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Edited Transcript of NUS earnings conference call or presentation 2-Aug-18 9:00pm GMT

Q2 2018 NU Skin Enterprises Inc Earnings Call

PROVO Aug 17, 2018 (Thomson StreetEvents) -- Edited Transcript of NU Skin Enterprises Inc earnings conference call or presentation Thursday, August 2, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark H. Lawrence

Nu Skin Enterprises, Inc. - Executive VP & CFO

* Ritch N. Wood

Nu Skin Enterprises, Inc. - CEO & Director

* Ryan S. Napierski

Nu Skin Enterprises, Inc. - President

* Scott Pond

Nu Skin Enterprises, Inc. - Director of IR

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Conference Call Participants

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* Beth N. Kite

Citigroup Inc, Research Division - VP and Analyst

* Douglas Matthai Lane

Lane Research - Principal & Director of Research

* Faiza Alwy

Deutsche Bank AG, Research Division - Research Analyst

* Mark Stiefel Astrachan

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Olivia Tong

BofA Merrill Lynch, Research Division - Director

* Stephanie Marie Schiller Wissink

Jefferies LLC, Research Division - Equity Analyst

* Timothy Scott Ramey

Pivotal Research Group LLC - Co-Head of Consumer Research and Senior Analyst of Food, Beverage, and Nutrition

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Q2 2018 Nu Skin Enterprises Earnings Conference Call. (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.

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Scott Pond, Nu Skin Enterprises, Inc. - Director of IR [2]

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Thanks (technical difficulty) and welcome, everybody. Thank you for joining us. On the call with me today (technical difficulty) Ritch Wood, Chief Executive Officer; Ryan Napierski, President; Mark Lawrence, Chief Financial Officer; and Dr. Joe Chang, Chief Scientific Officer.

During this call, comments will be made that include some forward-looking statements. These statements involve risks and uncertainties, and actual results may differ materially from those discussed or anticipated. Please refer to today's earnings release and our SEC filings for a complete discussion of these risks. Also, during the call, certain financial numbers may be discussed that differ from comparable numbers obtained in our financial statements. We believe these non-GAAP financial numbers assist in comparing period-to-period result in a more consistent manner. Please refer to our Investor page at ir.nuskin.com for any required reconciliation of non-GAAP numbers.

With that, I'll turn the time over to Ritch.

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Ritch N. Wood, Nu Skin Enterprises, Inc. - CEO & Director [3]

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

I've now been the CEO of Nu Skin for nearly 18 months. I love the good that this business and our people are doing around the world and the meaningful difference we are making as we execute our mission and effort to be a force for good. It is my privilege to work with our amazing sales leaders and with our talented and capable management team. I give credit to both of these groups for the growth we are seeing in the business.

As you read in our press release today, Q2 was a very strong quarter, as we continued to accelerate our growth. Our revenue of $704.2 million is up 28% year-over-year and more than $150 million higher than the second quarter of 2017. This marks our highest ever revenue quarter without a limited time product offering. Our revenue was driven by solid customer growth of 8% and sales leader growth of 21%.

We also delivered strong earnings per share of $0.90, up 17% over the prior year quarter. As noted in our release, earnings per share included a $0.13 negative impact from a foreign currency translation loss and a 5% noncash expense related to purchase accounting. Excluding these 2 unique items, [EPS] would have been more than 40% for the quarter, illustrating the strength of our underlying business and the power of our business model. We are (technical difficulty) a powerful consumer platform, and we're confident that our second quarter results continue to confirm that our growth strategy, focused on platforms, products and programs (technical difficulty) Ryan will provide more detail on this in a moment.

Given our strong second quarter results, we are again raising our annual revenue guidance, which Mark will highlight in a few minutes. We're particularly pleased that our growth came from nearly every region of the world, with double-digit growth in mainland China, Southeast Asia and the Americas and Pacific. Our results are benefiting from sales leader adoption of our social selling initiatives around the world. We continue to believe that social sharing is a game changer for us, and we plan to continue driving this activity with products and technology optimized for social channels.

ageLOC LumiSpa, the most recent product innovation in our device platform, is playing a significant role in driving our customer growth strategy, and we see it benefiting sales of both ageLOC Me and our Galvanic Spa. We are in the middle of the rollout of our velocity [compensation] enhancement. We are very encouraged (technical difficulty) accelerated customer acquisition and sales leader activity (technical difficulty) in markets where this program has been introduced.

In summary, we're excited about the potential of this consumer platform we're building by facilitating stronger and broader actions between sales leaders and customers. We're also encouraged with the capability improvement that we have made through development and acquisitions. Each of our acquired manufacturing partners is exceeding our expectations in contributing to our supply chain and product innovations. We see strong potential growth in these businesses going forward. And we're also making good progress with our indoor growing technology initiative, which is on track to sustainably produce pure, high-quality ingredients for select skin products by the end of this year, with expansion to additional products in 2019.

We believe this technology is another game changer for us, an innovation that will set us apart (technical difficulty) our product quality, product innovation and [ability]. I'll now turn the call over to Ryan to provide more detail on our 3P strategy and results from our global market, after which, Mark will provide insight into the financials and our increased 2018 guidance. Ryan?

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Ryan S. Napierski, Nu Skin Enterprises, Inc. - President [4]

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Thanks, Ritch. Good afternoon, everyone. As Ritch mentioned, the continued implementation of our growth strategy focused on engaging platforms, enabling products and empowering programs is driving accelerated growth around the world. This is [reflected] in the results, with 8% growth in our registered customer (technical difficulty), those who are purchasing directly from the company, and (technical difficulty) growth in our sales leaders. We are confident (technical difficulty) strategy is aligned with the right macro trend as the growing opportunity economy, as well as the personal care and nutrition product categories.

We continue to make progress in each pillar of our growth strategy. For engaging platforms, we continue to focus heavily on social sharing as the primary medium for acquiring more customers by leveraging social media to expand our reach. We remain focused on supporting our sales leaders in these efforts within [training] and tools as well as increases that (technical difficulty) technology.

For example, we have introduced the WeChat sales platform in China that allows our sales leaders to more easily facilitate sales transactions directly with their [customers]. On the enabling products front (technical difficulty) LumiSpa continues to exceed our expectations (technical difficulty) strong global demand, accounting for 14% (technical difficulty) second quarter revenue. This addition to our proprietary device platform has become a powerful contributor to increase (technical difficulty) acquisitions. We'll continue to enhance this [product] throughout the next year with additional colors, (technical difficulty) and cleansers, including a new acne (technical difficulty) line that we're very excited about.

Additionally, we are seeing positive results from several new product innovations built specifically to support social sharing, including (technical difficulty) long-lasting lip wear and Insta Glow, our innovative new sunless tanner, which is generating [significant] social media buzz. On the nutrition front, our TR90 body shaping and weight management system continues to be a strong performer in the sports nutrition category, with projected sales of more than $200 million this year.

Finally, regarding empowering programs, we introduced Velocity, our enhanced sales compensation program, in Taiwan and North America in the second quarter. This compensation enhancement is focused on rewarding sales leaders more quickly and providing additional flexibility to the earnings opportunity of our micro entrepreneurs. Early (technical difficulty) strong acceleration of the customer acquisition in (technical difficulty) markets, which translates to positive sales leader growth as well. We continue to believe that Velocity will be a meaningful contributor (technical difficulty) success this year, and as we move forward, into the future. In July, we introduced Velocity in Japan and most of our Southeast Asia markets, and expect it to be fully implemented globally by the middle of next year.

We're also pleased with the broad global results for the quarter, driven by our focus on (technical difficulty) growth, which is generating positive results in each of our [markets around] the world. In Mainland China, we grew local (technical difficulty) revenue by 33%, which translates to (technical difficulty) in U.S. dollar growth, driven by the strong LumiSpa launch and effective sales incentives. These also contributed strong sales leader growth of 48% in the market.

Revenue was up 21% in Taiwan and Hong Kong. This growth was spurred by continued interest in LumiSpa, resulting in customer growth of 12% and sales leader growth of 8%. We introduced Velocity in Taiwan during the second quarter and are seeing improved customer acquisition in the market. In addition, we held our Greater China Regional Convention in Hong Kong, with ticket sales benefiting this segment revenue by 11%. In the Americas and Pacific, we reported growth of 25% U.S. dollar base or 31% constant currency. Latin America is performing well as we continue to invest in this emerging market.

We're seeing significant growth driven by a positive response to the rollout of Velocity in North America as well as continued expansion of social sharing, with the introduction of new products, including Insta Glow. These contributed to 15% growth in both customers and sales leaders. In Korea, we're pleased with the 5% U.S. dollar growth, which was up 1% in local currency. While these numbers appear modest on the surface, it reverses a slowing trend in Korea, and we're seeing a stabilization of our business there, giving us greater confidence in our strategy for this market.

Southeast Asia had an outstanding quarter as it grew 31% in U.S. dollars and 28% in local currency, driven by a strong customer growth of 30% and sales leader growth of 19%. Most notably, each of our Southeast Asian markets grew as a result of strong social sharing activity and a great response to our LumiSpa launch. In July, we held a successful regional convention in Singapore, which boosted enthusiasm among our sales force, particularly as they can now take advantage of Velocity. Japan was down 1% in U.S. dollars or 3% in local currency, amidst ongoing environmental and economic challenges. However, we've begun seeing improvements in customer acquisitions related to our -- the initial rollout of our 3P strategy. In July, we launched Velocity as well, which we believe will further support customer growth.

And finally, EMEA grew 15% in U.S. dollars or 7% in local currency as social sharing adoption continued to expand throughout the region, including larger direct selling markets like France. Customer growth of 14% was driven by good response to LumiSpa as well as other social sharing (technical difficulty)

So in summary, it was a very strong quarter with solid results from each of our markets, driven by our platforms, products and program strategy. We expect to sustain this momentum by increasing our investment in technology to enhance social sharing, expanding our proprietary device platform and completing the rollout of Velocity to provide the most flexible, fast and fulfilling opportunity in the marketplace.

And with that, I'll turn the time to Mark.

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Mark H. Lawrence, Nu Skin Enterprises, Inc. - Executive VP & CFO [5]

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Thanks, Ryan. Let me take a moment to walk through our second quarter highlights and provide an update to our revised guidance for the year. As a reminder, you can find additional financial information in our release and on the Investors section of our website.

Second quarter revenue came in very strong at $704.2 million, up 28% and consisted of core Nu Skin revenue growth of 24%, which included a 4% favorable foreign currency impact and 4% growth from our recent acquisitions. Second quarter earnings per share were (technical difficulty) improving 17% year-over-year. Quarterly earnings per share were negatively impacted $0.05 by the previously guided purchase (technical difficulty) charge and $0.13 by a foreign currency translation loss.

The $0.13 foreign currency charge comes primarily from strengthening of the U.S. dollar in the last part of the quarter, particularly against the Chinese RMB and the Argentina peso. We translate our intercompany balances based on the foreign currency rate at the end of the quarter and this loss is reflected in the other income/expense line of our income statement. Without these 2 items, our earnings would have been $1.08, a more than 40% improvement over the prior year.

Gross margin for the quarter was 76.1% compared to 77.9% in the prior year quarter. Gross margin of our core Nu Skin business remains steady at 77.9%. We anticipate our gross margin will improve modestly through the balance of the year for 2 reasons. First, we will begin to see sell-through benefits of the products supplied by our recently acquired manufacturing entities. And second, we will see benefit from cost-saving initiatives, including LumiSpa manufacturing efficiencies.

Selling expenses as a percent of revenue were 38.7% compared to [41.5%] in the prior year quarter. The decrease was largely due to noncommissionable revenue from our manufacturing companies. General and administrative expenses as a percent of revenue were 25.6% compared to 24.6% in the prior year quarter. Please note that in the second quarter of this year, we held conventions in Greater China and Korea at a cost of approximately $13 million.

Our operating margin held constant with the prior year at 11.8%. The other income/expense line reflects an $11.2 million expense, due largely to the $8.4 million foreign currency translation loss previously mentioned. During the quarter, we paid $20.3 million in dividends and repurchased $18.4 million of our stock. In addition, based on the strength of our business, our Board of Directors approved an increase to our stock repurchase authorization to $500 million.

Our tax rate for the quarter was 28.8% compared to 32.2% in the prior year period. The tax rate was positively impacted by our decision to build a new manufacturing facility in China and permanently reinvest the funds required to do so. This decision allows us to disregard the potential withholding tax as we no longer plan to repatriate this cash. As previously mentioned, our tax rates are expected to continue to fluctuate due to U.S. tax reform. For the second quarter of 2018, we incurred a charge of $0.05 due to (technical difficulty). We continue to expect a $0.04 charge for the third quarter and a $0.04 charge in the fourth quarter, the impact becoming immaterial in 2019.

Our revenue guidance for the third quarter is $650 million to $670 million, representing (technical difficulty) to 19% growth and (technical difficulty) approximate 3% foreign currency headwind. We project Q3 earnings per share of (technical difficulty) to $0.98, which includes the $0.04 purchase accounting charge.

For 2018, we are increasing our revenue guidance by $120 million to a range of $2.63 billion to $2.67 billion, which includes a favorable foreign currency impact of approximately 1%. Please note, our prior guidance had assumed a 3% foreign currency benefit for the year. If currency had held to our prior guidance, our revenue raise would have been approximately $170 million.

Earnings per share for the year are now projected to be $3.50 to $3.55, including $0.16 in purchase accounting charges. We did not (technical difficulty) top end of this range due to the unexpected (technical difficulty) foreign currency charge in the second quarter and (technical difficulty) potential impact from translation losses due to a strengthening [U. S.] dollar.

Currently, we do not anticipate the recently enacted tariffs to materially impact our operations or financial results. However, as a result of recent global trade disputes, we have seen the U.S. dollar strengthen, which does negatively impact our reported results and is reflected in our guidance. Finally, we anticipate that our annual tax rate will be in the 31% to 33% range.

With that, we will now open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Tim Ramey with Pivotal Research.

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Timothy Scott Ramey, Pivotal Research Group LLC - Co-Head of Consumer Research and Senior Analyst of Food, Beverage, and Nutrition [2]

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The foreign currency translation impact should -- I know that's going to be impossible or very difficult to forecast, but should we see that likely go to 0 in the third quarter? Or based on current rates or -- it's hard to know as an outsider, based on where the rates were on the close of the quarter. Do you have any thoughts on that?

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Mark H. Lawrence, Nu Skin Enterprises, Inc. - Executive VP & CFO [3]

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Yes, let me take a shot at that, Tim, thank you for the question. And hopefully you can hear us okay, we're understanding that there's some breakout in the line, as we speak. So I apologize for that. The rate at the end of Q2 for the RMB was just over 3.6. It has moved closer to -- I'm sorry, 6.6. It's moved closer to 6.85 at this point in time. And it just really depends on where it finishes at September 30, and that's what's hard to project. We have a real hard time (technical difficulty) model, where we expect that might be.

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Timothy Scott Ramey, Pivotal Research Group LLC - Co-Head of Consumer Research and Senior Analyst of Food, Beverage, and Nutrition [4]

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

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Mark H. Lawrence, Nu Skin Enterprises, Inc. - Executive VP & CFO [5]

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Yes, there's 2 pieces of it. It's the amortization of intangibles and it's the backlog that had not shipped and it's split roughly $2 million to revenue and $1 million to G&A.

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Operator [6]

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And our next question comes from Steph Wissink with Jefferies.

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Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division - Equity Analyst [7]

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

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Ritch N. Wood, Nu Skin Enterprises, Inc. - CEO & Director [8]

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Sure. Let me take a quick shot and then Ryan will finish up the questions. What we really like about what we're seeing with LumiSpa is the fact that it really touches a broad demographic. The benefit of the acne line, which you mentioned, is something we really think applies to the millennial and the younger demographic, so we like them a lot. In terms of the other social selling products, it's primarily 2 different products. Powerlip, which is a long-lasting lip wear, as well as Insta Glow. And most of those have now rolled out to the Americas and Europe and will begin rolling into our Asian markets in the fall. Let me turn it to Ryan to speak more specifically on some of these.

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Ryan S. Napierski, Nu Skin Enterprises, Inc. - President [9]

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Yes, no, great question, Steph, on this. For LumiSpa, to your point, we're excited about the product because of its reach across demographics. We find it to be a very popular product at the millennial (technical difficulty) segment, Gen X, Baby Boomers as well. Particularly, I'm excited about acne, though, because of the target towards the millennial and younger segment in particular. It is a large market, as we know, a lot of leading brands participate there. However, our approach with the proprietary nature of the treatment and cleanse device together makes it -- for a very kind of innovative, experiential approach to acne. So very excited about that product. And it will be rolled out market by market from the beginning -- second half and into early next year.

On the digital [front] that you're asking about, I'm not sure if you're referring to the [products] or the tools themselves, but we are focused on providing digital tools. As I mentioned, the [WeChat] platform is a good one. We have another very effective tool that's launched in Korea on a local platform, doing very well. And then the rest of the world, we've been (technical difficulty) a series of tests and (technical difficulty) pilots on multiple (technical difficulty) enabling tools. And those will continue iteratively or in an agile form, moving forward. So there's no specific schedule that we would go through here in detail. But know that they are being implemented currently and will continue to do so, really moving forward.

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Operator [10]

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And our next question comes from Faiza Alwy with Deutsche Bank.

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Faiza Alwy, Deutsche Bank AG, Research Division - Research Analyst [11]

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

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Ritch N. Wood, Nu Skin Enterprises, Inc. - CEO & Director [12]

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

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Faiza Alwy, Deutsche Bank AG, Research Division - Research Analyst [13]

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

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Ritch N. Wood, Nu Skin Enterprises, Inc. - CEO & Director [14]

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Yes, we really (technical difficulty) we have business trending in China and [frankly that's] been trending this way for the last several quarters. So (technical difficulty) about a year ago or maybe a little bit more, we've seen a lot of strengthening in our sales leader numbers. We're seeing follow-on growth in our customer base and it really has been now boosted with the adoption of the LumiSpa product, which launched in April and was really solid throughout the quarter. But we see that as a continued driver.

The RMB has, over the last, let's call it, 8 weeks, made quite a move, and it's around 6.8 or so today. We -- I don't see it necessarily impacting our Chinese consumer but it certainly impacts the way we report back in U.S. dollars. (technical difficulty) you see today, the consumption and the interest in our business model remains very, very strong in China.

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Ryan S. Napierski, Nu Skin Enterprises, Inc. - President [15]

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

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Faiza Alwy, Deutsche Bank AG, Research Division - Research Analyst [16]

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

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Mark H. Lawrence, Nu Skin Enterprises, Inc. - Executive VP & CFO [17]

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Yes, perfect, thank you. We really acquired these businesses because we think it allows us to get product innovation to market quicker than we have in the past, and really give us some additional capability to grow. And they're very good manufacturing partners that are doing business (technical difficulty) companies as well, and we see good growth opportunities there. (technical difficulty) was about $22 million, $22.7 million. We see that growing. We see these businesses [growing] (technical difficulty) potential going forward. And so, depending on the ratio it is to our total sales, will be the impact it has, both on our gross margin and on our selling expense. However, these businesses have a very similar operating margin through the operating margin of our company. So we don't anticipate a drag on our overall operating margin once the purchase accounting is done really at the end of this year.

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Faiza Alwy, Deutsche Bank AG, Research Division - Research Analyst [18]

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

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Ryan S. Napierski, Nu Skin Enterprises, Inc. - President [19]

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Sure, Faiza. Yes, in fact, as we discussed that, mentioning it here, we wanted to include it because we continue to be pleased with the nutrition side of our business. The last couple of years, we've been very focused on the device platform, predominantly in the personal care space, but we wanted to indicate that our nutrition business continues to do very well, TR90 being a key lead product there. It is very -- playing in the sports nutrition category, which is the largest -- well, the fastest growth category in nutrition. It speaks very well to trends in Asia and the rest of the world in terms of consumer demand, and we see that playing out with TR90.

As far as new formulas and such, we continue to enhance the offering in various markets with different product complements. We have not changed the core focus as a body-shaping and weight-management (technical difficulty) So we keep it fresh with new products (technical difficulty) introduced, but that's a very powerful product in a very strong growth (technical difficulty) of the nutrition space.

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Faiza Alwy, Deutsche Bank AG, Research Division - Research Analyst [20]

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

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Mark H. Lawrence, Nu Skin Enterprises, Inc. - Executive VP & CFO [21]

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

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Operator [22]

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And our next question comes from Olivia Tong with Bank of America, Merrill Lynch.

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Olivia Tong, BofA Merrill Lynch, Research Division - Director [23]

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

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Mark H. Lawrence, Nu Skin Enterprises, Inc. - Executive VP & CFO [24]

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Yes, great question, Olivia, and thank you for that. Really, really strong quarter. And, in fact, the $704 million, we had projected actually a 5% benefit from currency that actually only came in at 4% due to the strengthening of the U.S. dollar, primarily in the last few weeks of the quarter. So it was even stronger, I guess, than the $704 million. The operating income of the business was very strong, particularly when you factor in the $12 million or $13 million of convention expense that we had this quarter in Korea and China. So generally, the operating (technical difficulty) very strong. It produced, without a doubt (technical difficulty) which by the way is easy to identify because (technical difficulty) below the operating income line on the P&L (technical difficulty). So when you take out that, it really -- we had a very strong quarter, which was well ahead of our guidance. The business did as we would have anticipated it to do. And so we're very encouraged with the way the model worked. We are not concerned, I should say, from a profitability standpoint.

Are you there, Olivia? Can we...

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Olivia Tong, BofA Merrill Lynch, Research Division - Director [25]

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I forgot to unmute myself. The -- classic problems. First, the G&A being higher, you mentioned the conventions, were there conventions in the year ago? And then, is there any shifting in expenses between the 2 line items or is that just the noncommissionable revenue? Obviously, you don't get selling expense on that. And then, the conventions that are causing that shift this quarter, between G&A and selling expense?

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Ryan S. Napierski, Nu Skin Enterprises, Inc. - President [26]

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

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Olivia Tong, BofA Merrill Lynch, Research Division - Director [27]

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

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Mark H. Lawrence, Nu Skin Enterprises, Inc. - Executive VP & CFO [28]

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Yes, it will be up sequentially from what we saw in the first half of this year, both (technical difficulty) and again above where we were in Q1. (technical difficulty) really for a couple of reasons. We will have some manufacturing efficiencies [at LumiSpa], which will take into account (technical difficulty) work we've been doing on that product as well as some of our other products. And then we will see the sell-through benefit of the products that we purchase from our manufacturing entities.

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Olivia Tong, BofA Merrill Lynch, Research Division - Director [29]

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Got it. And then just lastly, the guidance -- you obviously have Q3 outlook, and then we can figure out the implied Q4. And essentially, it suggests that you don't expect any sales growth in Q4 and it would be surprising to me that, that momentum would slow so dramatically by Q4. So can you give a little bit more color? Is it -- how much of that is conservatism versus something that you see versus tough comps that's driving that muted Q4 outlook?

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Ritch N. Wood, Nu Skin Enterprises, Inc. - CEO & Director [30]

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Good question. And you're right, as we forecast Q4 (technical difficulty) slight growth, as you know, in (technical difficulty) guidance, we were showing a decline in Q4 because we're comparing against the $130 million LTO that we had for LumiSpa in the fourth quarter of 2017. We are now actually showing growth, we're really encouraged by that. And also, we're showing a fairly heavy FX headwind in the fourth quarter. So both of those things played a factor. The business is trending very strong with the local currency growth. I think, in Mark's guidance that he provided, a 5% to 7% range for the fourth quarter. That's comparing against an LTO of (technical difficulty) $30 million from the prior year quarter. So the business is strong, and we're encouraged by the way it continues to trend and that's reflected in our guidance that we provided.

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Operator [31]

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And our next question comes from Doug Lane with Lane Research.

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Ritch N. Wood, Nu Skin Enterprises, Inc. - CEO & Director [32]

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

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Operator [33]

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Once again, our next question comes from Doug Lane with Lane Research.

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Ritch N. Wood, Nu Skin Enterprises, Inc. - CEO & Director [34]

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Maybe go to the next one and see if Doug can come back in (technical difficulty)

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Operator [35]

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Understood. Our next question comes from Beth Kite with Citigroup.

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Beth N. Kite, Citigroup Inc, Research Division - VP and Analyst [36]

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I was wondering if we could chat a little bit more, Ryan, with what you were talking about with the social selling portfolio. And I know you mentioned specifically, I think if I heard it correctly, that Powerlips and the Insta Glow are kind of largely now in the U.S. and European markets. But I think we were kind of also looking at maybe, sort of, like a 10 to 12 product portfolio of new products, starting with Live last year. So can you just help us think about the second half of the year, might we see more of Dr. Dana or the AP lip gloss or the -- I think there was a new mask that came out in the U.S. in the second quarter. Did that get any traction? Just a little bit more broad conversation around the social selling portfolio.

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Ryan S. Napierski, Nu Skin Enterprises, Inc. - President [37]

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Great, yes. Beth, great question. So to maybe give a little more clarity on our social [selling] approach. As you mentioned, we previewed a series of products and product concepts at our Live (technical difficulty) last October. And those products and product concepts would then be staged out over the course of the coming 2 years prior to our next Live event. So some of those products were still in concept. For example, Raw, which is one of interest, a high-interest [by the field, product concept that's currently in process of final development and will be rolled out in the next little while. We've effectively utilized this series of products market-by-market according to the promotional needs and the calendaring in the markets, seasonally speaking as well. And so we've had the products, for example, as you mentioned, Powerlips has been very good and Insta Glow both rolled out in the North America, EMEA regions, Latin America. Now that we've previewed some of those in Asia and they'll continue to roll out over the course of time.

Similarly, with Dr. Dana, we previewed it, we've sold it in a few key markets, but they'll roll market-by-market moving forward. And so we do continue to have additional products, you mentioned the mask. We have other products built to enable the same thing. These social sharing products, I will say, the intention of these products are really effectively to stimulate that customer acquisition through sharing of demonstrable products online (technical difficulty) and open the conversation. And that's really what we see (technical difficulty) products. Very good complements to products like LumiSpa as well in opening the conversation. But does that help give a little more color? I mean, they're really just phased over the course of the next [2 years], market by market.

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Beth N. Kite, Citigroup Inc, Research Division - VP and Analyst [38]

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Yes, perfect. No, very much so. And actually, when you mentioned LumiSpa, it reminded me of one in particular for China. You had such nice growth of sales leaders quarter-over-quarter in Mainland China. I assume, in part, as LumiSpa launched in June -- pardon me, in April. Do you sort of feel good about the momentum of maintaining that level of sales leaders, because obviously we've seen it rise and fall in the December to March quarters from the preview [sales].

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Ritch N. Wood, Nu Skin Enterprises, Inc. - CEO & Director [39]

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

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Beth N. Kite, Citigroup Inc, Research Division - VP and Analyst [40]

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Excellent. And so, if I could just go to Mark briefly. And kind of back to dialogue around G&A spending and Olivia's questions. I think you talked previously about a lot investment spending you're doing, right, in sort of probably a whole lot of markets around the world. I think you specifically have cited Latin America in the past and Argentina maybe in specific. So just trying to sort of understand the flow, as we exit this year and into next year, separate from the M&A impact and the events, sort of some moving around of large events. And obviously, I think the third quarter here, we won't have the lag like we had last year. But just big picture, how much reinvestment are you doing this year versus last? Do you think you'll continue to do next year? Just trying to think about operating margin progression over time.

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Mark H. Lawrence, Nu Skin Enterprises, Inc. - Executive VP & CFO [41]

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

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Beth N. Kite, Citigroup Inc, Research Division - VP and Analyst [42]

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Perfect. And I guess then -- I'm sorry, if I could squeeze one more last one in. The LumiSpa, the fact that you're able already so quickly to get some manufacturing sort of efficiencies or changes in there to improve the profit profile of that product. When you said that's going to happen here in the second half of the year, is that even a little earlier than you might have thought with such a new product? Or was that kind of -- I know, Mark, that was one of your initiatives. Is that kind of happening in the time frame you would've liked to have seen?

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Mark H. Lawrence, Nu Skin Enterprises, Inc. - Executive VP & CFO [43]

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Yes, it's happening right about in line with what we expected. As you know, we started that effort right as soon as the product launched. And once we saw the success we were going to have with that product, we started looking at ways to optimize cost, including expanding our manufacturing capability. And we're going to start seeing the benefit of that in Q3 and even a little bit stronger in Q4.

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Operator [44]

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And our next question comes from Mark Astrachan from Stifel.

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Mark Stiefel Astrachan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [45]

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

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Mark H. Lawrence, Nu Skin Enterprises, Inc. - Executive VP & CFO [46]

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

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Mark Stiefel Astrachan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [47]

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

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Mark H. Lawrence, Nu Skin Enterprises, Inc. - Executive VP & CFO [48]

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Yes, that's a great question too. Let me speak to that. The selling expense fluctuates for a couple of reasons. China, partially, has the biggest influence on that. And also the number of qualifiers that are qualifying for our sales in (inaudible)trips was a little bit lower in the second quarter than normal. I think we'll see that 40% raise up a little bit in Q3 and Q4, that's what we have in our modeling. And again, it's impacted -- that's on the core Nu Skin business that we're talking about.

It's also [impacted by] the rollout of our Velocity enhancements. Wallet should not increase very much. Our overall selling expense for Velocity program, it's (technical difficulty) really should be pretty close to the same, but sometimes with the rollout, may impact one quarter to the next on how the expense flows. So yes, generally, I think 40% is a little bit lower than we would anticipate in the next few quarters, for core Nu Skin business for sure.

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Mark Stiefel Astrachan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [49]

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

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Ritch N. Wood, Nu Skin Enterprises, Inc. - CEO & Director [50]

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Yes, that's correct, Mark. So right now, as Mark mentioned, it's about $3 million a quarter. That will drop just slightly, as acquisition accounting expense or purchase accounting expense. So right now, we're not showing a [lot of benefit] in earnings per share or margin, but that will change, beginning of next (technical difficulty) it's low double-digits operating margins for those entities.

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Operator [51]

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And once again, we have a question from Doug Lane with Lane Research.

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Douglas Matthai Lane, Lane Research - Principal & Director of Research [52]

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Sorry about that.

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Ritch N. Wood, Nu Skin Enterprises, Inc. - CEO & Director [53]

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You sound (inaudible) clear right now. So that's good.

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Douglas Matthai Lane, Lane Research - Principal & Director of Research [54]

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Oh, good. It's already an improvement then. Just a couple things. On the social selling initiatives, we're about a year into the program here, Ritch, and we've had various successes with AP 24 and Powerlip and Insta Glow and Clear Action. And can you give us a feel for how did those -- how did the lifecycle for these initiatives fall out? I mean, was any one of those particularly big in one quarter and then it moved to another one in another quarter? I mean, what is -- how does the lifecycle for these initiatives play out?

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Ritch N. Wood, Nu Skin Enterprises, Inc. - CEO & Director [55]

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Yes, when we really moved to social selling, and I give Ryan a lot of credit for his vision around this move towards social selling, the first product that (technical difficulty) was our toothpaste, our AP 24 toothpaste. It's a whitening paste that has just really -- it not only took off but it stayed really, really steady for the last 18 months. What we've done, as we go forward -- and by the way, that's producing around $20 million a quarter in that product -- what we've done is now followed that on with a lip gloss and some other products that continue to keep that product in the light going forward there. Because they sell at a lower price point generally, the margins are good but they are a lower price point. They don't necessarily move the needle on the overall revenue line in a single quarter. However, what we see is a strong customer acquisition with some of those customers then turning into sales leaders and really driving the business going forward. So it's really a great lead in to interest a customer in our product, that then turns into somebody who may want to sell and do the business. And that's really the way we see it rolling out.

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Douglas Matthai Lane, Lane Research - Principal & Director of Research [56]

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

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Ritch N. Wood, Nu Skin Enterprises, Inc. - CEO & Director [57]

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Yes, the [benefit of] expanding the product portfolio is that it keeps all the other products in play, right? I mean, we can continue to follow it on with products that work very well, for example, with the lip gloss that we came out with, Smile Pop we call it, that keeps AP 24 in the spotlight. So I think it's important that we continue to bring products to market much more quickly than we have in the past. And this is part of our strategy, Ryan talked about the PCC strategy. That product strategy is really to continue to enhance social sharing opportunity, and that's really new product coming to market more quickly. I give credit to a couple of things. Number one, our marketing teams, who have adjusted their strategy. Our salespeople, obviously, who have bought in and are really moving the social sharing. And then we've tried to build additional capability both internally and with our manufacturing partners so we're more capable of getting product to market more quickly.

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Ryan S. Napierski, Nu Skin Enterprises, Inc. - President [58]

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Let me just add on to that point, Doug. Dr. Chang is here, representing our research and development. One of the really exciting things about social sharing is that we have a lot of product innovation in-house that historically didn't fit into that one product cycle associated with LTOs and that rhythm that was going on. What we've been able to do with social sharing is refine the LTO cycle and enable some of these innovations that are actually in-house to come to market. And so, it's exciting to see a lot of these product concepts really get out there and gain traction, and they really do cycle based on trends and seasonality.

And so, we find, for example, Insta Glow going very well right now. Of course, it's in the middle of summer now. Southern [parts of the world], Southern Hemisphere, will pick up there and (technical difficulty) the off times or the proper times there. So it's (technical difficulty) for us to make our innovations more accessible and leverage the capabilities we have, built into Joe's team, the R&D organization, so...

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Douglas Matthai Lane, Lane Research - Principal & Director of Research [59]

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Okay. That's helpful. And just shifting gears, the top-line numbers are impressive and they keep going up but it's really driven by 3/4 of your business. Can you talk about Japan and Korea, which is still a quarter of your business, and really haven't done much in the past couple of years? And it doesn't sound like your outlook is for much to change there. Can you just give us a little color on what's going on in the markets, and what should we see going forward over the next 6, 12 months?

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Ritch N. Wood, Nu Skin Enterprises, Inc. - CEO & Director [60]

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Yes, these are very important markets to our ongoing success. What I'm most encouraged about is we are just (technical difficulty) implementing our customer growth strategy there, both Korea and Japan. So new products starting to hit the market. The Velocity comp plan change in Japan as at the 1st of July and going into Korea (technical difficulty) quarter. We have seen an uptick in [customer] acquisitions in the last few months in both of those markets, which is encouraging.

So really, we believe we have the right (technical difficulty). It's now implementing it to be able to turn those businesses in the right direction. We are encouraged that they seem -- the trends seem to be steady, and we believe moving in the right direction. So Q3 is going to be really important for us. We'll see some really important pieces of our strategy starting to be implemented. Our anticipation is that we'll start to see customer movement, customer growth in those markets, which would be the first time to a turnaround, and we are very focused. We know those markets are important to us and have good people in place to manage the business. And now, we believe this strategy is going in and it will start to have an impact.

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Ryan S. Napierski, Nu Skin Enterprises, Inc. - President [61]

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And I would just add to that, that point regarding the importance of social sharing in both of those markets. I mean, these 2 markets are very advanced skincare and antiaging markets because of the demographics in both markets, that we've done very well historically in that antiaging category. As we go more into social sharing, as we open up more with products like LumiSpa that are more millennial-oriented and reach a broader demographic than what we've historically focused upon, we really feel that, to Ritch's point, that we'll be better positioned in those markets to drive future growth. So this social sharing element is key to expanding our demographic reach.

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Ritch N. Wood, Nu Skin Enterprises, Inc. - CEO & Director [62]

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

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Operator [63]

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