Q4 2019 Earnings Call
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Hi, all participants are in listen only mode. Later, we'll conduct a question and answer session and instructions will follow at that time. As a reminder, this conference is being recorded I'll now turn to cool over to Mr., Scott Pod Vice President of Investor Relations. Please go ahead Sir.
Thank you, we and good afternoon, everyone on the call with me today are rich Moore, Chief Executive Officer lined up your ski President Mark learns Chief Financial Officer, and Dr., Joe chain, Chief Scientific officer on todays call comments will be made did include some forward looking statements. These statements involve risks and uncertainties and naturally.
Well its may differ materially from those discussed were anticipated.
Please refer to today's earnings release, and our FCC filing for complete discussion of these risks.
Also during the call certain financial numbers, maybe discuss.
That differ from comparable numbers obtained in our financial statements. We believe these non-GAAP financial numbers assisted comparing period to period results in a more consistent manner.
Please refer to our Investor page at IR got Nu skin Dot com.
For any required reconciliation of non-GAAP numbers I'll now turn the time over to rich.
Good afternoon, everyone and thank you for joining us today with everything that is going on in the world right. Now. We appreciate you taking time to participate in today's call.
Before I speak more about the broader global issues, let's take a couple of minutes and go over our Q4 in 2019 results.
Our fourth quarter finished in line with our expectation with revenue of $583.4 million and earnings per share of 72 cents.
Our markets generally performed as we had modeled although in mainland China. We continued to fill the effects of the meeting restrictions and negative media from earlier in the year.
For 2019, our revenue was $2.42 billion down, 10% or 7% in constant currency when adjusting for the 3% currency headwind throughout the year.
Earnings per share where $3.10.
Overall, our business results were greatly impacted by the events in China, which caused our China business to retreat, 15% in local currency for the year.
However, we are confident in our long term position and our future opportunities in China, and we have strong product and digital initiatives lined up for 2020.
Early in the fourth quarter, we held a global convention in Salt Lake City with leaders from around the world in attendance and tens of thousands more participating via livestream. During the event, we aligned our salesforce around upcoming initiatives and outlined our product strategy for 2020 generating energy and enthusiasm among our.
Sales leaders and setting setting the stage for the upcoming year.
We're also pleased with the performance of our manufacturing entities reporting 24% growth in the quarter and 35% growth for the year. These partner companies are contributing to improvements in our revenue operating margin cost efficiencies and product innovation and we anticipate continued growth in 2012.
Okay.
Before we discuss our business in China, and our outlook for 2020, I want to express our sincere concern for everyone being impacted by the recent spread of Corona virus.
Our top priority is the health and wellness of our customers our sales leaders and our employees in mainland China and around the world and we are taking proactive an appropriate measures to protect them.
We're also working carefully with local and international authorities regarding this issue.
Accordingly, beginning in mid January we suspended in person meetings in China and have ask our corporate employees in Shanghai to work from home.
Based on collaboration with officials in Shanghai, We plan to keep our corporate offices close through February 24, when we will reevaluate based on conditions at that time.
As of this week, our manufacturing and distribution centers are starting back up and we expect they will soon be fully operational.
Over the past year I've had the privilege of travel into China numerous times.
Hi, treasure my relationships with friends employees and business partners in this beautiful part of the World and I hope and pray that the situation where result be resolved soon and look forward to returning to China in the near future.
Although it's difficult to understand the full effect of Corona virus on our business. We do anticipate a significant short term impact as public gatherings and travel remain restrictive, which we believe will reduce the number and effectiveness of our sales leaders engaged in our business.
While we have strong plans to regenerate growth in our business in China and around the world, which Brian will speak about in a moment, we fill it is best to be cautious in our financial modeling for 2020, and we're estimating a revenue decline of 20% to 25% in mainland China.
The majority of this decline should be in the first half of the year and we believe our business will recover in the second half with the launch of our new beauty device.
Our experienced management teams are helping our sales leaders work through this temporary issue.
And we will continue to invest in our customer and sales leader initiatives as we see great future for our business in China.
I will now turn the call over to Ryan to provide more detail around our global business and following Ryan Mark will address our financial results and walk through our 2020 guidance Ryan Thanks, Rich and good afternoon, everyone.
We spoken at length in the past couple of years about our long term strategy, we grow our business by empowering sales leaders to grow customers by providing engaging technology platforms, enabling products and empowering programs. We remain committed to this strategy here and are actively refining our plans as we navigate a changing global environment.
I want to spend the next few minutes talking about what we accomplished in the fourth quarter and how we plan to execute in 2020.
Before I walk you through the highlights of our reporting segments for the quarter I think it would be helpful to provide you with broader context on the full year of 2019 as Q4 was effectively a result of the full years performance significant negative media coverage of the health food and direct selling industries in mainland China, and the resulting governor.
Restrictions on meetings throughout the year had a cumulative impact on our ability to create and retain sales leaders are meeting strategy plays a significant role in creating training and developing new sales leaders.
However, we've learned a lot through our experiences in 2019, which will benefit us into 2020 and beyond for instance, we have accelerated our transition to a digital first approach including.
Online product Expo and promotions, which helped us to drive continued customer activity in increased sales leader productivity. We also began the development of a new digital training platform, which began rolling out. This month. We believe this platform will help reduce our reliance on meetings in the future edited as it is fully implemented which I'll speak to more and.
Moment.
In general the remainder of art segments performed largely in line with our expectations a few of the highlights.
Or insights into those global results are as follows improved sequential trends in our Americas and Pacific region fueled by growth in Pacific, Mexico, and Colombia, but offset by continued instability of Argentina stabilization with improving sequential trends in South Korea, even as we faced a difficult year over year comparison from a success.
Yes for restage of our new skin, one eightyc skincare system in the prior year improvement in Japan, where we saw a 2% year over year growth continued challenges in Hong Kong impacted by ongoing social instances.
Mixed results in southeast Asia, with double digit growth in Indonesia, offset by softness and other key markets.
And improving sequential trends in EMEA due to the positive results from Black Friday and holiday promotions.
Next let me provide some updates on our long term strategy from a technology perspective, our 29 team focus was migrating to the cloud to increase the scalability and flexibility of our technology infrastructure. We completed this migration in the latter half of the year. We also made great progress on our digital first approach.
Roche with more than 80% of our global revenue and more than 90% of our global transactions now taking place online.
For 2020, we're now focused focusing on enhancing our customer experiences across all of our digital touch points.
For example in mainland China, We recently launched phase one of our new town digital App Newtown enables our sales leaders to digitally attracted acquired new customers promote and sell products and train new sales leaders. We will also leverages technology to improve education and development of our Salesforce, which we.
Believe will will reduce our reliance on in person meetings over time.
This will help us build a stronger foundation to return mainland China to growth.
Regarding our product strategy in 2019, we relaunched our new galvanic spot device, which was our best selling product in the fourth quarter, followed by luma spot.
One key learning we've had is that restage products did not generate the same incremental results as a new hero product, particularly in light of a challenge business environment.
We have a long history of launching new hero products. Approximately every two to three years as rich mentioned in the second half of 2020, we plan to launch our next T. Rowe product and innovative beauty device system targeted towards the emerging skincare enthusiast market. It will be our first hero product launch since Loomis spot in Q4 2017.
Which we believe we'll have a positive impact on our business. We began our global leadership alignment process in January and will extend product training throughout the coming quarters, leading up to a global preview beginning in the second half of 2020.
Finally for empowering programs, we continue to optimize velocity, our sales compensation plan as a key part of our effort to attract and retain sales leaders by enhancing their productivity. In 2020. We will also continue to expand our customer loyalty programs around the world to enhance retention and lifetime value.
We remain confident in our long term strategy and that our 2020 plans will enable us to return to growth is landscape improves we look forward to with from resolved and full confidence in our team around the world with that I'll turn the call over to Mark.
Yes, Ryan.
I will walk through our financial results for the fourth quarter. The full year of 2019, and provide Q1 and full year Twentytwenty guidance.
As a reminder, you can find additional financial information in our release and on the Investor section of our website.
Fourth quarter revenue came in above the midpoint of our guidance at $583.4 million and was negatively impacted 1% or approximately $6 million by unfavorable foreign currency fluctuations.
For the full year, our revenue was $2.42 billion and was negatively impacted 3% or $82 million by foreign currency fluctuations.
Fourth quarter earnings per share were 72 cents.
Compared to a negative 32 cents, which included a $1.37 cents impact from impairment and restructuring charges in the prior year.
Earnings per share for the year were $3 than 10 cents compared to earnings of $2.16, which was inclusive of the impairment and restructuring charges.
Gross margin for the quarter was 75.9% compared to 76.3% in the prior year quarter.
The difference comes primarily from our manufacturing segment, making up a larger percentage of revenue.
New Skus and gross margin improved to 78.5% compared to 77.9% in the prior year.
Selling expense as a percent of revenue was 39.1% compared to 39.4% in the prior year.
Selling expense for the new skin business was 41.3% compared to 40.9% in the prior year.
General and administrative expense as a percent of revenue was 27.4% compared to 23.9% in the prior year.
As expected general and administrative expense was impacted approximately $11 million by our global life convention during the quarter.
The other income expense line reflects a $1.1 million expense compared to a 4.3 million dollar expense in the prior year.
During the quarter, we paid $20.6 million than dividends and did not repurchase any stock.
Our tax rate for the quarter was 25.1%.
As rich noted we anticipate our first quarter annual results will be impacted due to the outbreak of the Corona virus due to the uncertainties surrounding the situation our guidance includes a larger than normal range.
Our revenue guidance for the first quarter is 482 $510 million and includes an approximate 2% to 3% foreign currency headwind.
We project Q1 earnings per share of 23 to 33 cents, which assumes a tax rate of 33% to 36%.
Note that our EPS guidance is disproportionately lower than our revenue guidance for a couple of reasons.
First the revenue reduction come primarily from China, one of our most profitable regions.
Second we view this as a temporary disruption and we will continue to invest strategically to return this market to growth as soon as possible.
This impacts both our quarterly and annual guidance.
For the full year, we anticipate annual revenue in the 2.17 to 2.30 billion dollar range inclusive of an approximate negative one to negative to foreign currency impact.
We are projecting earnings per share of $2 to $2 in 40 cents.
As rich mentioned, our guidance anticipate a return to growth in the fourth quarter.
Our annual guidance assumes the following.
Mainland China revenue decline of 20% to 25%.
Gross margin, 75% to 76%.
With new screen gross margin, 78% to 79%.
Selling expense.
39% to 40% with new skin selling expense, 41% to 42%.
GNSS expense, 26% to 27%.
Operating margin, 9% to 10%.
Tax rate, 31% to 37%.
Capital expense $60 million to $70 million, plus additional capital spending up to $18 million, depending on the timing of the construction of our China factory.
You'll also note that we increased our dividend for the 19th consecutive year.
We have a strong balance sheet and cash position and we intend to use this to increase shareholder value.
We have approximately $470 million remaining in our stock repurchase authorization.
With that operator, we will now open up the call for questions.
Ladies and gentlemen, if you have the question at this time. Please press Star then the number one key on their Touchstone telephone. If your question that's been answered arguably steering gears fall from the Q.
Punky will cost we just a moment.
We have a question Tom Filandro I'll read from Deutsche Bank Your line open.
Yes, hi.
So my first question is just.
On revenues in China in the quarter I'm curious if that was in line with what you were expecting going into the quarter.
Because it feels like there was a bit of a sequential decline from three Q and you Didnt Miss at least what I was expecting so I'm curious how you think about just on revenue number in the quarter.
Yes. Thank you five that we the revenues really for almost all of our regions were in line with our expectation for the quarters, we had modeled China about where it came in.
And we were not surprised or it was according to what we plan.
Okay and then.
Hi, I'm.
I'm curious how you talked about your guidance for next year and potentially how that changed as the Corona virus news spread and impacted your business in January.
So if we could maybe disaggregate I know you talked about China being 20% to 25%.
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Could you say how much of that impact is corona virus related and how much of it is just lingering impact from.
2019 regulatory disruptions.
Yes. Thank you let me take a shot and then mark can add some more detail to this as we were preparing our guidance at the beginning of the year and before Corona virus had really broken out we anticipated a about a flat year as what we would have guided to.
Slightly down to slightly up so you can see that this corona virus impacted two things one the dollar has strengthened during that time, so theres, an additional about 1% of FX headwind that we're anticipating.
Secondly, most of the decline, although corona virus will impact more than just mainland China.
Most of the decline is coming from mainland China.
Which we would have projected being close to flat for the year to down about 20% to 25%. So you can see most of the impact in the revenue line is coming from mainland China.
Which definitely has an impact on our profitability as well.
The only thing I would add is.
As rich mentioned, we believe the krona virus, we will have impact on in other regions of the world in particularly at our other Asian markets and so we did also reduce our guidance models on for Korea, Japan.
Japan in Southeast Asia, All we expect all of us to grow slightly below what our historical averages are.
Okay. So at this point so I know you gave the guidance for one Q are you expecting kind of normalization as we get into two Q.
So I know you're not specifically guiding for Twoq you at this point, but if we think about China being down 20%, 25% in the first quarter. At this point how are you thinking about and I know you said growth at for Q like how should we think about.
Twoq and Threeq you just.
That.
Down in China will be more severe in the first half of the yearend 20, or 25% with our annual guidance for that market.
We would anticipate what we built into the model as really a more severe impact in the first half of the year. We do believe we'll have a strong product launch in the fourth quarter, specifically, where we anticipate we'll actually see growth by that point in time as should grow both revenue, but more importantly sales leader and customer growth, which.
It is really the fundamentals continue to see.
Consistent growth going forward so.
The impact is primarily in the first half of the year. It will carry a little bit into the third quarter and then the fourth quarter will benefit from the strong product launch.
Alright. Thank you so much you bet. Thanks.
Your next question from alleviate Tong from Bank of America. Your line is now open.
Great. Thank.
Good afternoon.
I Wonder Phil build I'm talking about the cadence of recovering because it does seem like you're looking for a premium increased from the device launch.
And I guess can you sort of just parse out a little bit more.
Okay.
There is anything that you're seeing right now.
I would imagine there's not a ton of activity.
These categories like is there is there anything they can get picked up just a little bit more like on the ground what's happening.
Now if anything.
Thank you.
It's a really good question Olivia Thank you for that and we will certainly be transparent as we go throughout the first couple of quarters and talking about what's happening specifically with customer and sales later growth but.
I'd like to have Ryan just take a minute and talk through how we align our leadership around a hero product launch and and generally how we see things trend during the year.
This this Ed Olivia as you May recall, we haven't really on a long run.
Model that we use called our alignment and large process here.
Where we work to align our sales force globally around these types of new hero products.
I think back to the Loomis spot being the most recent example in 2017 that process is really an annual process that began in January this year and we continue to align our sales force from our top leadership.
On on down through the broader salesforce throughout the year with the execution of the global previewed Q4.
And then local launches come in the first the following two quarters of Q1 Q2 next year and so we look at this one it from a device innovation perspective, and the system perspective to be very similar to Loomis spots. So if you look at the comparisons back in 2017.
That's that's really where where our planning is based from there in terms of China's specifically and working through that with our leaders obviously as rich mentioned the disruptions locally in terms of how we meet with our leaders in such.
Doug will have an impact in terms of of getting that that full alignment earlier, but to my points in my comments were leveraging our digital technology and new town, specifically to provide the adequate training that we need to build towards that Q4 event.
Got it Okay and then you also mentioned investment.
And I'd love, a little bit more detail.
Spending behind or what you believe it's still mission critical presumably you have to hold your sales leader with our current levels when are they clearly.
Element to reaching levels right now so what else is going on that that's going to continue to to the costs and where can you make some notable.
When the new cars in order to offset some of the overall costs.
Yes, yes. Good question Olivia we have we believe this is not a sort of foundational issue it sort of a temporary issue that we have to work for you. So we'll continue to hold their sales leaders there'll be some expense around selling expense for sure. We're investing in brand building opportunity there in China, specifically that we think are important at this.
Point in time, and then we continue to invest in our digital initiatives that we think will be really valuable going forward. So those are the three primary.
Investments in China, there are some additional expenses, obviously to the Corona virus that will impact a slightly but if it were more foundational would be much more aggressive and saying we have to adjust the foundation of the expense structure.
We do believe this is temporary we believe our salesforce is anxious to go to work as soon as.
The environment improves and we'll see the business come back.
Got it and then just lastly that clean and 35 million on cash could you just talk through a little bit where where its domiciled.
Yes, so we have made progress in moving our cash on particularly out of China. So in China, we have about $75 million in cash throughout the rest is is relatively evenly disbursed around the rules with the large from care in Provo as well.
Got it thank you.
Thanks, Libya.
Your next question from Steph Wissink from Jefferies. Your line is now open.
Thank you I wanted to follow up on the digital training can you just remind us how many markets today have access to that platform and give us a sense by the fourth quarter, new product lines, how many of your global markets will be onboard and using that platform.
Yes, we have a step we have really two platforms that we run globally. One at one is in China with our Ali Baba partners. The other is here in to.
Located for the rest of the world.
With our eight that we U.S. partners. So we do have that platform in new town that I was specific specifically commenting on is as I mentioned hit began to rollout at the end of last year and earlier this year on the training side. The we do have LMS are learning management system support.
On our global platform as well that actually is running today. The content is is lighter than it needs to be long term, but we continue to invest in that content globally. So effectively all markets have a learning management system. The Newtown one in China, specifically is is a little more robust.
Based on the local technology ecosystem at our partnerships there we're utilizing those learnings through our global technology organization to benefit mutually both platforms by taking key learnings and practices and spreading them across both of them.
That's great and then my second question is just on customer count growth.
Or lack of growth embedded in your 2020 guidance can you help us think through the balance between leader and customers because you had.
Improved performance in your leader counterfeiting your customer account I wanted to just understand how youre thinking about those two key inputs into the sales growth guidance for the year.
Yes, great Great question staff, we have a real focus around customer growth than we did that when we rolled out our velocity.
Compensation program. So it's really meant to provide a faster and more flexible opportunity for our sales leaders, helping them to be no more productive and really focusing on driving customer growth that we've actually had good success generally in driving customer growth and seeing those initiatives working fairly well around the world the key.
Due to our customer growth this year will really be around a strong product launch and a strong strong product launch to us equals growth in the customer base and in the sales leader number so.
We believe as we go throughout the year, we'll see particularly in the back half of the year stronger numbers in both customers and sales leaders. It's being led initially by customers I think and then it will transition to the sales leaders as they build out a stronger base of customers.
Our plan would be to see good steady growth throughout the year with strength, particularly in the fourth quarter.
Thank you.
Your next question from Dog room from research your line is open.
Hi, good afternoon, everybody I'm, just staying on the whole concept of sales leadership, where your sales leaders are down a lot since that lumispa launching in 2017.
The down about a third and I get that a lot of that's China with what's going on over the past year or so, but if I look at the numbers all the regions are down from that peak.
If the into 2017, when you launch leumi small so you've done a lot with the at the social media and the velocity and what have you, but really is getting away from the LTL model may be a mistake here.
Well I think I would answer thanks for the question Doug at answer first of all of it.
Since that hero product launch, we have had a strong product launch than than which typically is what drives strong customer growth. The end of 2017 with spiked a little bit, particularly if you look at the numbers in China, We had a number of incentives running throughout that year, which hit.
Our sales leader number so I think the better comparison, obviously 2018 with the strong year, we grew the business, 18% that year, and then as we hit China and the disruption with.
The lack of meetings and so forth has really impact about sales leader number around the rest of the world generally even though China. The issues were in China as certainly had a hangover effect on a lot of our other.
Markets, where we have strong Chinese contingents that drive our business as well so.
In the wake of sort of a headwind with the business situation. We didnt have a strong product launch and Thats why we see the other markets.
In terms of sales leader count as well, we feel like we have good plans. This year to help drive that the LTL model or what we had referred to here as an alignment approach to launching a new hero product is really critical to that effort and Ryan spoke about it but it's a constant training and preparation.
For nine months before we actually start selling the product and were inside that window already and moving forward. So that should help drive that sales leader number. Your question is right on because at the end of the day that will be the key to our success. This year to seeing growth net sales later number I think we've got good initiatives that will drive that.
Great rich thanks.
Thank you.
Your next question is from within the Bolton Weiser from deep D.A. Davidson Your line is open.
Hi.
Wondering if you could provide a little more information about.
China and the process.
When you do return to a more normalized meeting process after the crown a virus abates.
Is that going to work in other words, if your voluntarily curtailing meetings.
Is it up to you when you started off meetings or is there some government intervention that even though your voluntarily curtailing. They are still dictating. The meetings. So can you just kinda talk about that and.
And in your guidance and everything when are you assuming that the spread of the disease actually abates.
Like what are you assuming kind of in your thinking when you give this guidance. Thanks.
Yes, Linda so I'll speak to the normalization of meetings certainly in China. It is a collaboration between the company and government officials whenever dealing with large group meetings, we need to get approval are all companies need to get approval for large meetings and so we are in.
Cooperation and collaboration with government officials prior to Corona via virus, you'll recall that we were receiving approvals from government.
Groups to hold meetings, but there were still there were still limitations placed on the number of people in those meetings in some parts of of China.
We we since cease the meetings through the Corona virus activities as we see the light coming through there, we'll we'll plan to open those up and work collectively with the government and government officials on the appropriate size of meetings and location for those meetings and.
I think in terms of our guidance as Mark and I have worked on this very closely it's just really difficult to know.
How quickly will be able to return to sort of normalized business. So for us. Our first focus has really been on developing digital tools, which will allow our salespeople to do their business without having to be in meetings I think thats going to help for sure and then what we've anticipated as the business will stabilize second an.
Orders and then we'll get a push this week.
Launch our strong product in the fourth quarter. So.
It's hard to know exactly but our modeling is I think we've been quite conservative in estimating a pretty big impact in China, specifically as we come out of the new year celebration and.
Really limitations on travel and so forth are pretty strict Gary right now.
Okay, and then just secondly.
I think in your commentary in the past you had alluded to the idea that.
The rollout of velocity was a bit disruptive in some markets can you comment on whether those types of disruption specifically with regard to its implementation whether those disruptions are over with and are there any regions at all that are still kind of feeling some disruption from from that or is it are you into now that.
It's just beneficial to your operations. Thanks.
Yes, there'll always be opportunity to continue to optimize I think where we've seen the biggest challenges when we.
Launched a new compensation structure in a market that didn't really have momentum.
So when there's a change like that.
The business doesn't have momentum behind it it's easy to point to potentially velocity or whatever else as a cause of the reason that things are going quite as well.
Generally we believe the majority of that learning process has happened and now we can refine and help to improve but.
I think at this point in time most of that impact has flowed through our revenue numbers and our sales leader numbers and would anticipate again with strong product initiatives that helps every aspect of the business.
Go better and look better and sales leaders income improvement.
We take our eye off the problems and focus more on the opportunity. So I think a lot of the impact to the sales compensation plan has happened in the benefits of launching a strong product will really come through the compensation plans. We go forward and I would just only add to that that we remain to riches point that always.
For todays to optimize but we remain very optimistic about the model itself and the way. It is built to help us expand or broaden our appeal to a broader demographic of entrepreneurs, we're seeing that play out in terms the number of pay ease.
Customer acquisition and productivity is good it's really just a change in the qualification structure.
For sales leaders that we've worked through but to riches point now we're going be well beyond a year of of implementation and sold I think those those year over year comparisons really normalized.
From this point forward.
Great. Thank you very much.
Thank you.
Your next question from Mark Astrachan from Stifel. Your line open.
Hi, This is Tim really on for Mark.
Please note a question you ended the year with 290 million of accrued expenses can you discuss what liabilities are included in that balance.
General timeline for when those payments are doing and how you plan to fund those given the expected decline and profitability, particularly in the first half the year.
Yes. Thank thank you for the question.
Our accrued liabilities aren't an anomaly of where we are in any given quarter.
We have a strong cash position, we continue to produce cash.
Throughout the course of this year, so I don't see any concerns about the accrued liability number.
Nothing nothing abnormal from a normal year end.
Okay fair enough. Thanks.
Thank you Kimberly.
I think that is the end of the questions and we sure appreciate your time, especially we'd like to thank you for your interest in new scan and despite the temporary slowing in the business due to the outbreak of the krona virus I want to know that us as a management team are very confident that we're set up for a good year, we're confident that we'll be able to grow the business, particularly.
In the fourth quarter of this year as we see things normalize and settle them. So thanks again for your time and we look forward to updating you on our progress as we go throughout this year.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation in has a wonderful going you may all disconnect.
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Or.
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