process, when you do return to a more normalized meeting process after the coronavirus abates. How is that going to work? In other words, if you're voluntarily curtailing meetings, is it up to you when you start up meetings? Or is there some government intervention that even though you're voluntarily curtailing they are still dictating the meetings? So can you just kind of talk about that. And in your guidance and everything, when are you assuming that the spread of the disease actually abates like what are you assuming kind of in your thinking when you give this guidance? Thanks.

Yes. Linda, I'll speak to the normalization of meetings. Certainly in China, it is a collaboration between the Company and government officials whenever dealing with large group meetings. We need to get approval or all companies need to get approval for large meetings. And so we are in cooperation and collaboration with government officials. Prior to coronavirus, you'll recall that we were receiving approvals from governments groups to hold meetings. But there were still limitations placed on the number of people in those meetings in some parts of China. We've since ceased the meetings through the coronavirus activities as we see that the light coming through there we'll plan to open those up and work collectively with the government and government officials on the appropriate size of meetings and location for those meetings.

I think in terms of our guidance, as Mark and I've worked on this very closely, it's just really difficult to know how quickly will be able to return to sort of normalize business. So for us, our first focus has really been on developing digital tools, which will allow our sales people to do their business without having to be in meetings, I think that's going to help for sure. And then what we've anticipated is that the business will stabilize second and third quarters, and then we'll get a push as we launch our strong product in the fourth quarter. So, it's hard to know exactly but our modeling is I think we've been quite conservative and estimating a pretty big impact in China, specifically as we come out of the New Year celebration, and really, limitations on travel and so forth are pretty strict right now.

Okay. And then just secondly, I think in your commentary in the past, you had alluded to the idea that the rollout of velocity was a bit disruptive in some markets. Can you comment on whether those types of disruptions specifically with regard to its implementation, whether those disruptions are over with? And are there any reasons at all that are still kind of feeling some disruption from that or is that, are you into now that it's just beneficial to your operations? Thanks.

There'll always be opportunity to continue to optimize, I think where we seen the biggest challenge is when we launched a new compensation structure in a market, they didn't really have momentum. So when there's a change like that, and the business doesn't have momentum behind it, it's easy to point to potential a velocity or whatever else as a cause of the reason that things aren't going quite as well. Generally, we believe the majority of that learning process has happened and now we can refine and help to improve. But I think at this point in time, most of that impact has flowed through our revenue numbers and our sales leader numbers and would anticipate, again, with strong product initiatives that helps every aspect of the business, go better and look better and sales leaders' income improves. And, we take our eye up the problems and focus more on the opportunity. So I think a lot of the impacts of the sales compensation plan, has happened and the benefits of launching a strong product will really come through the compensation plan as we go forward.

And I would just only add to that that we remain -- to Rich's point, there's always opportunities to optimize, but we remain very optimistic about the model itself and the way it is built to help us expand or broaden our appeal to a broader demographic of entrepreneurs. We're seeing that play out in terms of number of payees, customer acquisition and productivity is good. It's really just a change in the qualification structure for sales leaders that we've worked through. But to Ritch's point now we're going well beyond a year of implementation. And so I think those, year-over-year comparisons really normalized from this point forward.

Your next question is from Mark Astrachan from Stifel. You line is now open.

Hi, this is Kimberly on for Mark. So, we just had a question, you ended the year with $290 million of accrued expenses. Can you just discuss what liabilities are included in that balance and kind of a general timeline for when those payments are due? And how you plan to fund those given the expected decline in profitability, particularly in the first half of the year?

Yes, thank you for the question. Our accrued liabilities aren't an anomaly of where we are in any given quarter. We have a strong cash position and we continue to produce cash, throughout the course of this year. So, I don't see any concerns about the accrued liability number. There's nothing abnormal from a normal year-end.

I think that is the end of the questions. And we sure appreciate your time, especially, we'd like to thank you for your interest in Nu Skin and despite the temporary slowing of the business due to the outbreak of the coronavirus, I want you to know that us as a management team are very confident that we're set up for a good year. We are confident that we'll be able to grow the business particularly in the fourth quarter of this year, as we see things normalize and settle them. So thanks again for your time and we look forward to updating you on our progress as we go throughout this year.

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