Nu Skin Enterprises' (NUS) CEO Ritch Wood On Q1 2018 Results - Earnings Call Transcript

Apr. 26, 2018 8:36 PM ETNu Skin Enterprises, Inc. (NUS)1 Like
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Nu Skin Enterprises, Inc. (NYSE:NUS) Q1 2018 Earnings Conference Call April 26, 2018 5:00 PM ET

Executives

Scott Pond – Vice President, Investor Relations

Ritch Wood – Chief Executive Officer

Ryan Napierski – President

Mark Lawrence – Chief Financial Officer

Dr. Joe Chang – Chief Scientific Officer

Analysts

Olivia Tong – Bank of America Merrill Lynch

Tim Ramey – Pivotal Research Group

Faiza Alwy – Deutsche Bank

Douglas M. Lane – Lane Research

Beth Kite – Citi

Mark Astrachan – Stifel Nicolaus

Presentation

Operator

Good afternoon ladies and gentlemen, and welcome to the Q1 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 will follow at that time. [Operator Instructions] As a reminder, this call is being recorded.

I would now like to turn the conference over to your host, Mr. Scott Pond, Vice President, Investor Relations.

Scott Pond

Thanks Christine, and thanks everyone for joining us today. 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 includes some forward-looking statements. These statements involve risks and uncertainty, 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 Investor page at ir.nuskin.com for any required reconciliation of non-GAAP numbers.

And with, I'll now turn the time over to Ritch.

Ritch Wood

Thank you, Scott, and good afternoon everyone. Thank you for joining us on this call. As you read in our press release today, Q1 revenue was very strong at $616.2 million. That's up 24% year-over-year and approximately $117 million higher than the first quarter of 2017. This revenue improvement was driven by strong customer growth of 11%, with sales meters up 16%.

We also delivered strong earnings per share of $0.64, a 25% increase over the $0.51 that we reported in the prior year quarter. I would highlight that our earnings per share of $0.64 included a negative impact of $0.12 from the early conversion of a convertible debt instrument, and also a charge of $0.03 related to the amortization of intangibles associated with the recently announced acquisition. Neither of these two items was reflected in our previous guidance of $0.65 to $0.70. I'm very pleased with the first quarter results, which were driven by strong revenue growth and a modestly improved operating margin.

Given our strong first quarter, we are raising our 2018 guidance which Mark will speak to in a few moments. In 2017, we designed our strategy focused on growing our customer base, to engaging platforms, enabling products, and empowering programs. We are still in the early stages of the execution of this strategy. However, we are encouraged by the results we are seeing. Ryan will provide additional color in his commentary.

Our vision to grow this company is beginning to take hold. Our core Nu Skin business continues to strengthen and I'm also enthusiastic about the acquisitions we discussed on our previous earnings call, which solidify our supply chain and help us compete in a fast pace marketplace. While we added 3% to our revenue in the quarter, I'm most encouraged about our improved stability to be more innovative and get products to market faster. These manufacturing partners have state-of-the-art facilities and [indiscernible] to bring the very best products to market. They have strong growth potential and will add to our success.

We also continue to make good progress on our indoor growing initiative. We believe this technology will enable us to produce higher quality and more pure ingredients in an eco-friendly and sustainable manner. We expect to see some of these ingredients added to select Nu Skin products by the end of this year.

I will now turn the call over to Ryan to provide more detail on the execution of our strategy, and then Mark will provide insights into the financial details of this quarter and our increased 2018 guidance. Ryan?

Ryan Napierski

Thanks, Ritch, and good afternoon everyone. As Ritch mentioned, we are encouraged by the early results of our growth strategy as we focus on its three key pillars: Platforms, Products, and Programs. This strategy is focused on expanding our customer base, and we are pleased with solid 11% year-over-year growth. This is key to driving sustained growth of our sales leaders, which increased 16% year-over-year.

Let me give you a little more color on our three strategic pillars. Regarding platforms, social sharing continues to be a powerful way to expand our customer reach. In markets where social sharing efforts are more mature, we are seeing strong improvements in customer acquisition. Our focus is to leverage our experience in these markets to support our sales leaders [indiscernible] with increased training, as well as improved technology and tools to facilitate more effective customer acquisitions and lifetime value. We'll continue to see these tools together with improvements in our technology roll out throughout this year and beyond. I'm also excited about the execution of our products strategy which is gaining momentum.

ageLOC LumiSpa was launched a strong demand in most of our markets and was a key contributor to our results in the quarter. Mainland, China is introducing this product in the second quarter. We're also locking several additional products ideally suited to support social sharing around the world. For example EMEA enjoyed a very successful introduction of our new Powerlips longer lip line in the first quarter.

Finally regarding programs, we initiated the rollout of Velocity our enhanced sales compensation program to our Pacific markets in December. Velocity is intended to reward sales leaders for improved performance in a faster and more flexible manner which is vital for us today. Its initial response strengthens our belief that Velocity will be a meaningful contributor to our business in the future. We initiated Velocity in Taiwan in April and will continue to extend the rollout to North America in June.

Next our strategy of enabling growth throughout the regions; Mainland, China we generated strong customer growth of 14% with constant currency revenue growth of 22%. We saw a large increase in sales leaders in the fourth quarter of 2017 in connection with the global introduction of LumiSpa. As anticipated we had a close introduction decline in sales leaders but are pleased with 41% growth year-over-year. We look forward to the full launch of LumiSpa in the second quarter as well as our sold out Greater China convention that will be held this June in Hong Kong.

Next the Americas Pacific region also had a very strong start to this year with 32% constant currency improvement driven by a 29% increase in our customer base. Our emerging markets are performing very well with Latin America growing rapidly. Additionally North America continues to be a leader in executing our growth strategy and our Pacific markets are responding very well to the introduction of our Velocity sales compensation plan as I stated.

Southeast Asia and EMEA regions are experiencing positive results as well from the execution of our strategies by expanding social sharing to effectively drive solid customer grow with a 20% increase in Southeast Asia and a 15% increase in EMEA.

We're encouraged with the double-digit local currency revenue growth we generated in Hong Kong and Taiwan as a result of LumiSpa and promotional activities related to social sharing. Finally, we're seeing improving trends to South Korea and Japan related to optimism around LumiSpa and social sharing.

Local currency revenue in South Korea was up 1% in the quarter while Japan was down 2%. So we definitely feel that we have a lot of positive initiatives to grow our business by empowering our sales leaders to expand our customer base and look forward to continuing to execute our growth strategy throughout this year. Also we look forward to being with our top sales leaders from around the globe this next week at our Annual Strategy Alignment and Incentive. We will continue to partner with these great talented leaders to grow our business.

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

Mark Lawrence

Thanks, Ryan. I'll take just a few minutes to walk through our first quarter highlights and update our guidance for the year. As a reminder, we provide additional financial information in our release and on the investor section of our website. First quarter revenue was up 24% at $616.2 million driven by core Nu Skin global revenue growth of 14% in constant currency, 7% favorable foreign currency impact, 3% from recent acquisitions and double-digit growth in both our customers and sales leaders.

Our first quarter earnings per share were $0.64 compared to $0.51 in the prior year quarter. As reported in an 8-K filed on February 28, we incurred a charge associated with the early conversion of our convertible notes which was not included in our original guidance and negatively impacted first quarter earnings by $0.12 per share. In addition due to purchase accounting, we incurred a $0.03 charge related to the amortization of intangibles from our recent acquisitions.

We have very strong quarter of earnings against our previous guidance when adjusted for these unanticipated charges and compared with the prior year. You will notice that we have modified our segment disclosure to now include revenue from recent acquisitions in the other category. Additionally, our Pacific markets have now been combined with the Americas region.

Our gross margin for the quarter was 76.3% compared to 77.7% in the prior year quarter. Gross margin in our core Nu Skin business improved 20 basis points over the prior year to 77.9%. The gross margin profile of our recently acquired companies is significantly lower than our core Nu Skin business. We expect to see margin benefits from the product manufactured for our core business by these partners later this year. Settling expenses as a percent of revenue were flat with the prior year, while general and administrative expenses as a percent of revenue improved 170 basis points due primarily to the higher revenue.

Our operating margin improves to 9.6% for the quarter compared to 9.3% in the prior year. Our other income expense line reflects a $1.2 million gain versus a $4.6 million loss in the prior year. During the quarter, we've paid $19.8 million of dividends and repurchased 17.4 million of our stock.

Our remaining share repurchase authorization is $110.6 million. As previously guided, we anticipated an elevated quarterly tax rate due to a FIN 48 tax accrual in Indonesia, our tax rate for the quarter was 41% compared to 34.1% in the prior your quarter. We anticipate the second quarter tax rate to be 33% to 34% with the year at approximately 34%.

We recently completed a refinance of our debt through a new syndicated bank facility which provides for a $400 million term loan and a $350 million revolving credit line. We used the proceeds to settle the convertible notes and the existing credit facility, the new agreement puts us in a strong financial position to grow our business and increase shareholder value. We are pleased with the result of the new manufacturing partners we acquired during the quarter, these companies generated higher revenue than anticipated and have strong growth plans.

Under purchase accounting, various intangible assets are created which need to be amortized over their anticipated value. The most significant impact for our financials will be in 2018 after which the amount will decline significantly and will not be material to our financial results.

For the first quarter of 2018, we incurred a charge of $0.03 and we estimate amortization charges of $0.05 in the second quarter, $0.04 in the third quarter and $0.04 in the fourth quarter.

Our previous guidance did not reflect these purchase accounting adjustments due to the timing of the acquisitions. Our revenue guidance for the second quarter is $630 million to $650 million representing 15% to 18% growth and includes an approximate 5% favorable foreign currency impact.

We project Q2 earnings per share of $0.86 to $0.91. This guidance includes the $0.05 purchase accounting charge previously mentioned. For 2018, we are increasing our revenue guidance by $70 million. Our new range is $2.51 billion to $2.56 billion which includes a favorable foreign currency impact of approximately 3%.

Earnings per share for the year are projected at $3.45 to $3.65 inclusive of the $0.12 charge related to the convertible notes and approximately $0.16 of amortization of intangibles from the acquisitions.

With that, we will now open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Olivia Tong from Bank of America Merrill Lynch. Your line is open.

Olivia Tong

Great, thank you. Actually first just a couple of sort of housekeeping things, you talked about three point benefit from acquisition, is there any seasonality to that, or should we expect that to be similar for the rest of the year quarter-by-quarter? And also is there any benefit to EPS from that?

Ritch Wood

Yes, Olivia, thank you for that question. There really isn't a lot of seasonality in the manufacturing partners businesses. However, the first quarter only included about half the quarter, because the acquisitions were closed in February. So the numbers will be a little bit higher going over. Generally, any profit coming from these acquisitions in this first year will be offset by these amortization charges that Mark just highlighted. So we won't receive a real benefit this year in earnings per share, but going forward is 2019 and forward we should see really nice an improvement there.

Olivia Tong

Got it. Why wasn't the purchase accounting embedded in the outlook up -- why before it wasn't included?

Ritch Wood

It really has to do with timing. After the acquisition is complete, we go through a valuation assessment and that valuations determines how much of the acquisition goes to goodwill, how much of it goes to that unshipped backlog, the other items that need to be amortized, and included in that valuation is also the timeline over which those items need to be amortized.

Olivia Tong

Got it. Okay. And then the sales leaders now seem to be more closely aligned with sales growth, so what's execution for leader in customer growth going forward, you expect to be fairly stable more or less alignment your sales growth going forward and also on velocity, maybe can you compare and contrast performance in markets where it has launched versus those but it hasn't. Thanks.

Ritch Wood

Yes, thank you. Let me take the first step on this and then Ryan can add anything. Our sales leaders are exactly right, trends generally quite closely through revenue and frankly when you're customer number and sale leaders number are close together it's generally quite sustainable as well. So if you look markets-in-market you see that those markets are really adopting our strategy as it relates to social sharing and so forth we see strong growth in customers that is ending followed by growth in sales figures and then in China a little bit different where we have a really strong uptick in people qualifying for the LTL in the fourth quarter as sale leaders and now we see that customer number coming up to support it.

So really important that those two numbers trends together and frankly we like the direction we're seeing and then finally as it relates to your other question about the markets that have adopted velocity it's really only the pacific markets which we put in December, so we've got four months of experience more encouraged by that I think Ryan can speak to what we're seeing with that but that's really the only market that we have any experience from, that's only 0.2% of our revenue, so Ryan do you want to comment on what we…

Ryan Napierski

Simply to address the velocity question LIVE! event we are we're seeing positive result as Rich mentioned in the pacific, the model is really built to enable to greater customer acquisition and in our power of sales leaders to built more effective businesses faster more flexible and that's really what we're seeing improvements in customer acquisition trend, improvement in sales leader productivity. And So far so good it's producing what we had anticipated.

Olivia Tong

Got it. Thank you and then just lastly the consolidation of the Pacific into the Americas, should we read anything into that in terms of like what's driving that it is potentially Americas the next market share to where the velocity gets launched?

Ritch Wood

Yes, thank you. Actually velocity will be launched in the Americas but the purpose for combining them is that's the way we're managing the business today. Our head of our Americas region also oversees the Pacific region. They have a lot in common in terms of what they're doing to roll out their growth strategy and plan, so we had adjusted that over to be more in line with however managing the business.

Olivia Tong

Okay, got it. I'm sorry one last thing. In terms of the $0.12 and $0.03 that are new today, where are those on the P&L?

Ritch Wood

Yes, the $0.12 it's in the other income and expense line and the recent is split between revenue and G&A.

Olivia Tong

Perfect, thank you so much.

Ritch Wood

Thanks Olivia.

Operator

Your next question comes from the line of Tim Ramey from Pivotal Research Group. Your line is open.

Tim Ramey

Thanks so much and congratulations and to have the momentum back?

Ritch Wood

Thank you.

Tim Ramey

The new product contribution if you said that I might have missed it. Is there a way to still how much new products in total contributed to the quarter?

Ritch Wood

Yes, great question, Tim, and the thing I'd most excited about the new product is really see them contributing to your customer growth because that's much more sustainable than just getting revenues caught so a drop lot them follow the only one really had meaningful contribution in the first quarter and that was around $40 million.

Tim Ramey

Okay. And it was 121 in the fourth quarter. I'm trying to remember that?

Ritch Wood

It was about 130.

Tim Ramey

130, okay that's right. And nothing else that really moved the needle in terms of new products for the first quarter?

Ritch Wood

No, I think we saw some excitement coming from products that we had launched both in the U.S. and Europe those are kind of the first two that are introducing some of our socially shareable products like the long lasting lift line Ryan mentioned that actually launched in EMEA in March and had a really nice response to that but the long run Live that long lasting lift where mine as well as our doctor Dana nailed products have both last in the U.S. and are generating good. I think that excitement around that product as well.

Tim Ramey

Right and Mark just back to the other income line. We know there's the $1.2 million of FX and now we know that there's about a $7 million negative related to the convert but it all sort of net to zero, if we take those two things out there must be some other $7 million item in there can you shared any impact on or share any?

Mark Lawrence

Yes, I can give you the puts and takes. There's a number of puts and takes in that line item. If you remember our last earnings call, we highlighted a charge from Malaysia that we expected to receive in the quarter and we did, so back in some out line item there is a step gain from the acquisitions that is in that line item. There is the extinguishment of the convertible debt. They hits inside of their interest expense, FX expense and then interest income those think they all they all more or less washed until about the five number that I shared.

Ritch Wood

They were all really consistent generally to with the guidance that we have provided with the exceptions of the convertible expense that we took when the with the early converts and that we filed an 8-K the 28 of February, and we expected the expense to be around $0.16, came at a little bit lower that is $0.12.

Tim Ramey

Right. And Mark I think I heard you over the step, used to do in the release you said amortization of intangibles, so was there an inventory step up impact as well?

Ryan Napierski

Actually what happens if I need to jump in real quick but there is a when we owned a minority interests in those businesses and when we made a full purchase to get value purchase on that date. Now was actually 18 created, that's' what Mark was seeking to do what in the other income expense.

Tim Ramey

And there was no step up gain on the inventory?

Mark Lawrence

Got it. Okay, thank you so much, and just one more quick one Is there a D&A number you can provide for the 1Q?

Ryan Napierski

Yes, was about $20 million, I think $19 million to $20 million.

Tim Ramey

Thank you.

Operator

Your next question comes from the line of Faiza Alwy from Deutsche Bank. Your line is open.

Faiza Alwy

So I have a couple of questions. First of all, could you just talk a little bit about what's driving the growth in China, sort of what drove specifically the growth in China this quarter because LumiSpa is not flared to be launched until 2Q, so why are there specific products that are just if you could just expand a little bit more what you're seeing in the market there?

Ryan Napierski

Sure Faiza, yes absolutely, yes, we continue to be pleased with the growth in China seeing our customers up and our self leaders. Certainly the business is looking better as a result of excitement around LumiSpa anticipation of that our businesses incentives are really working well there as well. So generally speaking, kind of between those two elements, we are seeing a lot of positive growth there.

Faiza Alwy

Okay, and then may be if you could comment, historically we've seen a very strong correlation between the growth in sales leaders and the organic growth in the business. Could you comment, and we've always struggled was how much is this is correlation because most of the sales leaders sort of qualify or more of your customers qualified to be sales leaders because the sales are higher or because if the sales are higher because the sales leaders have increased. Do you have any sort of perspective on that, especially...

Mark Lawrence

Ryan and I'll both take a shot at that, Faiza. But I'll take a quick shot. The sales leaders really are so key to driving our business and generally they perform to a certain level each month to meet their requirements. Revenue will go up then based upon how many sales leaders we have, and unless we also see a productivity improvement or increase from the sales leaders, which is driven by an increase in customers or excitement around additional products that they are selling.

So it ties very, very closely however it's driven by a lot of different things, the excitement around the business, incentives that we have in place, momentum in the business where a lot of people are coming in to try a new product or just existing products. So we have a lot of initiatives that move that number. Our focus is to really move towards driving customer growth, which then supports the ability of sales leaders to become sales leaders but also to retain as sales leaders.

Ryan Napierski

And simply to add to that, by the -- as you mentioned, I mean, all three of those metrics are critical when we look at revenue, sales leaders and customer and they do move a little bit independently based upon the initiative. So as we saw in Q4 with the product in production, typically our sales leader number will go up initially, followed by customer growth as that new product is -- moves through the channel, which is kind of what we're seeing today. And so they do move -- they're correlated, but they move -- the timing of the moves can vary based upon initiative.

Faiza Alwy

Okay. Perhaps, Mark, could you talk a little bit about -- the G&A was up significantly. So what drove that? And I know we talked about some accounting changes that were going to impact this year. So if you could maybe detail what that impact was if any?

Mark Lawrence

Sure. Yes, so first of all, G&A as a percent of revenue was down year-over-year. So I'm happy with that. Secondly, we do continue to invest in our emerging markets such as Latin America that are showing high growth and high opportunity for growth. And then third, we did bring in the G&A expenses from our acquisitions. When you include all of those items, that's really what made up the increase in G&A.

Faiza Alwy

Okay. Thank you.

Operator

Your next question comes from the line of Douglas M. Lane from Lane Research. Your line is open.

Douglas M. Lane

Hi, everybody. Again, on the 14% organic growth, on the core business is really strong and it sounds like it's better than expected. Can you just tell us basically what your expectations were at the beginning of the quarter and the two or three areas where you saw the upside?

Ritch Wood

Sure, let me speak to it, and Mark can also add anything. We were very, very encouraged about the way the business grew in all of our markets around the world. We virtually saw growth in every single region with Korea seeing slight growth and Japan just slightly down. Outside of that, essentially close to double-digit growth or better in each of our markets. So it really came from everywhere. It was supported by strong customer growth, which again I believe was a more sustainable way to generate growth in our business.

So I'm encouraged with that. Certainly, LumiSpa gave energy and health, was about $40 million in the quarter. And I would say, overall, it was a really -- Africa was spread around the globe, Mark would you add to that?

Mark Lawrence

No, I would add to that as well versus forecasts -- we expected the market to come in -- every market performed at or above our expectations.

Douglas M. Lane

And that's both the sales leaders and the organic sales growth?

Ritch Wood

Yes, exactly.

Douglas M. Lane

Yes, that's pretty strong. Looking at some numbers I had on the acquisitions where I think originally I was looking for $60 million in sales and $0.06 added to DEPS. But obviously, with the amortization of intangibles, that probably goes for like a $0.10 dilution this year. But it sounds like the $60 million in sales should go up, because it's going to be something closer to $70 million this year?

Ritch Wood

Yes, I actually think it'll be a little bit higher than that. We picked up about $15 million in the first quarter. We anticipate probably closer to $25 million here in this quarter and probably in the out quarters as well. So we're seeing really strong growth out of those entities and I think they'll add meaningfully. Obviously, this year we moved some into purchase accounting, but generally their operating margins are -- while they're on different line items, right, they're not -- we have a lower gross margin, but they still have an overall operating margin that's not too far off where our operating margin is.

So going forward, that will be very accretive to our business, but the most important thing is that it fits our vision to really grow this business, to be able to move quicker, to innovate faster and we really think that provides us a competitive advantage down the road.

Douglas M. Lane

No, I understand the longer term advantages, I'm just trying to get the moving parts here, near term under -- in my mind straight. So the sales number is bigger, so it sounds like the contribution, the cash contribution is bigger. And then with the amortization, it's really kind of a push this year. I think that's what you said earlier, right? It's basically neutral EPS this year?

Ritch Wood

Yes, it might even be a little bit negative probably $0.04 to $0.05 negative with the…

Mark Lawrence

Including the amortization.

Douglas M. Lane

Okay. I got it. And then the amortization steps down significantly next year and probably goes away altogether in a couple of years, correct?

Ryan Napierski

Yes, it does a have a relatively long tail, but the numbers impact per quarter is insignificant.

Douglas M. Lane

Okay. Thank you. That's helpful. Another question I had is with the convertible note. There was an amortization component of that interest expense in the convertible note and I think that your documents show that it was all in payment at 7.1%, and I assume your new credit agreement is a lot more favorable than that. So did you have an accretion number from the refinancing of the convertible note?

Ryan Napierski

We don't, but you can kind of do the math, the cost -- the 7.1% was higher, because, we're amortizing this note discount, essentially, for the 4.75% rate up to that. So with the new loan agreement we don't have that note discount essentially. So it will save money. We ended up taking the costs the right now we settled it instead of spreading it over the next couple of years, but it will save us a little bitty quarter going forward.

Douglas M. Lane

Do you have, Mark, kind of an average cost of debt for those of us on the equity side that can't do all that math?

Mark Lawrence

I mean, I can give you the basic terms of the new loan where at 2.25 above LIBOR depending on how LIBORmoves that will affect us. Our prior debt was at 2.75 above LIBOR, so we got about a 50 basis point improvement there.

Douglas M. Lane

Oh, okay. Yes, so that is meaningful. Okay. And then I had one more -- oh I know what it was, the accounts receivable were up a lot. I hardly ever worry about accounts receivable, but it was a big year, I assume that's from the acquisitions?

Ryan Napierski

Yes, that's the biggest impact.

Mark Lawrence

Yes, I don't feel it impacted a little bit by the way the quarter closed on a weekend, right around the holiday, because that [indiscernible]. So some of our credit card processes pushed it a day, but you shouldn't read anything into that outside of really normal business closing on a weekend.

Douglas M. Lane

Okay. Sounds good, thanks.

Operator

[Operator Instructions] Your next question comes from the line of Beth Kite from Citi. Your line is open.

Beth Kite

Oh, terrific. Hello everyone.

Mark Lawrence

Hi, Beth.

Ritch Wood

Hi, Beth.

Beth Kite

If I could just please circle back to a couple of preceding questions just to -- I think for the guidance upgrade for sales. There were definitely a lot of moving parts that's unfavorable, but would you say the underlying sales growth expectation you had for your business in '18 is relatively the same as prior guidance. So ex-M&A and ex-foreign exchange?

Ritch Wood

No, I think we see the overall business looking really good. I think we're careful in terms of how we are going with our out guidance most of what we're building into that year increase is essentially the B plus an increase in the second quarter. So we're being fairly conservative, I think, in our overall model, but the way we see the business trending today is very positive. And so that's coming really from growth in the core business.

Beth Kite

Okay, perfect. And then for LumiSpa, it was great to get a sense of the $40 million in the first quarter, I assume you know the product, I think I saw for the U.S. and EMEA early in the quarter. I think you've just spoken to some other regions later on the quarter, can you help us to understand, because I just -- as we think about the year so the second quarter obviously you know, we have the guide, we know the full-year, but just thinking about how to model the third and fourth, give sense for is there's still a lot of pent-up demand in the regions where you did take LumiSpa already here in the first you assess that sort of sales leaders will be to ensue to continue to push that through the year. And then sort of related to that is the social selling products as more of them hit more markets, is that relatively staged across the second, third and fourth quarters like sequentially we should see if they sell well increasing social selling contribution kind of quarter-to-quarter across the year?

Mark Lawrence

Yes. Couple of comments on LumiSpa and then social selling, certainly Q1 was a good quarter for us, really the product is very well around the world where it was launched with the exception of Mainland, China in Q2, we saw really sell out numbers in several of our key markets and so we will be continuing to ramp up production with the second facility, a facility coming along and that will really help out. So demand will be solid throughout the year again Q2 China comes online and then we'll continue to drive that product throughout the year, there's a lot of excitement and exciting news around that product that we'll sprinkle throughout the year.

Regarding social selling products, we have those four key social selling products that we've discussed in previous calls. Ritch has mentioned PowerLIPS Dr. Dana, we have Smile Pop and we have Tru Face Essence Ultra Uplifting Cream. Those four products are safe and timed for introductions in markets according to their last calendars throughout the entire year and so we will see positive product news throughout the year.

Beth Kite

Okay, super. Thank you and then I suppose for Mark or really anyone but Mark I know you're not talking so much and I think investors have been focused on your gross margin trends, so I think the concept of the 77.9 mean up year-over-year of that as you added LumiSpa which was quite a drag in the fourth quarter, can you just help us to understand sort of some of the moving parts in the core business for gross margin?

Mark Lawrence

Yes, it's a great question Beth. I'm happy with the 77.9 for the core business especially as you mentioned LumiSpa gained about $40 million and as we mentioned on our last call, [indiscernible] was at a slightly lower gross margin than our overall product portfolio, I think that we have a number of initiatives that are in place to work to improve our gross margins, we're working on our manufacturing process for LumiSpa to try to improve the margin on that product.

And we're working basically across all of our supply chain to find opportunities to drive gross margin up, we do know that the acquisitions carry a lower gross margin if they overachieve in revenue that will have a drag on our combined gross margin and then the last thing to note is we have not received any of the benefit from the product that we buy from those acquisitions and we only get the benefit from them when they fell through to the end user into our significant channel into our distributor to end users. And so it will be the second half of this year before we see the benefit on the gross margin lines from our acquisitions.

Beth Kite

Perfect, okay, that helps a ton and then I guess last quick one on maybe for Ryan or Ritch, just in terms of Velocity it's terrific to hear that it's going well, our LumiSpa market that is going well so far and really not, seems the Americas. Do you see that as being a competitive advantage for you vis-à-vis other direct sellers?

Ryan Napierski

Yes, we absolutely do, Beth. For us, business model or compensation plan is the key driver for productivity. And for us particularly as we enter this new era of the Gig economy as some call it some would call it having a more flexible and staffed plan to compensate our reward sales performance is really in our view a competitive advantage and so we believe that to be the case.

Beth Kite

Okay, wonderful. Thank you so much.

Mark Lawrence

Thanks Beth.

Ryan Napierski

Thank you, Beth.

Operator

And your next question comes from the line of Mark Astrachan from Stifel. Your line is open.

Mark Astrachan

Good evening everyone.

Mark Lawrence

Hi Mark.

Mark Astrachan

Hey, I wanted to go back to the question on acquisition accounting. So I guess just first of all, so acquisitions are now anticipated to add I don't know $100 million plus or so on a run rate compared to $60 million previously or maybe it's $90 million to $100 million, I guess what specifically is happening within these businesses that's resulting in such strong growth relative to what your expectations were?

Ritch Wood

Yes, I mean excited about these business as they have new facilities that really have a large capacity at if brought on good strong customers over the last while that is driving that growth as well, so there's a number of things that driving their business but I think there exists enough that great businesses that have attracted a lot of new customers over the last several quarters and that rebuilding and strong growth right now.

Mark Lawrence

And Mark I would just add just you did mention a $100 million a year run rate that's in line with what Ritch mention but that's certainly not was planned in '18, so we did about 15 in Q1 and then so would be somewhere between 70 and 85 is where we have modeled for the rest of this year further for this year.

Mark Astrachan

Okay and what percent of those businesses selling to external customers?

Ritch Wood

All the revenue that we mentioned in our guidance is revenues external customer, so any revenue that they gain selling to us gets fact out and where we don't book that revenue in our consolidated results, so the numbers that we're giving are the numbers to external customers.

Mark Astrachan

Okay, what about the ETS benefit from the incremental sales from acquisitions, how do we think about that?

Ritch Wood

Yes, I think the best way to think about it on an ongoing basis Mark it's let's assume they have a around a 10% operating margin combined and that would be about the profit that they're going to generate. This year different because we have about $0.16 of amortization that will be bringing through but after this year in 2019 if they were to add somewhere around $80 million to $100 million or 10% operating profit if you look at somewhere around $0.12 to $0.15 a product.

Mark Astrachan

Okay, and I guess, you can maybe talk a bit offline I guess I'm trying to figure out why the 10% EBIT margin versus what you'd be offsetting on fixed cost that would sort of go away from running that like contribution margin as you says talk to versus and EBIT margin I would, imagine that the EBIT margin would be higher as there at all, so we can touch on that sort of?

Mark Lawrence

Yes, happy to watching through that…

Mark Astrachan

I guess you just one more on the acquisitions so how big was the gain in other income from your prior accounting for this?

Mark Lawrence

What sorry didn't hear that quite Mark?

Mark Astrachan

Gain the other income on the acquisitions how big was that in the quarter?

Mark Lawrence

It was $13 million, $13.6 million.

Mark Astrachan

Okay, great. And then just lastly to stay sort of on the acquisitions back to a previous question, so guidance for the year, so if you're adding 20ish million more this year $25 million more depending on what you want to assume for acquisitions that's a point in change relative to the original FX maybe a point better as well, so if you're raising guidance sort of mechanically 200 to 300 basis points versus previous numbers would nothing be all of it plus we get a little bit more upside from FX relative to what you're currently modeling, so how you think about your conservatism on the core business versus reconciling what I just said?

Mark Lawrence

I think the first thing we started FX are regional guidance for FX was two to three point we're seeing closer to three points now but then as the rates have been moving around quite a bit over the last week or so we guided 5.4 Q2. AND but for the year we're not moving up our FX guidance that dramatically. And then the numbers that Ritch gave you for the acquisitions would be up 10 to 25, so the remainder of that is core growth.

Mark Astrachan

Got it. Okay and just one last question back on the first question. Who are the external customers exactly for these acquisitions?

Ritch Wood

They range from customers all over the U.S. There is a whole list of customers but they produce some direct selling many that are not direct selling some are direct marketing or QVC this is whole range of customers.

Mark Astrachan

Got it. Okay, thank you.

Ritch Wood

Thank you, Mark.

Ritch Wood

Okay, that's the end of the questions it looks like. We are really excited about this year. We appreciate everybody joining us today, and if you have further questions feel free to reach out. Thank you very much.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.

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