Scott Pond - Nu Skin Enterprises, Inc. Ritch N. Wood - Nu Skin Enterprises, Inc. Ryan S. Napierski - Nu Skin Enterprises, Inc. Mark H. Lawrence - Nu Skin Enterprises, Inc..

Timothy S. Ramey - Pivotal Research Group LLC Stephanie Wissink - Jefferies LLC Faiza Alwy - Deutsche Bank Securities, Inc. Olivia Tong - Bank of America Merrill Lynch Beth N. Kite - Citigroup Global Markets, Inc. Mark S. Astrachan - Stifel, Nicolaus & Co., Inc. Douglas Calder Lane - Lane Research.

Good day, ladies and gentlemen, and welcome to the Q2 2018 Nu Skin Enterprises Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions for how to participate will follow at that time. 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..

Thanks, and welcome, everybody. Thank you for joining us. On the call with me today are Ritch Wood, Chief Executive Officer; Ryan Napierski, President; Mark Lawrence, Chief Financial Officer; and Dr. Joe Chang, Chief Scientific Officer. 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 results in a more consistent manner.

Please refer to our Investors page at ir.nuskin.com for any required reconciliation of non-GAAP numbers. With that, I'll turn the time over to Ritch..

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 [Technical Difficulty] (00:01:41). I've now been the CEO of Nu Skin [Technical Difficulty] (00:01:47) 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% non-cash expense related to purchase accounting.

Excluding these two unique items, [Technical Difficulty] (00:03:04) would have been more than 40% for the quarter, illustrating the strength of our underlying business and power of our business model.

We are seeing a powerful consumer platform, and we're confident that our second quarter results continue to confirm that our growth [Technical Difficulty] (00:03:24) focused on platforms products and programs [Technical Difficulty] (00:03:28). Ryan will provide more details 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 were 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 channel.

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 were in the middle of the rollout of our Velocity [Technical Difficulty] (00:04:32).

We are very encouraged [Technical Difficulty] (00:04:35) accelerated customer acquisition and the sales leader activity [Technical Difficulty] (00:04:38) 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 [Technical Difficulty] (00:04:50) between sales leaders and customers. We're also encouraged with the capability improvements that we have made through development and acquisition.

Each of our acquired manufacturing partners is exceeding our expectations and 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 initiatives, which is on track to sustainably produce pure high quality ingredients for select Nu 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 and innovation that will set us apart [Technical Difficulty] (00:05:39) product quality, product innovation and [Technical Difficulty] (00:05:42).

I'll now turn the call over to [Technical Difficulty] (00:05:46) to provide more detail on our 3P strategy and results from our global market, after which Mark provide insight into the financials and our increased 2018 guidance.

Ryan?.

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 this accelerated growth around the world.

This is [Technical Difficulty] (00:06:12) results with 8% growth in our registered customer [Technical Difficulty] (00:06:17) those who are purchasing directly from the company and [Technical Difficulty] (00:06:20) growth in our sales leaders.

We're confident [Technical Difficulty] (00:06:25) is aligned with the right macro trends of 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 a 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 [Technical Difficulty] (00:06:54) training and tools, as well as [Technical Difficulty] (00:06:58) technology.

For example, we have introduced a [Technical Difficulty] (00:07:00) sales platform in China that allows our sales leaders to more easily facilitate sales transactions directly with their [Technical Difficulty] (00:07:07).

On the enabling products front, ageLOC LumiSpa continues to exceed our expectations [Technical Difficulty] (00:07:15) global demand, accounting for [Technical Difficulty] (00:07:18) second quarter revenue.

This addition to our proprietary device platform has become a powerful contributor to increased [Technical Difficulty] (00:07:28) customer acquisition.

We'll continue to enhance this [Technical Difficulty] (00:07:31) throughout next year with additional colors, [Technical Difficulty] (00:07:36) and cleansers including a new [indiscernible] (00:07:36) that we're very excited about.

Additionally, we are seeing positive results from several new product innovations [Technical Difficulty] (00:07:47) to support social sharing including [Technical Difficulty] (00:07:49) long-lasting lip-wear and Insta Glow, our innovative new sunless tanner, which is generating [indiscernible] (00:07:55) 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.

[Technical Difficulty] (00:08:33) strong acceleration of the customer acquisition in the markets, which translates the positive sales leader growth as well. We continue to believe that Velocity will be a meaningful contributor [Technical Difficulty] (00:08:46) 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 to the quarter driven by our focus on [Technical Difficulty] (00:09:04) growth, which is generating positive results in each of our [Technical Difficulty] (00:09:09) world.

In Mainland China, we grew [Technical Difficulty] (00:09:10) revenue by 33%, which translates to [[Technical Difficulty] (00:09:16) 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 furred 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 the 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 up1 % 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 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 and 3% in local currency amidst ongoing environmental and economic challenges.

However, we've begun seeing improvements in customer acquisition related to our initial rollout of the three key strategies, 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 continue to expand throughout the region, including larger direct selling markets like France. Customer growth of 14% was driven by [Technical Difficulty] (00:12:03) as well as other social [Technical Difficulty] (00:12:05).

So in summary, it was a very strong quarter with solid results from each of our markets driven by our platforms, product 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..

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 Investor 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 $0.90, improving 17% year-over-year.

Quarterly earnings per share were [Technical Difficulty] (00:13:18) by the previously guided [Technical Difficulty] (00:13:23) and $0.13 by a foreign currency translation loss. The $0.13 foreign currency charge comes primarily from the strengthening of the U.S.

dollar in the last part of the quarter, particularly against the Chinese RMB and Argentina peso. We translate our intercompany balances based on the foreign currency rate at the end of the quarter. And net loss is reflected in the other income expense line of our income statement.

Without these two items, our earnings would have been $1.08, 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 remain steady at 77.9%. We anticipate our gross margin will improve modestly through the balance of the year for two reasons.

First, we will begin to see sell-through benefits of the product 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 non-commissionable 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 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 [Technical Difficulty] (00:16:39). We continue to expect a $0.04 charge in the third quarter and a $0.04 in 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 15% to 19% growth, and [Technical Difficulty] (00:17:05) 3% foreign currency headwind. We project Q3 earnings per share of $0.93 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 at 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 $3.65 including $0.16 in purchase accounting charges.

We did not [Technical Difficulty] (00:18:00) top end of this range due to the unexpected [Technical Difficulty] (00:18:04) foreign currency charge in the second quarter and [Technical Difficulty] (00:18:08) potential impact from translation losses due to a strengthening dollar.

Currently, we do not anticipate the recently inactive tariffs to materially impact our operations or financial results. However, as a result of recent global trade disputes we have seen 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..

Thank you. Our first question comes from Tim Ramey with Pivotal Research. Your line is now open..

Thanks so much. The foreign currency translation impact should – I know that's going to be impossible or very difficult to forecast that should we see that likely go to zero in the third quarter 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?.

Yeah. Let me take a shot at that, Tim. Thank you for the question, hopefully you can hear us, okay, we're understanding that there is 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 3. And that's what's hard to project. We have a really hard time [Technical Difficulty] (00:20:22) model where we expect that might be..

Great. And again, the charge for the purchase accounting is non-cash.

And I think, as I recall, maybe related to your inventory step-up, or what was the direct reason for that?.

Yeah. There is two pieces of it. It's the amortization of intangibles, and it's the backlog that we had not shipped, and a split roughly $2 million to revenue and $1 million to G&A..

Sounds great. Thanks so much..

Okay. Thank you, Tim..

Thank you. And our next question comes from Steph Wissink with Jefferies. Your line is now open..

Good afternoon, everyone. Two really quick questions. 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, this is 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 with the different markets of the world? Thank you..

Let me take the quick shot and then Ryan will finish up the question. 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 millennials and the younger demographic. So, we like that a lot.

In terms of the other social selling product, it's primarily two different products, Powerlips, 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 be then rolling into our Asian markets in the fall. Let me turn it to Ryan to speak more specifically on some of these..

Yeah. No, no great question, Steph on this.

For LumiSpa, to your point we're excited about the product because of its reach across demographics that we [Technical Difficulty] (00:22:42) a very popular product as the [Technical Difficulty] (00:22:47) Gen X, baby boomers as well, particularly I was excited about acne though because of the target toward 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 – we're 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 [Technical Difficulty] (00:23:27), that you're that you're asking about, I'm not sure if you're referring [Technical Difficulty] (00:23:31) themselves, but we are [Technical Difficulty] (00:23:35) providing digital tools. As I mentioned, [Technical Difficulty] (00:23:37) platform is a good one.

We have another very effective tool that since launched in Korea on a local platform [Technical Difficulty] (00:23:47) doing very well. And then, the rest of the world we've been [Technical Difficulty] (00:23:51) series of tests and [Technical Difficulty] (00:23:57) tools. And those will continue iteratively or in an agile form moving forward.

So, there's no specific schedule that we will go through here in detail, but know that they are being implemented currently and will continue to do so really moving forward..

Thank you and congrats on a great quarter..

Thank you..

Thank you, Steph..

Thank you. And our next question comes from Faiza Alwy with Deutsche Bank. Your line is now open..

Yes. Hi. Good morning. Sorry, good evening..

Hi, Faiza..

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 that.

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?.

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

Yeah. Just given, like there's some concern that – just given the movements in the renminbi like sort of spending in China is going to get impacted or the Chinese – like just the consumer confidence in China might get impacted.

So just – like what kind of trends are you seeing in the last few weeks?.

Yeah. We really [Technical Difficulty] (00:25:24) way our business is trending in China and [Technical Difficulty] (00:25:29) have been trending this way for the last several quarters. So, it's 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 a follow on growth in our customer base. And it really has been now boosted with the adoption of 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 eight weeks made quite a move.

And it's around [ph] 6.8 (00:26:05) or so today. I don't see it necessarily impacting our Chinese consumer, but [Technical Difficulty] (00:26:11) the way we report back in U.S. dollars. [Technical Difficulty] (00:26:15) today the consumption and the interest in our business model remains very, very strong in China..

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

Okay, okay. Great. And then, could you talk a little bit about the acquisition 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?.

Yeah, 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] (00:27:07) companies as well and we see good growth opportunities there. [Technical Difficulty] (00:27:11) was about $22 million, $22.7 million, we see that growing. We see these businesses [Technical Difficulty] (00:27:19) 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..

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. Anymore color around that would be helpful..

Yes. Sure, Faiza. In fact as we discussed – 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.

So, 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 and 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 formulae 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 [Technical Difficulty] (00:29:10).

So we keep [Technical Difficulty] (00:29:15) introduced, but [indiscernible] (00:29:19) very powerful product in a very strong growth [Technical Difficulty] (00:29:23) the nutrition space..

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 be – will happen this year and maybe if you could give us a cash flow guidance for the year?.

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 as – does it make more sense for us to pay down debt or repurchase shares. We historically bought between 1% and 2% of our shares back.

I would believe that we will continue along that same path..

Okay. Thank you..

Thank you. And our next question comes from Olivia Tong with Bank of America Merrill Lynch. Your line is now open..

Great. Thank you. 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 non-commissionable revenue contribute to the top line this quarter? Thank you..

Yeah. 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 in 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 have this quarter in Korea and China. So generally, the operating [Technical Difficulty] (00:31:29) very strong.

It produced without [Technical Difficulty] (00:31:32) it's easy to identify because [Technical Difficulty] (00:31:35) below the operating income line on P&L [Technical Difficulty] (00:31:41). So, when you take out that it really – 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 works. We're not concerned I should say from a profitability standpoint.

Are you there Olivia?.

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 two line items or is that just the non-commissionable revenue, obviously you don't get selling expense on that.

And then the conventions that are kind of causing that shift this quarter between G&A and selling expense?.

Yeah. Thanks, Olivia. I can take that one. So, there weren't any significant spend in conventions in the prior year. I think that was the year that we had our global convention. So, that $13 million is largely incremental. There will be shifting in the line in the P&L.

We mentioned that we had $22.7 million of non-commissionable revenue from our manufacturing partner. 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..

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 do you mean by that? Do you mean it will 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?.

Yeah. It will be up sequentially from what we saw in the first half of this year, both [Technical Difficulty] (00:33:41) above where we were in Q1 [Technical Difficulty] (00:33:43) for a couple of reasons.

We will have some manufacturing [indiscernible] (00:33:47), which will take into account [Technical Difficulty] (00:33:52) work we've been doing on that product as well as some of our other products. And then, we will see the sell-through benefits of the product that we purchased from our manufacturing entities..

Got it. And then just lastly the guidance, you obviously have Q3 outlook and then we can figure (00:34:09) 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 a tough comps that's driving that muted Q4 outlook?.

Good question, and you're right, as we forecast [Technical Difficulty] (00:34:36) growth as you know in our [Technical Difficulty] (00:34:37) guidance we were showing a decline in Q4 because we're comparing against the [ph] $113 million LTL (00:34:44) 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 play to the fact that the business is trending very strong with the local currency growth I think in Mark's guidance that he provided 5% to 7% range for the fourth quarter, that's comparing against an [indiscernible] (00:35:16) in the prior year quarter.

So, the business is strong, we're encouraged by the way it continues to trend and that's reflected in our guidance that we provided..

Great. Thank you..

Thank you..

Thank you. And our next question comes from Doug Lane with Lane research. Your line is now open..

Doug, we can't hear you.

Are you on mute?.

Once again, our next question comes from Doug Lane with Lane research. Your line is now open..

Maybe we go to the next one and see if Doug can come back in..

Understood. Our next question comes from Beth Kite with Citigroup. Your line is now open..

Terrific. Hi, everyone..

Hi Beth..

Hi, Hello. Hello. I was wondering if we could chat a little bit more Ryan, with (00:36:18) talking about with social selling portfolio. And I know you mentioned specifically [Technical Difficulty] (00:36:22) I think 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, new products starting [indiscernible] (00:36:39) 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 I think there's 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..

Great. Yeah, Beth, great question.

So, to maybe give a little more clarity on [Technical Difficulty] (00:37:01) as you mentioned, we previewed a series of products and product concepts that [Technical Difficulty] (00:37:08) last October and those products and [Technical Difficulty] (00:37:11) staged out over the course of the coming two years prior to our next live event.

So, some of those products were still in concept. For example, [indiscernible] (00:37:22), which is one of the interest – the high interest [ph] side of feel (00:37:25), product concept that's currently in process of final development 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 region, Latin America.

Now that you know we 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 sold it in a few key markets, they'll roll market by market moving forward. And so, we do continue to have additional products you mentioned the (00:38:25).

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 (00:38:42) open the conversation and that's really what we see (00:38:46) products very good complements to products like LumiSpa as well in opening the conversations.

But does that help to give a little more color that – I mean, they're really just (00:38:57) the course of the next two years market by market..

Yes, perfect, very much so. And actually when you mentioned LumiSpa reminded me of one in particular for China, you had such nice growth of sales leader 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 sales leaders because obviously we've seen a rise in the fall in the December to March quarters from the previous years?.

Yeah. 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 leaders led growth, and then customers follow on after that.

So, we anticipate as we go in the 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'll anticipate strong growth rates still in China in Q3 as well. So overall, we see really strong trends there and anticipate that to continue..

Excellent. Thank you. Thank you. And so, if I could just go to Mark briefly, can you (00:40:18) some of the dialog around G&A spending and in Olivia's questions.

I think you talked previously about a lot of investment spending you're doing, right, sort of probably a whole lot of markets around the world, I think you specifically 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 – sort of moving around of large events, and obviously, I think the third quarter here we won't have that (00:40:52) 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?.

Yeah. 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 infrastructure, we continue to invest in IT and building out our digital initiative 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..

Perfect. And I guess then – I'm sorry. If I could (00:41:51) last one, 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 timeframe you would have liked to have seen?.

Yeah, 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 (00:42:26) that product, we started looking at ways to optimize costs including expanding our manufacturing capabilities.

And we're going to start seeing the benefit of that in Q3 and even a little bit stronger in Q4..

Perfect. Thank you all very much..

Thanks, Beth..

Thank you. And our next question comes from Mark Astrachan from Stifel. Your line is now open..

Yeah. Thanks, and good afternoon, everyone..

Hey, Mark..

Wanted to ask, so $22.7 million from acquisitions in the second quarter, I want to verify if 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 could give a little bit of clarity there that would be great..

Yeah, sure. The $22 million was correct for the second quarter, I think it was $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 into year-end, it's a little bit softer.

So, yeah, right about that same level for the next couple of quarters, and then we do anticipate some slight growth of that coming into next year in 2019..

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 non-commissionable 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 levers 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?.

Yeah. 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 incentive for us (00:44:30). The 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 impact – that's on the core Nu Skin business that we're talking about. It also impacts the roll-out of our Velocity enhancements.

(00:44:50) It should not increase very much our overall selling expense, the Velocity program, (00:44:57) should be pretty close to the same, but sometimes with the rollout may impact one quarter to the next one, how the expense flow. So, yeah, generally I think 40% is a little bit lower than we would anticipate in the next two quarters..

For core Nu Skin business for sure..

Got it. Okay.

And then also just one last clarification, so on the acquisitions, I think you had said historically the operating margins would 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?.

Yeah, that's correct, Mark. So, right now as Mark mentioned, it's about $3 million a quarter, that was dropped just slightly as acquisition accounting expense or purchase accounting expense.

So right now, we're not showing a lot [Technical Difficulty] (00:45:47) earnings per share [Technical Difficulty] (00:45:50) margin, but that will change beginning of next [Technical Difficulty] (00:45:53) low-double-digit operating margin for those entities..

Got it. Okay. Thank you..

Thank you..

Thanks, Mark..

Thank you. And once again, we have a question from Doug Lane with Lane Research. Your line is now open..

Hi. Sorry about that. Good afternoon everybody..

Hi. Your sound is clear right now, so that's good..

Oh! Good, all right, so 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 very successes with AP-24 and Powerlips and Insta Glow and Clear Action, and can you give us a feel for how does the lifecycle for these initiatives fold out? I mean, was any one of those particularly big in one quarter, and then it moved to another one in another quarter? How does the lifecycle for these initiatives play out?.

Yeah, when we really move to social selling, and I give Ryan a lot of credit for his vision around this move towards social selling, the first product [Technical Difficulty] (00:47:01) our AP-24 toothpaste, it's a whitening paste that is just really, it not only pickup, [indiscernible] (00:47:11) really, really steady [Technical Difficulty] (00:47:12) the last 18 months.

What we've done as we go forward and by the way it's producing around $20 million a quarter in that product. What we've done is now follow that on with the lip gloss and some other products that continue to keep that product in the life going forward.

Because they sell at a lower price points generally, the margins are good, but they're a low store price point. They don't necessarily move the needle on the overall revenue lines in a single quarter.

However, what we see is a strong customer acquisition with some of those customers and turning into sales leaders and really driving the business going forward.

So, it's really a great lead into interest to customer and our products 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..

Oh, that's interesting. Okay.

So, will 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?.

Yeah. The [Technical Difficulty] (00:48:27) the product portfolio is that it keeps all the other products in play, right. We can continue to follow it on with products that work very well, for example with a lip-gloss that we came out with a Smile Pop we call it, that keep 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 PPP strategy (00:48:54), that product strategy is really to continue to enhance social sharing opportunity and that's really new products come into market more quickly.

I give credit to a couple of things. Number one, our marketing teams, who have adjusted their strategy. Our sales people obviously who have bought in and are really moving the social sharing.

And then, we try to build additional capability both internally and with our manufacturing partners, so we're more capable of getting product to the market more quickly..

[Technical Difficulty] (00:49:25) just to add on to that – that point, Doug. Dr. Chang is here, representing our research and development.

And 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 LPOs and that rhythm that was going on.

What we've been able to do with social sharing is refined the LPO cycle and enable some of these innovations that are actually in-house to help the market. And so, it's exciting to see a lot of these product concepts really get out there, engage fraction 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 in the middle of summer now, [Technical Difficulty] (00:50:22) Southern Hemisphere will pick up there [Technical Difficulty] (00:50:25) the proper time there.

So, [Technical Difficulty] (00:50:29) to make our innovations more accessible and leverage the capabilities we have built in to Joe's team, the R&D organization..

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 three quarters 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 six, 12 months..

Yeah. These are very important markets to our ongoing success. What I'm most encouraged about is we're just [Technical Difficulty] (00:51:19) implementing our customer growth strategy there, both Korea and Japan.

So, new products starting to hit the market, the Velocity [indiscernible] (00:51:30) change in Japan as of the 1st of July and going into Korean border. We have seen an uptick in [Technical Difficulty] (00:51:39) acquisitions in the last few months in both of those markets [Technical Difficulty] (00:51:41).

So, really, we believe we have the right [Technical Difficulty] (00:51:46). It's now implementing [indiscernible] (00:51:48) be able to turn those businesses in the right direction. We're encouraged that they seem – the trend 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 thesis 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 sign 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 the strategy is going and it will start to have an impact..

And I would just add to that that point regarding the importance of social sharing in both of those markets. These two markets are very advanced skin care and anti-aging markets because of the demographics in both markets. So, we've done very well historically in that anti-aging 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 will be better positioned in those markets to drive future growth.

So, this social sharing element is key to expanding our demographic reach..

Okay. That's helpful. Thank you..

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 for continued growth and progress in the business and thank you all for being part of our call today. Have a great afternoon..

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