Good afternoon, ladies and gentlemen, and welcome to the Q4 2019 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 will follow at that time. As a reminder, this conference is being recorded. I'll now turn the call over to Mr. Scott Pond, Vice President of Investor Relations. Please go ahead, sir.
Thank you, Lee, and good afternoon, everyone. 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. On today's 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 filing 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 investor page at ir.nuskin.com for any required reconciliation of non-GAAP numbers. I'll now turning the time over to Ritch.
Good afternoon, everyone, 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 and 2019 results. Our fourth quarter finished in line with our expectations with revenue of $583.4 million and earnings per share of $0.72. Our markets generally performed as we had modeled, although in Mainland China, we continued to feel 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 were $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 live stream. During the event, we aligned our sales force around upcoming initiatives and outlined our product strategy for 2020, generating energy and enthusiasm among our sales leaders and 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 2020. 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 coronavirus. 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 and 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 asked our corporate employees in Shanghai to work from home. Based on collaboration with officials in Shanghai, we plan to keep our corporate offices closed through February 24th, 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 traveling to China numerous times. I treasure my relationships with friends, employees, and business partners in this beautiful part of the world, and I hope and pray that the situation will be resolved soon and look forward to returning to China in the near future. Although it's difficult to understand the full effect of coronavirus on our business, we do anticipate a significant short-term impact as public gatherings and travel remain restricted, 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 Ryan will speak about in a moment, we feel it is best to be cautious in our financial modeling for 2020, and we are estimating a revenue decline of 20%-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, Ritch, good afternoon, everyone. We've 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 via providing engaging technology platforms, enabling products, and empowering programs. We remain committed to this strategy 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 year's performance.
Significant negative media coverage of the health food and direct selling industries in mainland China, and the resulting government restrictions on meetings throughout the year, had a cumulative impact on our ability to create and retain sales leaders. Our meeting strategy plays a significant role in creating, training, and developing new sales leaders. 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 and increase 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 as it is fully implemented, which I'll speak to more in a moment.
In general, the remainder of our 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 face the difficult year-over-year comparison from a successful restage of our Nu Skin 180° Skincare system in the prior year. Improvement in Japan, where we saw 2% year-over-year growth. Continued challenges in Hong Kong impacted by ongoing social unrest. Mixed results in Southeast Asia with double-digit growth in Indonesia, offset by softness in other key markets. 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 2019 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 with more than 80% of our global revenue and more than 90% of our global transactions now taking place online. For 2020, we are now focusing on enhancing our customer experiences across all of our digital touchpoints. For example, in mainland China, we recently launched phase 1 of our Nu Skin Vera digital app. Nu Skin Vera enables our sales leaders to digitally attract and acquire new customers, promote and sell products, and train new sales leaders.
We will also leverage this technology to improve education and development of our sales force, which we believe 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 ageLOC Galvanic Spa device, which was our best-selling product in the fourth quarter, followed by LumiSpa. One key learning we've had is that restaged products do not generate the same incremental results as a new hero product, particularly in light of a challenged business environment. We have a long history of launching new hero products approximately every two to three years. As Ritch mentioned, in the second half of 2020, we plan to launch our next hero product, an innovative beauty device system targeted towards the emerging skincare enthusiast market.
It will be our first hero product launch since LumiSpa in Q4 2017, which we believe will 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 as the landscape improves. We look forward with firm resolve and full confidence in our team around the world.
With that, I'll turn the call over to Mark.
Thanks, Ryan. I will walk through our financial results for the fourth quarter, the full year of 2019, and provide Q1 and full year 2020 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 $0.72 compared to a - $0.32, which included a $1.37 impact from impairment and restructuring charges in the prior year. Earnings per share for the year were $3.10 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. Nu Skin 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 Nu 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 live convention during the quarter. The other income expense line reflects a $1.1 million expense compared to a $4.3 million expense in the prior year. During the quarter, we paid $20.6 million in dividends and did not repurchase any stock.
Our tax rate for the quarter was 25.1%. As Ritch noted, we anticipate our first quarter and annual results will be impacted due to the outbreak of the coronavirus. Due to the uncertainty surrounding this situation, our guidance includes a larger than normal range. Our revenue guidance for the first quarter is $480 million-$510 million and includes an approximate 2%-3% foreign currency headwind. We project Q1 earnings per share of $0.23-$0.33, which assumes a tax rate of 33%-36%. Note that our EPS guidance is disproportionately lower than our revenue guidance for a couple of reasons. The revenue reduction comes primarily from China, one of our most profitable regions. 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 billion-$2.30 billion range, inclusive of an approximate -1% to -2% foreign currency impact. We are projecting earnings per share of $2-$2.40. As Ritch mentioned, our guidance anticipates a return to growth in the fourth quarter. Our annual guidance assumes the following. Mainland China revenue decline of 20%-25%. Gross margin, 75%-76%, with Nu Skin gross margin 78%-79%. Selling expense, 39%-40%, with Nu Skin selling expense 41%-42%. G&A expense, 26%-27%. Operating margin, 9%-10%. Tax rate, 31%-37%. Capital expense, $60 million-$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 a question at this time, please press star and then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, press the pound key. We'll pause for just a moment. We have a question from Faiza Alwy from Deutsche Bank. Your line is now open.
Yes, hi. 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. It feels like there was a bit of a sequential decline from 3Q, and you didn't miss, at least what I was expecting. I'm curious how you think about just that revenue number in the quarter.
Yeah. Thank you, Faiza. The revenues really for almost all of our regions were in line with our expectation for the quarter. We had it modeled China about where it came in, and we were not surprised or it was according to what we had planned.
Okay. I'm curious how you thought about your guidance for next year and potentially how that changed as the coronavirus news spread and impacted your business in January. If we could disaggregate. I know you talked about China being 20%-25%. Could you say how much of that impact is coronavirus related, and how much of it is just lingering impact from 2019 regulatory disruptions?
Yeah, thank you. Let me take a shot, then Mark can add some more detail to this. As we were preparing our guidance at the beginning of the year and before coronavirus had really broken out, we anticipated about a flat year is what we would've guided to. Slightly down to slightly up. You can see that this coronavirus impacted two things. One, the dollar has strengthened during that time, there's an additional about 1% of FX headwinds that we're anticipating. Secondly, most of the decline, although coronavirus will impact more than just mainland China, most of the decline is coming from mainland China, which we would've projected being close to flat for the year to down about 20%-25%. 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 Ritch mentioned, we believe the coronavirus will have impact in other regions of the world, in particular our other Asian markets. We did also reduce our guidance models for Korea, Japan and Southeast Asia. We expect all of those to grow slightly below what our historical averages are.
Okay. At this point, I know you gave the guidance for 1Q. Are you expecting sort of normalization as we get into 2Q? I know you're not specifically guiding for 2Q 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? I know you said growth at 4Q, how should we think about 2Q and 3Q, just roughly?
The down in China will be more severe in the first half of the year, and then 20%-25% was our annual guidance for that market. We would anticipate, what we've built into the model is 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. It should grow both revenue, but more importantly, sales leader and customer growth, which is really the fundamentals to continue to see consistent growth going forward. 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.
All right. Thank you so much.
You bet. Thanks, Faiza.
Your next question is from Olivia Tong from Bank of America. Your line is now open.
Great, thanks. Good afternoon. I wanted to still build on talking about the cadence of the recovery, because it does seem like you're looking for a pretty meaningful increase from the device launch. I guess, can you sort of just parse that a little bit more if there's anything that you're seeing right now? I would imagine that there's not a ton of activity, but these categories, is there anything that can get picked up? Just a little bit more on the ground what's happening now, if anything. Thanks.
Yeah. It's a really good question, Olivia, thank you for that. We will certainly be transparent as we go throughout these first couple quarters in talking about what's happening specifically with customer and sales layer growth. I'd like to have Ryan just take a minute and talk through how we align our leadership around a hero product launch and generally how we see things trend during the year.
Yeah. Olivia, as you may recall, we have really a long run model that we use called our Alignment and Launch Process here, where we work to align our sales force globally around these types of new hero products. You could think back to the LumiSpa being the most recent example in 2017. That process is really an annual process that began in January this year, we continue to align our sales force from our top leadership on down through the broader sales force throughout the year with the execution of the global preview in Q4. Local launches come in the first, the following two quarters of Q1, Q2 next year. We look at this one from a device innovation perspective and a system perspective to be very similar to LumiSpa. If you look at the comparisons back in 2017, that's really where our planning is based from there.
In terms of China specifically and working through that with our leaders, obviously, as Ritch mentioned, the disruptions locally in terms of how we meet with our leaders and such will have an impact in terms of getting that full alignment earlier. To my points and my comments, we're leveraging our digital technology in Nu Town specifically to provide the adequate training that we need to build towards that Q4 event.
Got it. Okay. You also mentioned investment. I'd love a little bit more detail on what you're spending behind or what you believe is still mission-critical. Presumably, you have to hold your sales leaders at their current levels, even though there's an impediment to reaching those levels right now. What else is going on that's going to continue to be a cost, and where can you make some mitigating maneuvers in order to offset some of the overall costs.
Yeah. Good question, Olivia. We believe this is not a sort of foundational issue. It's sort of a temporary issue that we have to work through. We'll continue to hold our sales leaders. There'll be some expense around selling expense, for sure. We're investing in brand-building opportunities there in China specifically that we think are important at this point in time. We continue to invest in our digital initiatives that we think will be really valuable going forward. Those are the three primary investments in China. There are some additional expenses, obviously, to the coronavirus that will impact us slightly. If it were more foundational, we'd be much more aggressive in saying we have to adjust the foundation of the expense structure. We do believe this is temporary.
We believe our sales force is anxious to go to work as soon as the environment improves, and we'll see the business come back.
Got it. Just lastly, the $335 million in cash, could you just talk through a little bit where it's domiciled?
Yes. We have made progress in moving our cash, particularly out of China. In China, we have about $75 million in cash. The rest is relatively evenly dispersed around the world, with a large chunk here in Provo as well.
Got it. Thank you.
Thanks, Olivia.
Your next question is from Stephanie Wissink from Jefferies. Your line is now open.
Thank you. I want to follow up on the digital training. Can you just remind us how many markets today have access to that platform? Give us a sense by the fourth quarter new product launch, how many of your global markets will be on board and using that platform?
Yeah. Steph, we have really two platforms that we run globally. One is in China, with our Alibaba partners. The other is here, located for the rest of the world with our AWS partners. We do have that platform in Nu Town that I was specifically commenting on is, as I mentioned, had began to roll out at the end of last year and earlier this year on the training side. We do have LMS or learning management system, support on our global platform as well. That actually is running today. The content is lighter than it needs to be long term, but we continue to invest in that content globally. Effectively, all markets have a learning management system. The Nu Town one in China specifically is a little more robust, based on the local technology ecosystem and 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. 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 leaders and customers? You've had some improved performance in your customer count. I'm wanting to just understand how you're thinking about those two key inputs into the sales growth guidance for the year.
Yeah. Great question, Steph. We have a real focus around customer growth, and we did that when we rolled out our Velocity compensation program. It was really meant to provide a faster and more flexible opportunity for our sales leaders, helping them to be more productive and really focusing on driving customer growth. We've actually had good success generally in driving customer growth and seen those initiatives working fairly well around the world. The key to our customer growth this year will really be around a strong product launch. A strong product launch to us equals growth in the customer base and in the sales leader numbers. 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.
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 is from Douglas Lane from Lane Research. Your line is now open.
Oh, hi. Yeah. Good afternoon, everybody. Just staying on the whole concept of sales leadership, where your sales leaders are down a lot since that LumiSpa launch in 2017. They're 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. If I look at the numbers, all the regions are down from that peak at the end of 2017 when you launched LumiSpa. You've done a lot with the social media and the Velocity and what have you. Really, is getting away from the LTO model maybe a mistake here?
Well, Thanks for the question, Doug. I'd answer, first of all, that since that HERO product launch, we haven't had a strong product launch since then, which typically is what drives strong customer growth. The end of 2017 was spiked a little bit, particularly if you look at the numbers in China. We had a number of incentives running throughout that year, which had spiked our sales leader numbers. I think the better comparison, obviously 2018 was a strong year. We grew the business 18% that year. As we hit China and the disruption with the lack of meetings and so forth has really impacted that sales leader number.
Around the rest of the world, generally, even though China, the issues were in China, it certainly had a hangover effect on a lot of our other markets where we have strong Chinese contingents that drive our business as well. In the wake of sort of a headwind with the business situation, we didn't have a strong product launch, and that's why we see the other markets soft in terms of sales leader count as well. We feel like we have good plans this year to help drive that. The LTO model or what we'd refer to here as an alignment approach to launching a new hero product is really critical to that effort. Ryan spoke about it, but it's a constant training and preparation for nine months before we actually start selling the product.
We're 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, just seeing growth in that sales leader number. I think we've got good initiatives that will drive that.
Great, Ritch. Thanks.
Thank you.
Your next question is from Linda Bolton Weiser from D.A. Davidson. Your line is now open.
Hi. I was 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 coronavirus abates. How is that going to work? In other words, if you're voluntarily curtailing meetings, is it up to you when you start up meetings, or is there some government intervention that even though you're voluntarily curtailing, they are still dictating the meetings? Can you just kind of talk about that, and in your guidance and everything, when are you assuming that the spread of the disease actually abates? What are you assuming kind of in your thinking when you give this guidance? Thanks.
Linda. 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, or all companies need to get approval for large meetings. We are in cooperation and collaboration with government officials. Prior to coronavirus, you'll recall that we were receiving approvals from government groups to hold meetings, but there were still limitations placed on the number of people in those meetings in some parts of China. We've since ceased the meetings through the coronavirus activities. As we see the light coming through there, 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.
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 we'll be able to return to sort of normalized business. 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 that's going to help for sure. Then what we've anticipated is that the business will stabilize second and third quarters, and then we'll get a push as we launch our strong product in the fourth quarter. 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 Chinese New Year celebration and really limitations on travel and so forth are pretty strict there right now.
Okay. 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 disruptions, specifically with regard to its implementation, whether those disruptions are over with? Are there any regions at all that are still kind of feeling some disruption from that, or are you into now that it's just beneficial to your operations? Thanks.
There'll always be opportunity to continue to optimize. I think where we've seen the biggest challenge is when we launched a new compensation structure in a market that didn't really have momentum. When there's a change like that and the business doesn't have momentum behind it's easy to point to potentially Velocity or whatever else as a cause of the reason that things aren't going quite as well. Generally, we believe the majority of that learning process has happened, and now we can refine and help to improve. 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, it helps every aspect of the business go better and look better, and sales leaders' income improves, and we take our eye off the problems and focus more on the opportunity.
I think a lot of the impact to the sales compensation plan has happened, and the benefits of launching a strong product will really come through the compensation plan as we go forward.
I would just only add to that, to Ritch's point, there are always opportunities to optimize. 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 of number of payees, customer acquisition, and productivity is good. It's really just a change in the qualification structure for sales leaders that we've worked through. To Ritch's point, now we're going well beyond a year of implementation. I think those year-over-year comparisons really normalize from this point forward.
Great. Thank you very much.
Thank you.
Your next question is from Mark Astrachan from Stifel. Your line is now open.
Hi, this is Kimberly on for Mark. We just had a question. You ended the year with $290 million of accrued expenses. Can you just discuss what liabilities are included in that balance and kind of a general timeline for when those payments are due and how you plan to fund those given the expected decline in profitability, particularly in the first half of the year?
Yeah. 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. I don't see any concerns about the accrued liability number. There's 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 would like to thank you for your interest in Nu Skin, and despite the temporary slowing of the business due to the outbreak of the coronavirus, I want you 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 in. 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, and have a wonderful day. You may all disconnect.