NUS
#Thank you, <U<UNK>K>, and good afternoon, everyone, and thank you for joining us today.
As this is my first earnings call as the CEO, I wish to thank you all for your interest in <UNK>u Skin Enterprises.
I'm excited about our future.
And since recently changing to this assignment from my previous CFO assignment, my optimism for our future has only grown.
I believe our business ---+ I believe that ---+ I believe in our business.
I believe we have great confidence in our ability to compete and succeed.
I feel fortunate to be surrounded by a very talented and experienced management team.
To that point, I'd like to begin by introducing to you our new CFO, <U<UNK>K> <U<UNK>K>.
<U<UNK>K> brings a tremendous skill set to our management team, and we look forward to his impact on helping us grow our business and create shareholder value.
And we'll hear from him a little bit later on during this call.
I'll provide a few quick highlights to the quarter and then turn the time over to our President, <U<UNK>K> <U<UNK>K>.
He will provide information on segment results and key initiatives in the business, and then <U<UNK>K> will address a few financial highlights.
And as customary, we'll open up the call for questions.
Overall, I am quite pleased with what we accomplished in the first quarter.
We posted revenue nearly $500 million compared to $472 million in the prior year.
This represents growth of 6% in reported revenue and 7% in constant currency.
Our quarterly earnings per share were $0.51, which compares to $0.06 on a reported basis of $0.42 when excluding the impact of a Japan customs charge in the prior year.
Our growth in revenue was driven by strength in Mainland China, in South Asia/Pacific and in the EMEA region.
While the Americas revenue was flat for the quarter, we're actually seeing encouraging signs of growth, particularly in our customer count and believe this will lead to revenue growth in the future.
And we continue to have challenges in South Korea and Japan, and we'll address these a little bit further when <U<UNK>K> speaks.
As a reminder, we executed strong LTO sale in 2016 in both Q2 and Q3.
To remind you, we reported $106 million in LTO sales in the second quarter, mostly in China and in South Asia/Pacific; and $56 million in LTO sales in the third quarter that was mostly in South Korea and China.
In the current year, our planned introduction of the ageLOC LUMISPA is for the fourth quarter.
And <U<UNK>K> will speak to our guidance, but note that the comparable year-over-year sales over the next few quarters are impacted by the timing of these product introductions.
During the quarter, we made steady progress against our key initiatives for 2017.
We continued the rollout of ageLOC Me during the quarter, which positively impacted results in Mainland China and South Asia/Pacific.
This is an important product for us, and it further strengthens our competitive advantage in the skin care device category.
We continue to see good progress in our China business and solid growth particularly in this market, in our customers and sales leaders.
And social selling is becoming a multiplier in our global business, allowing our sales leaders to share our products with many more of their friends in a powerful and efficient manner.
We're focused on driving growth through social selling as we move forward.
With that introduction, let me turn the time over to <U<UNK>K> to provide additional detail regarding our markets and our growth plan.
Thanks, <UNK>.
Good afternoon, everybody.
I'm also very excited about our business potential around the world.
As <UNK> mentioned, we are acutely focused on customer and sales leader acquisition.
We believe that this is key to driving growth in 2017 and sustaining that growth moving forward.
Let me address some first quarter highlights as well as our plans to generate growth and improvements throughout the world.
In Mainland China, we generated 33% local currency revenue growth in the first quarter.
We were encouraged by a significant year-over-year increase in customer growth as well as a sequential increase from Q4 to Q1.
Typically, we see a sequential seasonal decline in customers in the first quarter.
We initiated the product launch of ageLOC Me in China at the end of the quarter, which is proving to be a strong product for both attracting and retaining customers.
We continue to leverage business incentives and quarterly expos in the market.
These initiatives introduce our products and business opportunity to many potential customers and drive sales leader productivity.
And we're working towards a strong LUMISPA introduction in the fourth quarter.
Japan and Korea continue to be challenging markets for us.
While the economic and political environments are difficult in both markets, we believe our key to improving these markets is to increase our focus on customer acquisition through social selling and other mediums.
I just returned from visiting both of these markets last week, where I spent time with our management teams as well as key leaders in the area who remain optimistic despite the challenging environment.
In Japan, we executed a successful convention, which is helpful in aligning our sales leaders with the company's direction.
Over the next several quarters, we will focus our initiatives around social selling and customer-focused promotions while training and preparing these markets as well for a successful LUMISPA introduction in the fourth quarter.
While we don't expect to see immediate improvements, we anticipate that our initiatives will begin positively impacting these markets later this year.
Let me briefly speak about social selling, as it is becoming a powerful platform for us around the world.
Generally, our sales leaders are introducing new customers to many of our differentiated products through their social media outlets.
We're seeing strong trial and customer acquisition through this social business model.
Social selling has become a powerful business driver in many of our markets in EMEA, South Asia/Pacific and most recently in the Americas.
Our efforts to enable social selling include providing differentiated products position for a broader demographic, including millennials; enhancing the platforms that empower our sales leaders to build their businesses; and providing programs that increase the velocity of our business.
Lastly, we look forward to meeting with our top sales leaders from around the globe in 2 weeks as we continue to partner with them to grow our business.
We feel contagious excitement that will help us accelerate the pace of growth moving forward.
I'll now turn the time over to <U<UNK>K>.
Thanks, <U<UNK>K>.
I'm happy to be with you today, and I'm looking forward to the opportunity ahead of me.
I can tell you that after just a few short weeks in my new position, I am confident in the leadership of <UNK>u Skin, and I look forward to building on the already great things taking place.
It truly is an honor to be part of the <UNK>u Skin family, and I look forward to getting to know many of you soon.
My immediate focus as the new CFO will be on 3 areas: supporting an accelerated pace of growth in top line revenue, identifying the efficiencies in the business to improve margins and working with our management team to create shareholder value.
Before diving into the financials, let me explain some of the changes you will notice in our financial reports for this quarter.
First, we have modified the format of our earnings release to highlight what we believe are the key financial metrics.
Secondly, you will notice that we began reporting revenue in 7 segments to provide increased visibility into Japan, South Korea and Mainland China.
I will now take you through the financial details from the first quarter.
As <UNK> mentioned, our revenue grew approximately 6% over the prior year quarter to $49.1 million.
There were no limited time offers in either quarter.
The operating margin for the first quarter improved to 9.3% compared to 1.7% or 8.4% when excluding the impact of the Japan customs charge in the previous year.
Gross margin improved slightly in the quarter to 77.7% compared to 70.8% or 77.4% when excluding the customs charge.
Selling expenses for the first quarter were 41.9% compared to 41.5% in the prior year.
General and administrative expenses were 26.6% compared to 27.6% in the prior year period, reflecting leverage from the revenue increase.
We incurred an expense in the other income expense category of $4.6 million due largely to interest expense in conjunction with the Ping An transaction, which took place in 2016.
This compares to an expense of $2.9 million in the prior year.
Our income tax rate for the first quarter was 34.1% compared to 37.3% in the prior year period.
During the quarter, we paid $19 million of dividends and repurchased roughly $7 million of our stock, leaving approximately $193 million remaining in our share repurchase authorization.
Our guidance for the second quarter is revenue of $530 million to $550 million with earnings per share of $0.65 to $0.70.
Second quarter revenue is expected to be negatively impacted 1% to 2% by foreign currency fluctuations.
As a reminder from our Investor Day, the quarterly comparables to 2016 are challenging due to significant LTOs in the prior year of $106 million and $56 million in the second and third quarters, respectively.
We have no significant product introductions in Q2 or Q3 of 2017.
We do anticipate a significant bump in the fourth quarter revenue from the planned introduction of ageLOC LUMISPA beginning in October.
We estimate approximately $100 million in revenue from this new product in the fourth quarter.
With this in mind, as we look to the year, we are reiterating our previous guidance with revenue of $2.26 billion to $2.30 billion with a negative currency impact of approximately 3% and earnings per share of $3.10 to $3.25.
We will now open up the call for questions.
Yes.
Tim, we'll keep it consistent with what we talked about at Investor Day, really about $60 million for the year.
I think the first quarter was $16 million.
So consistent on that line, around $45 million for the balance of the year.
Yes.
I'll take that, Tim.
Yes, we were encouraged, as we indicated, with the results in China.
And this is partially related to ageLOC Me, where the response to that was good, although ageLOC Me really only began to sell the last few days of the quarter.
And so the growth that we were seeing earlier on is really attributed to better customer performance in the quarter.
Again, sequential improvement that we typically don't see, which is a positive.
We have some good business promotions ---+ or programs, excuse me, going on there that are helping this as well.
So overall, we feel very good about it.
Yes.
We did do a lot in the fourth quarter.
We'll continue to be in the market.
I wouldn't expect our behavior around stock repurchase to change at all under my leadership as the CFO here.
Yes.
I think ---+ great, great question.
And going back to customer activity, was really solid in the quarter.
One of the unique elements of the social selling model is that we find that the customer growth is very favorable.
Our traditional model is, to your point, where we have LTO activities in some of our business programs really strengthen the sales leader numbers.
We didn't have a lot of that activity or those initiatives going on in Q1, but we did have quite a bit of the social selling activity that's really helping us around the world.
Also, going back to ageLOC Me and the benefits we're seeing there on both customer acquisition and retention, are very positive there.
So overall, combining these ---+ the customer elements of the opportunity with the leadership elements of our opportunity, we think, will ---+ go hand in hand.
It does.
In fact ---+ I mean, one of the greatest benefits of ---+ for social selling products are demonstrability, and LUMISPA is a very, very demonstrable product.
So we believe, both from a pricing standpoint, positioning standpoint, from a benefit standpoint as well as just the overall attractiveness or the appeal of this product to a millennial market is going to fare very well in social.
<U<UNK>K>, this is <U<UNK>K>.
Yes, I think you've got the points accurate.
We would expect to see a shifting of revenue out of Q2 and Q3 into Q4 just based on the historical.
Last year, we had the large LTOs in both of those quarters.
And I think your growth rates in the 20% range are spot on, where we think we will end up in Q4 with the launch of the LUMISPA.
So <U<UNK>K>, maybe just to add one thing to that question as well.
There's a lot of excitement building for the fourth quarter.
We have a live event, which is our global convention, which will happen in October.
So that's really the kickoff of ---+ the start, let's stay, of the launch of LUMISPA, which will then kind of be introduced in several events throughout the quarter.
So we are looking to a real strong fourth quarter and, as <U<UNK>K> mentioned, probably around the $100 million mark as it relates to the new LUMISPA launch.
So yes, we would anticipate to have a real, good, strong fourth quarter and think that we have real, good ammunition in place to deliver that result.
Yes.
<UNK>o, great question, and it's something we're focused on significantly here.
For us, social selling is really a modification of direct selling.
The underlying principles of social selling are not dissimilar to direct selling.
They're just in a new medium.
And so for us, that's ---+ what we're focused on is how to apply those fundamental principles into a new environment and then to support that, again, from a products, programs and a platform perspective.
And so for us, we view it very much as individuals sharing products via their social networks and really taking advantage of the natural sharing practices that occur there.
And we're just ---+ we're seeing ---+ as I mentioned, we're seeing this pick up around the world.
It's a very natural process.
And it's something, by the way, that is just very, very natural for millennials.
Direct Selling put out a new study on this just recently, talking about the appeal of the 2 models: direct selling with social selling.
So that's really our view of it.
Sure.
I'll take this one.
If you look at our gross margins reported at 77.7%, it's pretty close to in line with what we reported the same quarter last year at 77.4%.
As you look at last year, you also see that, that gross margin improved as revenue improved throughout the year.
I would expect to see the same trends this year.
And as revenue goes up, our gross margin will improve.
I don't think there's anything specific about product mix or mix shift that we're seeing that would cause our margins to behave differently than it did last year.
Sure.
As you all know, the environments in Korea ---+ well, Korea, in particular, is facing some political and, I guess, war-oriented distractions, I think, in that market that make it difficult.
And direct selling, in general, hasn't been as growing an industry as we've seen in years past.
Japan has just kind of an ongoing lag in both industry dynamics as well as economic dynamics in that market.
But again, as I stated earlier, our intent and our focus, our approach to these markets is to really focus on the fundamentals of customer acquisition via social selling, which is an emerging opportunity in these markets, both of which have unique regulations, by the way, around social selling.
And so we study these intensely.
<UNK>evertheless, we believe as we focus on the fundamentals, we focus on customer acquisition through these mediums, we'll ultimately see improvements in the business.
Also, we're very, very ---+ looking at LUMISPA very favorably for these markets because, again, they're both very strong consumer markets, personal care markets.
And for us to be able to offer a new cleansing device into that market that has kind of revolutionary science to it, we believe, will fare quite well in those markets in over the midterm.
Yes.
Let me speak to that, <U<UNK>K>.
Thank you for that question.
We are really excited about China, frankly, because we think there's great potential for the products we offer and especially the opportunity we provide as well.
So while the customer ---+ sort of there's been up and down in the customer over the last little while, we believe our primary focus is just delivering a real, compelling opportunity.
And ageLOC Me seems to hit that, but we also have several other products that are doing very well, the Galvanic Spa, for example.
And again, that's why we believe LUMISPA has great potential, because these devices seem to be playing very well.
So I think it's partially the customer, it's partially the opportunity we provide for people to be successful and earn additional income.
And all those things are playing into our favor right now, and we're real optimistic about what we see going on there.
I would love if we could ---+ I just have a couple more questions on Me and then on LUMISPA.
For Me, are you able to share with us since it did launch in China in late March, now kind of a full month in April, what ---+ sort of what your trends are or the customer sales leader response to that.
Yes.
We ---+ as I mentioned, it ---+ really, we launched it out the last few days of March, and we're going into April now.
So we're kind of in our second month into it.
Seeing some really favorable things.
I mean, obviously, the customer activity has been really favorable.
And that's really been driven both by customer acquisition as well as retention, which, for us, is ---+ well, any business but particularly ours in China, we're very interested in seeing that improve.
So ageLOC Me has been critical for that.
And we'll continue to focus upon initiatives and programs that will enable us to drive greater acquisition.
But the retention just continues to do really well there.
Yes.
Maybe I can add one thing to that, <UNK>, too.
I totally agree with <U<UNK>K> here.
This is really an interesting product for us.
And I think it will be similar to what we've seen with Galvanic, which has become our largest selling product.
It took time to have our sales leaders really get to understand how to present that product, how to attract customers with it.
And we think ageLOC Me will sort of have that take a little bit longer time to get.
What I was really encouraged with in China was the fact that we had a lot of people who purchased the device last year in the LTO who are back buying the cartridges now.
So that, to me, is really encouraging.
We had to take them off the market for a short period of time because we stocked out, as you know, in December.
And those were all ---+ the cartridges, the devices available for sale to a limited group at the end of the March and then to a larger group beginning in April.
And so we're encouraged by both, as <U<UNK>K> said, the ability to attract new customers, but the fact that we have a lot of customers who purchased last year who are back purchasing is very encouraging to us.
Great.
Perfect.
And with regard to the $300 price point of the promo, where the product was sort of pitched to us at the Investor Day in December, are you feeling good about that $300 price point in many of your markets.
Or might that need to shift.
Or is that settling in pretty nicely.
We're encouraged by that price point.
I mean, for us, it's a persistent pursuit to finding the optimal offer that enables us to maximize our ---+ really, our customer acquisition with our margins.
And so we're pleased with what we're seeing so far in multiple markets.
I think we'll continue to focus on the optimal offer as we move forward, but so far, so good.
Great.
And then for LUMISPA, I know in the last call is when you spoke about LIVE.
But could you just help us a little bit understanding how is that different from the biennial conventions of the past.
Will folks be buying it in person, virtually over the couple days of the convention.
We're just trying to understand the risk associated.
Is this a big October event.
Is it a 4Q.
And also, is the supply chain in good order for that product.
Yes, absolutely.
And I'm glad you asked the question, <UNK>, because it gives us an opportunity to invite you all to the LIVE event in October 11 through the 13.
But the LIVE event ---+ so really, we do this biennially, as you mentioned.
We're really changing this up in a few ways, though.
First, it is a live event being broadcast globally.
So while we can only fit 15,000 people in our arena here, we're seeking for many times that around the world.
And we've been experimenting this in EMEA, for example, and this LIVE event form is really favorable.
It gives us an opportunity to truly globally preview our new programs and initiatives and products.
So LUMISPA will be globally previewed on site for people in attendance, followed by some additional sales opportunities in markets.
And then, of course, we'll go throughout the market preview process throughout the quarter.
Q4, that is.
So that's really kind of how it differs.
We're excited about it because it gives us an opportunity in a global stage to release this really unique product as well as our programs and initiatives for the last 2 years.
As far as supply chain goes and being geared up for that, we are gearing up for that.
And of course, we're ramping up.
We're really conscious of ensuring that we don't overproduce, but we'll be able to supply.
Certainly, our forecast and the way we have our model set up, things are looking really good.
Great.
And <U<UNK>K>, if I could address one towards you, and welcome.
I look forward to working with you.
The guidance for reported sales, I think, is the same from prior.
And there's the update of, I think, 100 basis point less pressure from FX to the top line.
I believe it was 3 to 4, now 2 to 3.
Kind of how does that shake out with that less pressure.
Where does local currency sales, I think it was 4% to 6% previously, now come out today in the guidance.
I think we're pretty conservative on our ---+ with our 3% approximate number.
There's a lot of movement in the dollar right now.
There's a lot of uncertainty, what's going to happen with the Trump tax implications and the changes there.
And we didn't see a tremendous amount of movement, 1% in Q1.
So we felt pretty comfortable leaving our overall guidance where it was and giving a range of roughly 3% FX impact for the quarter ---+ or for the year.
Fair enough.
I have one last question, if I may.
Is there any chance that Youth launches in China this year.
<UNK>o.
That's a long time line.
Yes.
It's just regulations in the market are so complicated that Dr.
Chang's life is difficult.
We're (inaudible).
Yes.
That's exactly right, <U<UNK>K>, and appreciate that question.
We're still, frankly, working on the allocation of exactly how many go to each market as they finalize their plans with their sales leaders on how to introduce this product.
So it'll be spread.
There's probably somewhere around 60 million to 70 million of device sales, again based on where our price is, with the balance coming from the cleansers and the heads that go with it.
And there's a lot ---+ it feels like there's a lot of excitement around the product.
We anticipate that, that's a quantity that we will pretty much sell through for the most part.
And we kind of make those final allocations as we get closer right to the end and understand the direction of each market and how it's going to play out.
Yes.
I think we still stay at 36%.
Yes.
It's really a 2-question.
<U<UNK>K>, do you want to address the gross margin issue.
Yes, for sure.
I don't have a lot to add to what I said before.
We came in at 77.7%.
Same period prior year, we were 77.4%.
So we had a slight improvement there.
As revenue increases, we get more leverage against the fixed cost that hit gross margin, and you see gross margin go up.
I don't think we've seen anything from a mix perspective nor do we suspect anything from a mix perspective to challenge that number.
Yes.
I think overall, <U<UNK>K>, the numbers came in really where we had anticipated them to be from our guidance.
The margin was similar to what we expected.
Sometimes, we'll see a little movement one line item to the next, but it was really pretty much in line.
What drove that and what I'm really encouraged about is it felt like we've needed to really focus on customer acquisition.
We've got to drive our active customer base up to support our growth as we go forward in sales leaders.
And so I was really encouraged during the quarter to see several of our regions make some progress in this area.
And I think we can continue to stay focused on that, trying to get our offerings just right for the customer, trying to accelerate customer acquisitions through social selling.
And I think it'll do 2 things.
<UNK>umber one, it will help the productivity of our salespeople, but it will also make them ---+ be able to retain them longer.
They'll have a bigger base of customers that are purchasing.
So from my perspective, one of the encouraging things out of the quarter was a quick response to our initiatives around customer acquisition, and we're going to stay really focused on that as we go forward.
Yes.
We ---+ no, great question, <U<UNK>K>.
For us, on LUMISPA and the $100 million, it really is a forecasting exercise based on the growth of the sales leader and then the number of customers per sales leader that we can acquire.
And so for us, we build our programs, all of our initiatives in Q3 and Q4 to drive to those outcomes.
This year ---+ and we've talked about this in years past, how we've gone away from maximizing the size of the product introduction in order to really optimize the development of the channel, of our sales leaders and our customer base.
And you'll be seeing this year a more balanced approach to driving through our programs and our initiatives, even our launch plans themselves, how we drive customer growth with sales leader growth attached.
And so yes, we're forecasting it in that way, and that's how we're planning our ---+ all the programs.
Yes.
And to <UNK>'s point earlier, Tim, as we work with the markets and the program design, based on the dynamics of the sales force, these plans change as we go.
And so we want to be somewhat noncommittal that way.
But generally speaking, we ---+ the consumer research across the board, market to market, has been consistent, very, very favorable response on the product concept, on testing that we've done around this product.
And we haven't seen one market outperform the other in terms of appeal.
They're all very strong.
And so for us, it's really around maximizing the ---+ we have a limited quantity of 500,000.
And it's really optimizing the allocation according to the markets' plans.
And of course, we have to look into 2018 as well in how we allocate.
And so we see very favorable reaction in Greater China, in both Korea and Japan, very positive Southeast Asia, Americas, EMEA.
They're all very favorable.
So for us, we'll be allocating according to the needs of the business and, to some degree, reflect the revenue size of those businesses.
Yes.
I just had one other comment, Tim.
This is, as <U<UNK>K> mentioned, a scaled-back version of what we've done with LTOs in prior years, which have been substantially larger at times.
We really began training our sales force on the product, on the benefits of the product, how we're going to position it 3 or 4 months before the product actually launches.
So the anticipation is that they will have several customers in place and ready to purchase at the time the product becomes available.
And it's an exciting time.
It's an exciting time for the business.
It's an exciting time to bring out a new product.
So that energy should build throughout the third quarter and to a strong fourth quarter.
And we feel fairly comfortable with that number that we put out, both based historically on what we've seen but as well, as <U<UNK>K> commented, on the feedback we're getting right now.
So it looks like that is all the questions that we have right now.
And let me just take a second again to thank you all for joining us today and reaffirm our confidence in the future.
I'm excited about what we're seeing.
We're going to partner very, very closely with our sales leaders as we go forward.
They're talented and excited.
I think about the future, and we'll focus on 3 things.
We'll focus on making sure we have the right products, building upon and leveraging our product portfolio, making sure we can deliver that, deliver innovation as well in our product pipeline.
We'll focus on the programs that we have, which will enhance the appeal to a larger demographic in both of entrepreneurs but as well as customers.
And then we'll focus on our platforms.
And I'd really point there to social selling, our ability to support that and help that take shape all around the world.
We think that's a game changer for us.
We look forward to the year.
We got good things ahead, and appreciate again your attention today.
Thank you very much.
