Scott Pond - Director of Investor Relations M. Truman Hunt - Chief Executive Officer, President and Director Ritch N. Wood - Chief Financial Officer, Principal Accounting Officer and Vice President.

John A. Faucher - JP Morgan Chase & Co, Research Division Olivia Tong - BofA Merrill Lynch, Research Division William Schmitz - Deutsche Bank AG, Research Division Scott Van Winkle - Canaccord Genuity, Research Division Mark S. Astrachan - Stifel, Nicolaus & Company, Incorporated, Research Division.

Good day, ladies and gentlemen, and welcome to the First Quarter 2014 Nu Skin Enterprises Earnings Conference Call. My name is Janina, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr.

Scott Pond, Director of Investor Relations. Please proceed..

Thanks, Janina. We appreciate you joining us today. With me in the room are Truman Hunt, President and Chief Executive Officer; Ritch Wood, Chief Financial Officer; Dan Chard, President of Global Sales and Operations; and Joe Chang, Chief Scientific Officer. Just a reminder, during the call, comments may be made that include forward-looking statements.

These statements involve risks and uncertainties, and actual results may differ materially from those discussed or anticipated. We encourage you to refer to today's earnings release and our SEC filings for a complete discussion of these risks.

Also, during this call, certain financial numbers may be discussed that differ from comparable numbers obtained in our financial statements. We believe these non-GAAP financial numbers assist management and investors in evaluating and comparing period-to-period results in a more meaningful and consistent manner.

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

Thanks, Scott, and good morning, everyone. As always, we appreciate you joining us on the call today. Perhaps needless to say, the first quarter of this year was the most eventful quarter of my tenure as Nu Skin's CEO. As we entered 2014, we certainly could not have predicted what has transpired in China.

But all things considered, we're pleased to report this morning record first quarter results with growth in all 5 of our geographic regions. For the quarter, we posted revenue of $671 million, a 24% increase over the first quarter of 2013. Our earnings per share for the quarter increased 17%, finishing at $1.05.

And we also grew year-over-year in both the number of sales leaders as well as our active accounts. The quarter's results were obviously significantly impacted by what occurred in mid-January in Mainland China.

Shortly thereafter, we took decisive and voluntary actions, which included suspending promotional meetings as well as new sales representative sign-ups. And we recognize that these steps were aggressive. But our objective is to build a long-term, sustainable business in China.

And all things considered, the right course of action was to assure the government that we will be responsive to any concerns they may have about our business. We've always tried to do business this way.

I think you'll agree that the timely conclusion of the investigations and the recent resumption of corporate hosted meetings and new sales rep sign-ups reflect the good work that our China management team has done over the past few months.

While we recognize that these developments in China will impact 2014 results, our attention is now focused on moving forward to continue to build a healthy long-term business. And I'd like to say that our optimism for China remains intact.

We continue to believe in the market's potential for direct selling with the industry continuing to enjoy impressive growth. In addition, we're encouraged by the Chinese government's continuing commitment to develop its economy.

And while China will likely always be a unique marketplace, we believe that the macro factors there will bode well for us and for our industry going forward.

If we take a minute to consider some subjective factors and mindset, I would also note that nothing has transpired in the past 4 months that would lead us to believe that our business is incapable of rebounding. Attitudes are good and spirits are strong among our team members, both at corporate as well as within our sales force.

So we remain optimistic on China's potential and the prospects for our business there. In the meantime, we continue to build our ageLOC anti-aging brand. Our latest product, the ageLOC TR90 weight management and body-shaping system, is our most significant effort to penetrate the large and growing market for weight management.

You'll recall that we generated about $550 million of sales of this product last fall. As we move into the regional launches of the TR90 system this year, we're making some refinements to our LTO and our rollout strategy. Weight management is a complex category.

Consumers are often blinded by programs that focus on short-term weight loss and ignore the quality of any weight lost. Some research that we've reviewed shows that as much as half of weight loss from many diets comes from lean muscle mass.

So helping consumers understand that healthy weight management requires the loss of fat and the retention of lean muscle mass is a significant proposition. But we believe the right approach is to focus on body composition rather than raw weight loss. So we have work to do to educate consumers that not all weight loss is healthy weight loss.

Compliance with the TR90 program yields great results. But we're trying to change the landscape with TR90 and change consumer mindsets. And thus, we need to increase our educational efforts on the nutritional and lifestyle components of the system, which we believe will help consumers maximize their weight management and body-shaping results.

TR90, so far, has only been sold in LTOs in a 3-month supply. We believe that consumers will benefit from being able to try the product first before making a 3-month commitment. In addition, we've also realized that with weight management, probably more than with any other category, it's tough to take a product off the market post-LTO.

Consumers in weight management just don't enjoy a start again, stop again reality. So moving forward with the regional launches, we're refining our rollout of TR90. To give us more time to educate the sales force, we changed our China LTO in June to introduce just our Tru Face Essence Ultra skincare system.

This is a product, a skin care serum that has been introduced throughout the Americas and in primarily in South Asia and is a very nice performer for us. It's already a top-performing product in most of the markets where it's sold.

So TR90, then, will follow later in the year in Q4 or possibly even in 2015 to give us time to educate and train our sales force better in Mainland China.

TR90 continues to roll out in other markets, as previously planned, with the exception that in many markets, the product is -- will be made available immediately after the introduction instead of waiting the 3 to 6 months as we've typically done over the past couple of years with product introductions.

This change will temper the results for the LTO in many markets but is simply a more consumer-friendly approach to introducing a product in the weight management space. Now let me give you some color commentary on a few specific markets.

The North Asia region was up 9% in local currency on the strength of South Korea, which enjoyed a 38% growth year-over-year. Japan had a difficult quarter, down 14% over the prior year on partly a tough comp, given that we launched the ageLOC body spa last year in Japan. But even with the comp issue, the environment in Japan remains challenging.

The Americas region improved by 17% in local currency over the prior year. Latin America and Canada, very strong growers. And we plan to introduce an ageLOC facial spa in the United States in the second half of the year, which will be a very welcome addition to our product offering here.

As you will recall, we took the facial spa off the market about 1 year ago. So our U.S. sales force will be very happy to have that back in their arsenal. Our South Asia/Pacific region also grew 17% in local currency during the quarter, with the business performing there as expected.

Our EMEA region generated 9% revenue improvement over the prior year and will benefit from a second quarter TR90 introduction there. And just before turning the call over to Ritch for more financial detail, I want to comment briefly on this morning's guidance.

As you know, as of May 1, we're allowing new sign-ups in China and have recommenced company-hosted meetings. But the first few days of May are holidays in China. So the reality is that our second quarter forecast, and really our forecast for the remainder of the year, is highly dependent on how quickly the China business recovers.

Ideally, we'd be further into normalized operations in China before we provide guidance, as it's frankly just difficult to project how the business will respond. But for purposes of modeling today, we believe that a conservative projection for the quarter would be $700 million on the top line, which will yield $1.25 on the bottom line.

So while we've had some challenges in 2014, we continue to be pleased with where we are in the overall direction of the business. We're -- we continue to be very excited about our prospects in almost all of our geographic regions.

And we're also very excited about our continued efforts to innovate in our product categories and feel like we have good ammunition to use going forward in the remainder of this year and looking into next year as well. We're committed to building for the long term. We have high expectations for the future.

And with that, I will turn the call over to Ritch..

Thank you, Truman. Good morning, everyone. And I've got to admit, I'm really happy to be sitting on this side of the first quarter, having weathered a storm that I'm confident will help us be a lot stronger in the future. Today, we're moving forward, we're getting stronger and we look forward to creating improving sequential trends as we move forward.

I have great confidence in the foundation we've developed over the past 30 years. I have great confidence in our sales force. I have confidence in our management team around the world and our business model. Our product pipeline looks good, and our future around the world remains very bright.

As we mentioned, overall sales grew 24% in local currency during the first quarter, and each region contributed to our success this quarter. Our revenue of $671 million represents the largest first quarter in our history and a very nice start to 2014. Our gross margin for the quarter was strong at 84.1%.

That's up approximately 70 basis points compared to 83.4% in the prior year. The gross margin is higher due to the increasing sales of ageLOC products, which have strong gross margins, and a higher percentage of our overall sales in the Greater China region, where we have slightly higher gross margins due to self-manufacturing.

Selling expenses for the quarter increased to 46.7%. That's above the 43.1% in the same period last year. We have more sales leaders qualifying for promotional sales incentives, pushing the expense higher. Also, under the unique direct selling model in China, we have fixed salaries to our sales reps, which are adjusted on a quarterly basis.

With the lower than initially expected sales in China, these fixed salaries caused expenses to be higher as a percentage of sales in the first quarter. General and administrative expenses for the quarter as a percent of revenue were 22.4% compared against 25% in the prior year period.

Our management team is committed to maintaining and improving the profitability of the company as we move forward. We have a track record of growing revenue and operating margin together, and we'll stay focused on this objective. We incurred a loss of $3.6 million in the other income expense line item as compared to a slight gain in the prior year.

Our tax rate for the quarter was 34.2% compared to 34.4% in the prior year. During the quarter, we paid $20.1 million of dividends and repurchased $25 million of our outstanding shares, which leaves our authorization at $370 million at the end of the first quarter.

Our balance sheet is impacted by the changes in our LTO plans relating primarily to China and the impact of the recent events there. Our inventory balance has grown significantly as we've dealt inventory for product LTOs this year based on our growth projection.

In China, we now plan to launch the Tru Face Essence Ultra, as Truman mentioned, in the second quarter, and then the ageLOC TR90 somewhat later. We'll see the inventory begin to convert to cash as we make these products available for purchase, but our change in plans will certainly increase the inventory balance in the short term.

Despite the difficult circumstances that arose in January in China, we're very happy to have worked through the challenges. And we've always, as you know, tried to be conservative in our guidance. And the guidance that we're providing today is certainly reflective of this same approach.

As of today, we estimate our revenue from Greater China, the LTO specifically in June, to be approximately $100 million, and also revenue for the second quarter to be around $700 million. We estimate currency will negatively impact revenue by approximately 3%, which is factored into our guidance.

At this level of revenue, we'd anticipate our operating margin to be around 16.5% and, therefore, earnings per share around $1.25. We provide these estimates simply as high-level targets to help with modeling.

And as for the remainder of the year, we prefer to see the trends in Mainland China before estimating what those numbers will be for the balance of the year. So with that commentary, we'll go ahead now and open up the call for questions..

[Operator Instructions] And your first question comes from the line of John Faucher with JPMorgan..

I want to talk a little bit about sort of the geographic composition of the guided slowdown in revenue as we head into the second quarter. I mean, I think all things considered, Mainland China came in better than what most of us were looking or thinking.

So as we look at the fall-off in the growth rate against similar comparisons in the second quarter, is that just saying, look, we think it is in fact going to hit the business in the second quarter in China? Or is this something where you're saying you're going to see a slowdown more broadly? How should we think about the geographic composition there?.

Yes, it's a great question, John, that I think everybody has on their mind right now as well. And as we look at guidance, the first quarter in Greater China was strong.

Obviously, January started out very, very strong prior to the disruption that hit the latter part of January and then slowed a little bit throughout the quarter as we limited sponsoring activity as well as holding meetings. So we're kind of growing from that trajectory. And as we look forward, we're just barely starting activity right now.

We do have things in place that should bring back a lot of sales leaders or sort of a welcome-back campaign for those who weren't able to make it and hold on as employees during this period of time, so they can come back during the month of May in preparation for the LTO in June.

So we expect, on a sequential basis, to see things now picking up in China, but we're starting from a little bit lower standpoint in terms of the number of sales reps that we have in place today. So sequentially, we see things improving. We're a little cautious at putting guidance out there and trying to be too aggressive at this time.

So we're trying to be fairly cautious as well on the guidance that we're providing. But outside of that, the business should be quite healthy. The difference is our Greater China region was up 60-plus percent in the first quarter. And what I have in my model right now is a 20% sort of growth rate for Greater China in the second quarter.

So that's really the difference between the overall numbers in Q1 versus Q2..

Okay, great. And then secondly, just one of the things that's going to happen is we're going to start hitting some very large selling expense comps in the back half of the year, and I realize you're not giving full year guidance yet.

But how should we be thinking about out-year -- excuse me, out-quarter margins as we start to lap some of those big increases as you guys had that tremendous sales growth in the back half of last year?.

Yes, certainly, our selling expense number will come down as we don't have the large LTOs planned in the back half of the year. So from an overall margin standpoint, I believe -- and frankly, we're very committed to maintaining a high level of operating margin.

So I think as we go forward, a 17% operating margin in the back half of the year, which is similar to where we were last year, is something that we're focused on maintaining.

And then I think from a sales side, we will really look at the business sequentially from here forward to -- and believe that we can generate sequentially improving numbers as we go forward..

Your next question comes from the line of Olivia Tong with Bank of America Merrill Lynch..

First, on the actives and sales leaders, you obviously provided the numbers through March. I was wondering if there was any big difference as you -- whether you have the April numbers.

And if you do, are there any major differences in April versus where you ended in March?.

Yes, it's really a little early to tell too. We're just getting those numbers in right now. But certainly, in Greater China, there was no push to be able to move forward during the month of April. So the numbers will come down a little bit. The rest of the world, frankly, continues to perform quite well. And so overall numbers look good.

And as we mentioned earlier, we continue to expect growth happening here in the second quarter. But from a greater China perspective particularly, we'll start to see improvement sequentially now that business activity can resume..

Got it.

And then can you just give us some color on how the investigation progressed now that it's in the rearview mirror? Are there learnings that you can take from it on how to structure your business in China going forward?.

I think in retrospect, one might argue, perhaps, that the steps that we took in discontinuing sign-ups and promotional meetings might have been overly aggressive. I think one could make that argument.

I think that we would argue in response to that, that our primary objective is a long-term business in China, and we just felt it prudent to act aggressively on a voluntary basis to address the concerns that came up. China is a unique place, and we're almost continually in conversations with regulators in one place or another.

We felt really good about the process and the outcome of the investigation. We want to be responsive to the issues that were raised, that relate primarily to better training of our sales leaders to make sure that they stay in balance in terms of how they're presenting the business and the product and income claims that they make.

We feel like we have a good level of support from our top sales leaders in this regard.

They, interestingly enough, were not as disruptive, mentally and emotionally, perhaps, as a result of the investigations that one might think, as when you live in China and work in that environment, you realize that these kinds of things are not as unusual as they may be outside of China.

I would also say that we felt, throughout the process, like the government was being very fair with us. It was not a -- there was not an agenda on their part to be overly aggressive with us or, we felt, with direct selling generally. They wanted to be fair. They wanted to make sure they understand what was going on.

And so it was actually, interestingly enough, more of a constructive dialogue than one might think on this side of the fence. But we were really pleased with the work that our team did there.

It was obviously a significant disruption to their attention on the business, but we felt good about the outcome and continue to believe that the government will work constructively with us and with direct sellers to ensure the long-term viability of our business model..

Your next question comes from the line of Bill Schmitz with Deutsche Bank..

Can you guys just talk about -- so the 31,000 executives in Greater China, that's kind of roughly half of what it was in December.

So do you guys think this is going to be the bottom? And then do you know where those 31,000 people went? And how likely are you guys going to be able to get them back into the business?.

Well, that's the thing. As soon as we announced that we were recommencing sales rep sign-ups at the end of April, the team there put in place some welcome-back campaigns, and we're now going back to those people who have dropped out over the course of the past quarter to try to welcome them back into the business.

And again, ideally, we would have been farther into that process today before providing guidance for Q2, but we're not. It is what it is, and the timeline is what it is. But we definitely are reaching out to those people who fell out in the process. And I feel like we have a good shot at bringing many of them back..

Maybe just one other comment, Bill, too. We were at 30,000 in June of last year. So there was a lot of sales reps who came in during the back half of the year and really hadn't had a lot of time to establish a large group of customers and so forth by the time this hit.

So a lot of those are going to fall out, the newer ones, that the 30,000 that are there today are the strong ones who really are committed and able to carry it forward. And so I think, hopefully, we can bring many of those back. But we've got a really good base in that 30,000 that remain to drive the business going forward.

It gives us good confidence that we can take that, which is really at a level that we were a year ago, or not even a year ago, and drive from that level going forward..

Okay.

I mean, so do you know where those people went? Like what else would they do if they weren't doing the Nu Skin thing, the 30,000 that have left?.

Yes, I mean, most of them are doing Nu Skin part-time. So do we think that they went to other direct selling companies? Probably not. And so it's just a question of us reaching out to them and bringing them back in..

Okay, great. That's -- is that 31,000, do you -- it sounded by your commentary that you think this is sort of the bottom in terms of execs in Greater China because I think you said it's going to get sequentially better from here.

Is that -- did I understand you correctly?.

Yes, that's exactly what we would anticipate, that we see that number build from here going forward..

Okay.

And then just on the share repurchase, I know you kind of wanted to get guidance out of the way, and you still haven't done full year guidance, but are you tempted now to get much more aggressive on the buyback? I know there's some inventory that's lingering from TR90 that still has to kind of come through, so that, obviously, has a little bit of a call on cash.

But are you tempted to start buying back some more stock now?.

number one, to drive long-term growth in the business because that's where we're going to create the most shareholder value; number two, make sure we have plenty of cash to be in a position to invest and drive the business forward; and number two, make sure we're paying our dividend; and three, use any extra cash for opportunities we have to buy back shares.

So we'll continue to follow that, and our board will make that decision as we go forward. But yes, this is certainly an enticing price level for us to be participating in buybacks..

And as you note, Bill, from the balance sheet, the reason why we haven't been more aggressive is simply because our inventory has gone up here and cash gone down, which we projected would happen. And so as we work through the balance of inventory and cash, we'll be in a better position to repurchase shares..

Right. And then just one quick last one. Are you tempted to push forward any of the big initiatives now? Because it sounds like TR90 still is nice, but I think you're tweaking it a little bit, and maybe the expectations are a little bit more muted on what that business is going to do.

So are you tempted to maybe push forward the air filter thing in China or maybe with some of the personalized skincare stuff, I guess, that you have slated for next year?.

Yes, we are working on some pipeline adjustments. We likely will not move forward the personalized skincare initiative only because it's just frankly not feasible because it's a fairly significant development project.

But we are working on other local product initiatives, such as air filters in China, that could provide a nice revenue boost along the way. I think perhaps, by the end of the second quarter, we'll have better visibility on what those initiatives will look like..

[Operator Instructions] Your next question comes from the line of Scott Van Winkle with Canaccord Genuity..

Ritch, did you say that you were looking at a Greater China number of about 20% growth in the second quarter?.

That's right, year-over-year growth of 20%..

So if I do that math, and maybe I did it wrong here on the back of the envelope, but it would have the rest of your business down almost 10%.

Does that sound right?.

Yes, when you -- are you comparing against -- didn't go through book market-by-market, but....

If I take 20% growth off of last year's Greater China figure, subtract that against the $700 million and compare it to the rest non-China business last year, I come up with a decline year-over-year. Is there a comparison? I mean, last year in Q2, you had real strong business in Southeast Asia, and I think you were building up to the LTO last fall.

So is that what it is, it's challenging comparisons in other markets?.

Yes. I do show our Greater China business down. I show the currency issue hitting us a little bit as well. And over the -- the rest of the businesses should be slightly ahead of last year..

Okay, all right. Maybe I'm doing the math wrong.

And then on the China executive number falling almost 50% sequentially from December, how much of that is just kind of normal attrition versus something that's very identifiable to the challenges you had this past quarter?.

Yes, that's a good question, Scott, but I'm not sure we've really dissected to be able to determine what percentage of that would have been more organic and expected in nature. But we'll do that. We'll take a whack at that and see if we can provide some better thoughts on that. But....

Yes, I think if you look, I mean, generally, when we have a big convention and a big LTO, we see a spike in the sales representatives. And then it comes down, generally, after that.

And if you look at the rest of the regions around the world, we did see kind of an approximately 10% reduction from Q4 to Q1 in a lot of those markets around that same issue. So the fact that we declined significantly more than that, probably another 25% or so in Greater China, is probably reflective of the impact of this adjustment.

That would be a high-level analysis..

And Scott, let me chime in with an additional thought related to Q2 guidance, which is, as Ritch indicated, our numbers show a $100 million LTO for Tru Face Essence Ultra in the quarter, which is on the low end of what we would expect there. So that guidance is conservative too..

Okay.

And then to go back into the weight management product, so were any LTOs completed in the first quarter?.

Yes, we did have 2. Again, we changed the way the LTO was working. So basically, we kind of made the product available essentially right after the LTO. So there really wasn't urgency to participate in the LTO. But the 2 that sold the product in the first quarter were Korea and Japan.

And let's see, one of those went in February and the other one in March. I'm forgetting right now, but basically, we had, in total, TR90 sales of around $38 million during the month of -- or during the first quarter.

And there was a little bit of that, about $15 million, that was in the Greater China region was the final sort of piece of their LTO from the prior year, which happened in January, the first week in January..

Okay. And as far as regional conventions, is there anything that's coming up here in the next quarter or 2 that we should think about? Obviously, we'll be doing something in Salt Lake in the fall..

Yes, there's nothing significant happening. We have various conventions on a smaller basis, but nothing significant in this quarter..

Your next question comes from the line of Mark Astrachan with Stifel..

Given you're back to accepting applications for sales reps in China and have resumed corporate-hosted business meetings, are there any changes to how you see these processes look relative to how they were done preinvestigation?.

I'm sorry, I didn't hear the question, Mark.

Can you repeat that?.

Sure. Just basically trying to get a sense of how the processes look in China today relative to how they were done preinvestigation, so specifically, accepting applications and resuming the corporate-hosted business meetings..

Yes. Yes, there are some tweaks to processes as we refine the way that we're bringing people into the business. I don't currently expect that those changes are going to really cause a material disruption to the way things happen there. But there are some modest changes to processes, but nothing that's really material..

Okay.

Anything of those that you'd highlight? Or is it collectively immaterial, some that are better, some that are worse?.

No, it's just -- it's a question of funneling people into the business primarily through the direct selling door. And then, for those who want to make the business more of a career opportunity, converting them to our other mechanisms, employed structure and whatnot. But I mean, it might take some time, I suppose, to refine those processes.

But our team there is not citing any of those changes as something that should be business-disruptive. Listen, we appreciate everyone joining us on the call this morning and appreciate your ongoing support as we continue our effort to become the world's leading direct selling company.

And as always, we stand by to address whatever other questions we can separately. Thanks for joining us today..

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day..