Scott Pond - Director-Investor Relations Truman Hunt - President, Chief Executive Officer & Director Ritch N. Wood - Chief Financial Officer.

Olivia Tong - Bank of America Merrill Lynch Scott Van Winkle - Canaccord Genuity, Inc. Frank A. Camma - Sidoti & Co. LLC Bill Schmitz - Deutsche Bank Securities, Inc. Timothy S. Ramey - Pivotal Research Group LLC.

Good day, ladies and gentlemen, and welcome to the Q1 2015 Nu Skin Enterprise Earnings Conference Call. My name is Tavone, and I will be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. I would now like to turn the conference over to your host for today, Mr.

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

Thank you, Tavone, and thank you to everyone who is on the call. With me in the room today 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 will be made that include 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 management and investors in evaluating and comparing period-to-period results in a more meaningful and consistent manner.

See the Investor Relations page of our corporate website for any required reconciliations for non-GAAP financial numbers. I'll now turn the time over to Truman..

Thanks, Scott. Good afternoon, everyone. We appreciate you joining us on the call today. As you see in our release this afternoon, first quarter revenue came in at $543.3 million, which is near the top end of our revenue guidance.

Earnings per share for the quarter were $0.60, or $0.72 when excluding charges related to the new currency exchange mechanism in Venezuela. The adjusted earnings per share followed about the midpoint of our EPS guidance. Our results this quarter were negatively impacted by a strong U.S. dollar.

The currency exchange headwind was slightly more than we anticipated and resulted in a negative foreign currency impact of 7% during the quarter. Overall our performance was in line with our guidance, but frankly, came in a little bit lighter than I had hoped.

A good portion of that is currency related, but we remain encouraged by enthusiasm among our sales force as we prepare to launch a number of exciting new products and continue to expect a return to growth in the second half of the year. I want to address five topics generally in my opening remarks before turning the call over to Rich.

First I'll give a little color on our first quarter results. Second, I'll provide an update on regulatory matters that we've discussed previously. Third, I will highlight progress we're continuing to make in terms of our financial strength.

Next, I'll provide some thoughts on China specifically and why we are increasingly bullish about our prospects there. And finally I'll close with how all these chapters play into our guidance for the remainder of the year. So first, our first quarter is always impacted by seasonality and is typically our lowest revenue quarter of the year.

This is usually the result of seasonal issues like the timing of Chinese New Year. Currency headwinds this year continue to work against us, as we experienced a slightly larger negative impact to our revenue than we had forecasted.

The $0.12 charge for Venezuela is obviously painful, but fortunately there is not a lot of Venezuela risk left as our remaining exposure in that market is currently about $5 million and our price adjustments there significantly impacted revenue. So we don't see a lot of EPS risk from Venezuela going forward.

As you recall, we also saw a large spike in our active purchasers in the fourth quarter of last year. This was primarily a result of purchasing on promotions that we ran to reduce inventory which drove our active count up in the fourth quarter, and which explains the drop in active accounts that you see sequentially in the first quarter.

So all of these things considered, we feel that we remain on track to return to growth in the second half of the year. Now, moving on to regulatory issues, as we've previously discussed our audit committee initiated a voluntary review of our China business in January of 2014 in response to media and government inquiries.

I'm pleased to report that that review has essentially concluded and that it did not uncover any fact that would alter management's view that our business model and operations in China comply in all material respects with applicable laws.

We've communicated with the SEC on a voluntary basis a few times over the past year to report on the status of this internal review. Recently the SEC sent a formal request for additional information focused on one aspect of our review, and that is a donation that Nu Skin China made to a local charity in 2013.

As those who follow our company know, our corporate culture is centered upon a commitment to be a force for good in the world. And in fact that phrase is embedded in our mission statement. We are very active in supporting numerous charitable causes around the world, largely focused on children's issues and children's causes.

The donation in question was made in 2013, well before the media scrutiny in China. And we continue to believe that our business and operations in China comply in all material respects with applicable laws.

As always we're committed to maintaining an open and transparent dialogue with the SEC and will cooperate fully in responding to their information requests. In terms of our financial health we continue to make good progress on our balance sheet. Our cash flow metrics are normalizing and cash and debt levels are healthy.

You'll note that we are making good progress on our inventory balance. And this quarter we also purchased about 474,000 shares of stock and continue to believe that share repurchases are a good use of free cash. Overall we anticipate the balance sheet will continue to improve throughout this year.

Two weeks ago our board of directors visited China to get an on-the-ground look at the business. And it's fair to say that we came away from the trip bullish about our prospects for growth. China is slated to surpass the U.S. this year in terms of the dollar value of goods that flow through the direct selling channel.

And frankly one just cannot go there and not be impressed by China's continued growth as a market and its rapidly emerging middle class. Our management team remains optimistic about the market's potential.

Since November of last year we have started to see really encouraging trends in the number of people attending business meetings throughout the country and in the number of people joining to build a business. We expect that this pipeline will begin to become more apparent in the coming quarters in the numbers that we report.

We're also pleased to have received this past week two new direct selling licenses in the Guangdong province, as we continue to expand our direct selling footprint in the market.

And so looking forward we see Mainland China getting back to even on a year-over-year basis in the second quarter with healthy levels of growth in the second half of this year.

So finally with respect to our outlook for the remainder of the year, currency headwinds and a slightly softer than expected first half, as well as the $0.12 charge in Venezuela, puts pressure on our 2015 guidance.

But we're ramping up for the introduction of new ageLOC products and believe that they'll be an important catalyst for accelerated growth in the back half of the year. There is a lot of energy building among our sales leaders for these upcoming new product launches.

We got a taste of this in April when we launched our new Epoch Essential Oils to sales leaders in the U.S. and Canada. We were very pleased with the demand and the limited supply that we had available sold out in just a few hours.

We're also looking forward to introducing an ageLOC line of essential cosmetic oils in China starting in June to sales leaders there, with a general rollout of this product line in the fall.

To maximize the impact of this launch, the oils we're launching in China will be used in conjunction with the Galvanic Spa in Mainland China specifically, which will be a nice boost to our already top selling product there.

So for example a Galvanic Spa user will put a few drops of rose oil in her facial gel, which provides not only a pleasant aroma, but is also showing strong results in our clinical studies as well. Also slated for introduction later this year are ageLOC Youth and ageLOC Me.

These products have been in our development pipeline for several years, and we've talked a lot about them. And we're excited to finally get them to market, as these are the most advanced products we've ever introduced.

We've talked about these products before, but just as a quick reminder, ageLOC Me includes an innovative anti-aging skin care device that enables consumers to personalize a skin care regimen based on their individual preferences in skin care needs. This is a very unique product that's generating great anticipation among our sales force.

On the nutrition side ageLOC Youth is the most advanced anti-aging supplement we've ever developed. It incorporates the best of nutrition and gene expression science to provide a potent, broad-spectrum anti-aging supplement. We expect that this product will become quite quickly the core of our nutritional supplement offering.

So as I hope I've conveyed, we're excited about our pipeline. And based on our interaction with sales leaders around the world over the past few months, we really feel we have a solid foundation and are poised to recommence growth in the second half of 2015. So with that, I'll turn the call over to Ritch..

Thank you, and good afternoon, everyone. The business, as Truman mentioned, performed mostly as we had expected in the first quarter for both revenue and operating margin. I'll highlight two items that varied from our previous modeling in the first quarter.

First, we adjusted the currency rate in Venezuela to coincide with the newly adopted currency mechanism, which is called SIMADI, resulting in a loss in the other income expense line item. And this loss impacted our first quarter earnings per share negatively by $0.12.

Secondly, we reclassified up to cost of sales, some inventory-related expenses that historically have been reported in general and administrative expense.

So while this reclassification has no impact on operating income or earnings per share, and is immaterial to our financial reports, we feel the accounting is more accurate and we will continue to follow this practice going forward.

In the first quarter the amount we reclassified was $8.3 million, and would expect this reclassification amount to remain fairly consistent in dollar terms in future quarters. The operating margin for the first quarter was 12.6%, compared to 15.1% in the same prior-year period. Gross margin was 80.7% versus 84.1% in the first quarter of 2014.

The negative impact of the reclassification was 1.5% of sales and in addition gross margin was negatively impacted by the strengthening of the U.S. dollar against foreign currency. Our selling expenses for the first quarter were 43.1% of sales.

That's compared against 46.7% in the prior year, and although selling expenses were lower from the prior year period, they were mostly consistent sequentially and should be steady in this range as we go forward throughout this year.

General and administrative expenses for the quarter as a percent of revenue were 25%, compared to 22.4% in the prior year period.

As we have mentioned, we incurred a loss of $12.3 million in the other income expense line item and this current period loss included a $10.2 million charge related to the change in the SIMADI exchange mechanism in Venezuela.

Our income tax rate for the first quarter was 35.7% compared to 34.5% in the prior year and our 2015 tax rate is negatively impacted by the non-deductible Venezuela currency expense recorded in the quarter. During the quarter, we paid $20.7 million in dividend.

We repurchased $26.3 million of our stock and that leaves our remaining authorization at $322.5 million as of the end of March. Our cash provided by operations for the quarter was approximately $74 million. We continue to make solid progress with our inventory balance.

We improved slightly more than $25 million during the quarter and we remain on track with our forecasted improvement for this year in the inventory balance. Our guidance for the second quarter and the remainder of the year is being negatively impacted by the strong currency headwind.

While our initial forecast included a currency headwind of about 4% to 6% for the year, we now estimate the negative impact from foreign currency to be about 7% as we continue to forecast a stronger dollar throughout the balance of the year.

However, we continue to see very strong back half of the year, as Truman mentioned, with growth in the second half around 15% in local currency terms.

The precise timing of product introductions is still being fine-tuned between Q3 and Q4, but we're confident that our product and business initiatives will drive strong results helping us to report a strong constant currency growth number. We expect this growth to be driven by solid improvements in our active base and our sales leaders.

So for the second quarter, we estimate revenue to be in the $540 million to $560 million range with earnings per share of $0.72 to $0.75. Our revenue guidance for the second quarter anticipates a negative foreign currency impact of 7% to 8%.

For the year we anticipate revenue to be in the $2.45 billion to $2.5 billion range, again reflecting a negative impact from foreign currency of approximately 7% and that puts earnings per share of approximately $3.65 to $3.75. With that we'll now open up the call for questions..

Your first question comes from Olivia Tong representing Bank of America Merrill Lynch. Please proceed..

Great. Thank you. Good afternoon. I wanted to ask first about sales expectations in China.

You talked about sales expectations in China, but what's embedded in that in terms of your expectation for distributors? Because the distributor numbers in Greater China did come down pretty dramatically and I know last year you saw a pretty big drop off Q4 to Q1 but the prior two years you did see a decent pick-up, so maybe can we start with that?.

Yeah. As we indicated in my comments, Olivia, the drop in actives from Q4 to Q1 was primarily a result of strong promotional activity in Q4. It just drove a lot of purchasing in the consumer base, and which wasn't repeated in Q1. So that's why you're seeing that dynamic.

As I also mentioned we expect Mainland China to be even in Q2 year-over-year and then returning to strong growth dynamics in the back half of the year. We're fresh home from a trip there and our team is fired up and very optimistic and frankly it's hard for us not to be as well because they are.

And the pipeline dynamics that we see with a number of people attending meetings and number of people in qualification to become sales leaders is very encouraging. And so that activity is not fully reflected yet in our sales leader count or in our active count.

But we feel like beginning in Q2 you're going to start to see that pipeline reflected in those numbers..

Got it.

So can you talk through some of the promotions that you did in Q4? And did you just decide we're only going to do it in Q4 and you didn't repeat it in Q1? What was the driving factor behind it? And as you think about driving growth in the back half of 2015, I know you have a lot of new products coming, but what about promotion plans for the remainder of the year?.

Yeah. The driving factor for these promotions, Olivia, is the attention that we're applying to bringing down inventory balances. And so as you've seen the past couple of quarters we made good progress in that regard. And obviously it's an important issue.

Many of our products have expiration dates, and we want to make sure that we're managing the risks appropriately there. And hence the attention on bringing inventory levels down. The first quarter was not void of promotional efforts.

But we drove a lot of promotions in the fourth quarter, because it's a big gift giving season as you know, and hence the spike in the active account, particularly in Mainland China. So we do maintain an active promotional calendar currently and really going forward throughout the rest of the year. I want to add just a little bit of color to that.

Because one of the reasons we're hearing from our geographic management teams for perhaps a little bit of sluggishness in the business is the fact that these promotions are largely inventory focused.

And so whereas we might typically promote with a product that is really hot at any given moment in time, most of our promotional efforts right now are focused on inventory reduction, which may not always focus on the hottest product. And so that's one of the reasons why we felt that Q1 came in just a little bit lighter than we would have hoped.

But again we're just doing our best here to balance our attention on inventory reduction with moving the business forward..

Got it. And then just lastly on Q2, the sales outlook. Lighter than you originally expected I assume. And I understand a part is FX. But relative to your prior expectations what was the biggest driver of the change in expectations on Q2 sales? Thanks a bunch..

Yeah. Thank you, Olivia, and I'll just speak to that. The other impacting factor in addition to the currency was really the – I think as Truman mentioned we had hoped to see Q1 a little bit more aggressive in terms of our sales leader count improvement.

And given that that was a little softer we brought our numbers in the second quarter down a little bit from the model that I had at least initially. We have not really touched the back half of the year. We continue to see that very, very strong. But that was the lighter sort of number in Q2..

Your next question comes from the line of Scott Van Winkle representing Canaccord Genuity. Please proceed..

Thanks. Ritch, what was the reclassification dollar amount again from G&A to COGS? I missed that..

$8.3 million..

Okay. So if I just adjust it by $8.3 million, we end up with a gross margin down about 190 basis points year-over-year.

Is that all currency driven?.

Yeah, pretty much all currency. There is, as Truman mentioned we do have some promotional activity which has impacted a little bit as compared to the prior-year number. Not too much, but that would be in addition to the currency impact..

Okay.

And then how do you count active distributors in Mainland China? Is it someone who placed an order during the three-month period?.

Yeah, that's right. Any unique person that purchased during that three-month period of time..

And so in China is a customer considered a distributor? Do they sign something as – I'm wondering how the classifications seem so easy that you would add 100,000, then lose 100,000..

Anybody who purchases. So any customer who purchases during the quarter is considered an active. And as Truman mentioned there were some aggressive promotions in the fourth quarter that were on lower-priced products, so easy for somebody to purchase a product at a discount. And that's really what drove the active number up.

A lot of those did not turn around and repurchase in the first quarter..

Got you, okay. And then if I assume Mainland China is flat in the second quarter – well if I take the midpoint of your guidance, call it $550 million, that's down about $100 million year-over-year.

And there's a 7% currency headwind, right?.

Yeah, that's correct, 7% to 8%..

So, let's call that $50 million. So, there's a net $50 million decline outside of Mainland China. Can you help us out where that would be? Because I had trouble getting down to your guidance in Q2 if I assume Mainland China is flat year-over-year..

Sure. So, I'll just kind of look at the top regions, maybe, to help out. I'm showing down somewhere around $20 million in North Asia. And somewhere around – not too far down in Southeast Asia. The Greater China region, while Mainland China will be flat, we expect Taiwan and Hong Kong to both be down during the quarter.

So that will impact another about $20 million to $30 million. And those are the primary ones. Europe will be down just a little bit as well. A lot of these markets did have a push with TR90. That's when the TR90 actually launched in the second quarter last year.

So, the comparison is a little bit off, but those are the primary factors that – or in my model that's different from prior year..

Great.

And then when you look at Mainland China and having confidence in the back half of the year, is there an internal metric that kind of gives you that or what's your feel on what's coming being launched? Is it the number of letter of intents coming in to be a sales leader picking up? Or what's – are there any metrics driving confidence?.

Yeah. The two metrics that we're citing, Scott, are numbers of people attending meetings around the country, which is trending up nicely. And as you know people have to submit letters of intent to qualify to become sales leaders, and that pipeline is very encouraging..

Great. Thank you very much..

Thank you, Scott..

Your next question comes from the line of Frank Camma representing Sidoti. Please proceed..

Good afternoon, just a couple of questions. When TR90 launches, obviously it was very successful and then it didn't sell through as great as you expected, I just wondered, do you think there's any long lasting impact on your distributors from that? I'm just wondering if you've gotten any feedback on that..

Yeah. We obviously ramped up for big TR90 launches in 2014 as you know, Frank, and we didn't hit our sales projections by any means in the course of that year. But on the other hand, TR90 is actually doing pretty darn good.

I think it was our second top selling product in the quarter, wasn't it, Rich?.

That's correct..

In the first quarter? And will be a $250 million-plus product for us this year. So, we're not south on TR90 and neither are our sales leaders, although we missed the big launch events last year..

Okay. No, I was just wondering if they got sour on it because maybe it didn't meet their expectations or something like that. So it doesn't sound....

Maybe one comment, Frank, if I can just add one thing. It has impacted the way we have forecasted our LTOs for this year. So we're doing smaller LTOs, we're splitting the ageLOC Youth in half of our markets and the ageLOC Me to again put less strain on our supply chain and be able to sell through.

So, we don't anticipate the big jump in sales that we'd normally get from a LTO or at least that we got pre-2014..

Yeah..

So, our numbers really in the back half of the year while they're going to benefit from sales of these LTO products, we really anticipate that the growth is coming from strong growth in our sales force and in our customer base..

Great. Actually that was my second question because I mean basically your guidance, despite the fact that you're having two kind of major product launches, your guidance doesn't suggest really that much incremental revenue from those products. I mean it has some, but clearly not as much as you would've had in a typical launch..

Yeah, that's right..

That explains it. Okay, that's all I had..

Thanks, Frank..

Your next question comes from the line of Bill Schmitz representing Deutsche Bank. Please proceed..

Hi, guys. Good afternoon..

Hi, Bill..

Hi, Bill..

A couple things.

How big was that Chinese donation that you guys referenced?.

I'm not sure that I can share that number with you, Bill. But let me check with our Counsel and perhaps do it in another setting. But as I did state, it was a single donation given to a children's charity in China in 2013..

Okay, got you. And then the applications in China to become sales leaders, I think it was trending like 3,500 or so at the end of the fourth quarter.

Can you share what that number is now?.

Yeah. The number of people I would say in qualification, which includes those who passed the LOIs and also are actually in qualification is up about 100% from Q4 to the end of Q1.

So while that's not declaring victory yet, because you got to get them all the way through the channel and get them qualified as sales leaders, it's a very encouraging number, which is what Truman talks about as he feels confident with that pipeline fill..

In my relative numbers it was like 3,500 I think.

So would it be like 7,000 now? And maybe kind of what was it ahead of the TR90 thing? Like similar reference point?.

Yeah. I think the 3,500 number would refer more to probably in qualification numbers, Bill, than LOI numbers. And the number that I provide towards the end of the quarter, we normally don't provide that in qualification number. But it's trending very, very well.

And it looks to us that the sales leader number will actually begin to fall here in the second quarter..

Okay, great.

And then the two products, the Youth and the Me products, have they been approved for sale in China yet?.

They are in the registration process..

Okay.

I mean is there a timeline when you think they'll get that approval through?.

Timeline?.

The ageLOC Me is really close I believe.

I don't know if you have an update?.

ageLOC Me – personal care products generally are easier to get through the qualification process, the nutrition products take longer. So Youth will definitely follow ageLOC Me in China, and probably not launch there until 2017 or so from what we understand..

Got you. Okay. And then the inventory numbers look great. And I know you filed the 10-Q in line with the press release, which is really helpful.

Do you still think $250 million is kind of the right number by sort of the tail end of next year? Is that still like a good assumption for us?.

Yeah. I think our initial build was it would be down around $100 million from the beginning of the year, probably put us closer to $275 million by the end of 2015..

Okay. And then even the share repurchase, because the cash is definitely building. It was a really good cash flow quarter. But it was only I think $26 million of repo.

I mean is there any limiting factor there?.

Really not. I mean it's we continue to be steady in the market and feel like it's a good use of cash. And it's always nice to have dry powder on our side if we determine we want to step that up a little..

Okay great. I appreciate your time. Thanks guys..

Thanks, Bill..

Thanks..

Your next question comes from the line of Tim Ramey representing Pivotal Research Group. Please proceed..

Thanks so much. Just I wanted to clarify a number.

And maybe was it $26.3 million for the share repurchase that you mentioned earlier?.

Yeah. That is correct, Tim..

Okay. And as we think about China, I mean can you give us any more on what your board thought about the market there? Was it what they expected to see? Were they just excited to see big meetings or medium-sized meetings maybe? What exactly was the tone of the....

I think, Tim, I mean there are obviously a lot of encouraging signs as you visit the Chinese market, and you see the continued pace of growth in the infrastructure and what not. I mean just going from the airport to your hotel you'll pass little mini cities that are under development.

And the rate of growth continues to be somewhat mindboggling, just from an economic perspective. But honestly what encouraged us the most is the extent to which our management team is upbeat, and they really are. I mean they've been through a lot in the course of the last year and four or five months. And it has frankly not been an easy battle there.

I mean it has been tough given everything that we've been through and the pressure that they've been under to reduce inventory and stimulate growth. And do all of that and keeping sales leaders in check and in good spirits. And so to have them be as bullish as they are is frankly energizing to us and to our board members.

They have very high expectations of the market. And it's just they just have an infectious enthusiasm for the potential of the market. And we think they have a pretty good feel for it. So that's probably the one thing that encourages us the most..

Got it. And, Ritch, are you doing any translation hedging of FX at this point? Or it's just generally what it....

Yeah, yeah. No, we certainly do. We hedge primarily the yen and the euro. We continue to enter kind of a not speculative but a consistent hedging practice each month..

And can you help us with kind of the shape of that? Is it just sort of looking at the first quarter or front quarter out or is it a little bit further out?.

No, it's our 12-month cash forecast that we're hedging against, and we try and always be about 60% hedged against what we would anticipate to be our 12-month cash flows..

Okay. Thanks a lot..

You bet..

Okay, operator, it looks like we have no further questions. So let us just close by reiterating our confidence in the strength and direction of the business. We're setting up the year to return to growth in the second half and to show local currency revenue growth for the full year, which we still believe is very achievable.

We also continue to have great hopes for high potential markets and in particular the Mainland Chinese market and we're making very healthy progress in our balance sheet and in our financial metrics. So we appreciate the questions today and as always, we'll look forward to visiting with you on future occasions..