Nu Skin Enterprises - Earnings Call - Q3 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by and welcome to the Nu Skin Enterprises Third Quarter twenty twenty Earnings Conference Call. At this time, all participant lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Scott Pond, Head of Investor Relations.

Thank you. Please go ahead, sir.

Speaker 1

Thanks, Shannon, and good afternoon, everyone. Today on the call with me are Rich Wood, Chief Executive Officer Ryan Napierski, President and Mark Lawrence, Chief Officer. On today's call, comments will be made that include forward looking statements. These statements involve risks and uncertainties and actual results may differ materially from those discussed or anticipated. Please refer to today's earnings release and our SEC filings for a complete discussion of these risks.

Also during the call, certain financial numbers may be discussed that differ from comparable numbers obtained in our financial statements. We believe these non GAAP financial numbers assist in comparing period to period results. Please refer to our Investor page at ir.nuskin.com for any required reconciliation of non GAAP numbers. And I'll now turn the time over to Rich.

Speaker 2

Thank you, Scott, and good afternoon, everyone. Thank you very much for joining us today. Amid the global uncertainty of this pandemic, we are so pleased with the stability and the strength of our business driven by our global sales force and customer base. Our thoughts and appreciation continue to turn to first responders and all those who are giving their all to help us through these challenging times, And we recognize our own first responders, those in our supply chain, our manufacturing and support groups who are working around the clock to ensure our customers have product and our sales leaders have the support they need. The third quarter was truly a remarkable quarter for our business.

Generally, we see a seasonal decline due to vacation during summer months in many of our markets. Rather, this year, we improved sequentially, resulting in 19% year over year revenue growth and 37% EPS growth in the quarter. These results were driven by customer growth of 28% and sales leader improvement of 12%, both enhanced by our socially enabled business model and the investments we have made in becoming a digital focused company. Of particular note is the sequential improvement in sales leaders as we prepare for our new product introductions here in this fourth quarter. Our results are benefiting from an environment where individuals around the world are working from home and shopping more online.

These results are also being driven by our focus to grow customers through our investments in three key areas, which we refer to as our 3P strategy: platforms, products and programs. First, our platform is our digital technologies that empower our sales leaders accelerate customer acquisition and increase their productivity. Second is our healthy pipeline of innovative products, and we are encouraged with early results in the new products we are launching this year. And third, we continue to provide an unrivaled opportunity for aspiring entrepreneurs to build a business with our unique and flexible compensation programs. Brian will speak to each of these priorities in more detail.

The effective execution of our strategy is spurring significant growth in our West Region, consisting of The Americas, EMEA and Pacific markets where social selling has been more widely adopted by our sales force. Mainland China continues to stabilize with sequentially improving revenue, customers and sales leaders, and we remain on track for a return to year over year growth in China in the fourth quarter. Each of our other regions reported modest growth. I'm very encouraged with the improving geographic balance of our global business. Our manufacturing businesses also performed well, reporting 34% revenue growth in the quarter, and we're continuing to see strong demand from many customers.

Our manufacturers are also providing significant benefits to the Nu Skin business as we continue to work through the supply challenges associated with COVID-nineteen. We see tremendous potential in this segment moving forward. We continue to lean in also on our sustainability efforts. This year, we've been particularly focused on our top 20 products, analyzing their environmental impact and making sustainable changes that are measurable. For example, our newly introduced NutraSentials line was awarded several Global Green Beauty Awards for its cleaner formulas and more eco friendly packaging.

And this is just the beginning of some exciting news and new ways we're improving the impact we have on the planet. We generated very strong cash from operations in the quarter and continue to strengthen our balance sheet, putting us in a strong position to create shareholder value going forward. Given the trends in customer and sales leader growth ahead of our product introductions in Q4, we are again raising our 2020 revenue and EPS guidance. Overall, we are optimistic that our products will continue to be in strong demand, as will the opportunity we provide for supplemental income to entrepreneurs all over the world. We are confident in our strategy.

We're optimistic about the future, and we believe the momentum we're generating now will help set us up for an exciting 2021. With that overview, I'll turn the call over to Ryan. Thanks, Rich. Good afternoon, everyone. Over the past three years, we've been executing our strategy to transform Nu Skin to become the world's leading opportunity platform.

Direct selling, which has traditionally relied heavily on face to face word-of-mouth marketing, is currently being impacted by the convergence of social commerce, influencer and affiliate marketing and the growing gig economy. These macroeconomic shifts have also disrupted traditional advertising and retail business practices in favor of socially enabled and direct to consumer models. Most recently,

Speaker 1

due to COVID-nineteen, the migration to remote work and online shopping has further accelerated disruption across all industries. These shifts in the way people live and work present us with a unique opportunity to amplify the strength of our person to person sales model as we evolve to become a digital first, socially enabled affiliate opportunity platform. The power of word-of-mouth marketing has always been at the backbone of our business and together with these converging macro trends, we are seeing a new horizon of growth for Nu Skin as our affiliates grow their businesses online at an accelerated pace. To enable this transformation and empower our leaders, affiliates and customers, we continue to make significant strategic investments in our digital platform, our innovative product portfolio and our empowerment programs. These investments are crucial to ensuring the long term growth of Nu Skin, and I'd like to provide you with a quick update on each of them.

First, regarding our digital platform. As we've transitioned to the cloud, we've expanded our ability to access a host of micro services that are now enabling us to provide an enhanced online customer experience and digital tools to empower our affiliates and customers. These tools are designed to enable affiliates to focus on attracting new customers and developing their teams. We're in the process of rolling out Vera, our personal recommendation app, and MySite, our personal offer app, which empower our affiliates to build their businesses socially. Today, approximately 90% of our revenue flows through our digital properties.

Second, we continue to refine our approach to product innovation as we seek to provide customers with products that help them look and feel their best. We're excited about our latest beauty device system, AgeLock Boost, which generated $30,000,000 during the third quarter as we accelerated some early top leader previews in a few of our markets. The U. S. And EMEA are leading out with NutraCentral's bioadaptives, which is targeted towards the millennial and Gen Z customer segments.

We anticipate 70,000,000 to $80,000,000 of sales from these new product previews in Q4 ahead of the full launch in 2021. Third, we continue to expand and refine our programs to provide an opportunity for people everywhere. The gig economy has disrupted traditional industries as people seek new or additional ways to supplement their personal or family incomes with greater flexibility to work at their own pace and in their own environments. This approach is new and unfamiliar for many companies, but it's not new to us. Our Velocity sales compensation plan and Enjoy rewards programs that were rolled out over the past two years continue to perform well, supporting the accelerated growth in both customers and sales leaders that Rich mentioned.

Our long term strategy has contributed to our strong global results over the past few quarters as we build on a track record of improving performance around the world, which is evidenced in the result of each of our major geographies. Over the past three quarters, we've seen an improving geographic balance with accelerated growth from our West markets, which now make up 30% of our business as our affiliates have embraced the socially enabled business model. The Americas and Pacific grew by 90% in constant currency with customer growth of 92% and sales leader growth of 86%. A key contributing factor of this growth has been a strategic relaunch of our U. S.

Business that we spoke about a year ago and have referred to as Discover the Best U. S. We also generated significant growth in Latin America, particularly in Chile, where sales leader and customer growth is driving strong revenue trends in these emerging markets, which now account for more than 5% of global sales. We see great potential for continued growth in this region. EMEA also reported high double digit growth of 67% in constant currency.

This is supported by 59% growth in customers and 53% growth in sales leaders. We are seeing growth throughout the region led by The U. K, Poland and South Africa attributing to further adoption of this socially enabled business. We also experienced improvements in Japan and Korea where both markets grew modestly and are trending in the right direction. South Korea showed encouraging progress reporting local currency revenue growth of 5% driven by an increase in sales leaders due to the anticipation of the Boost launch.

Japan continued to show favorable local currency growth of 4% and sales leader growth of 9% driven by an increasingly younger sales force. In Greater China, we're pleased with continued stabilization as the business has been on a long term recovery following last year's setbacks in Mainland China. Mainland China reported a moderate local currency decline of 4%, but continued to show sequential improvements across the business as we transform to a digital first approach and reduce our reliance on in person meetings. With two consecutive quarters of sequential growth in our sales leaders and customers combined with an upcoming product preview, we anticipate a return to revenue growth in the fourth quarter. Hong Kong and Taiwan were even with the prior year and had an encouraging leader preview of AgeLock Boost giving us optimism that these markets are moving in the right direction.

Southeast Asia also reported constant currency revenue growth of 8% due in part to a successful virtual convention, which generated excitement in anticipation of the upcoming Boost previews. Customers were up 12% and sales leaders grew 5% over the prior year. We're encouraged by the adoption of our socially enabled business model in key markets like Indonesia and The Philippines and are looking forward to a successful Boost preview throughout Southeast Asia in the fourth quarter. So in summary, we're pleased with how the business continues to perform amidst the uncertainty in the broader global marketplace. Our ongoing investments are enabling us to transform our business from a traditional direct sales company into a socially enabled digital first affiliate opportunity platform.

We believe that the world needs what we have to offer, and we're committed to our mission of scaling this business to empower as many people as possible as we work to become the world's leading business opportunity platform. And with that, I'll turn the time over to Mark.

Speaker 3

Thanks, Ryan. I will provide some additional color regarding our financial results, give Q4 guidance and update our full year 2020 outlook. As a reminder, you can find additional financial information in our release and the supplemental slides and tables on the

Speaker 2

Investors section of our website.

Speaker 3

Third quarter revenue and earnings per share came in above the top end of our prior guidance. Q3 revenue was $703,300,000 with a negative foreign currency impact of less than one percent. Earnings per share for the quarter were $1.08 Gross margin for the quarter was 73.9% compared to 76.2% in the prior year quarter, with Nu Skin gross margin moving from 78.6% in the prior year to 76.3% this year. Gross margin was lower largely due to two factors. First, freight.

The significant sales increase in some of our markets required us to expedite product to keep in stock. The expedited freight coupled with incremental shipping costs associated with COVID-nineteen amounted to approximately $9,500,000 and impacted gross margin by more than 1%. Second, our geographic mix is shifting due to the strong growth in the West region. The West has lower average gross margins than the East due to its product mix and pricing dynamics in the emerging markets there. While the growth in the West weighs on gross margin, that impact to the P and L is largely offset by the lower tax rate generated by the increased profit from those markets, specifically The U.

S. Selling expense as a percent of revenue was 39.9% compared to 39.3% in the prior year. Selling expense for the Nu Skin business was 42.4% compared to 41.5%. As we have referenced in the past, selling expense increases as the number of qualifiers for incentive increases due to strong revenue growth. This is also reflected in our sales leader count, which increased significantly.

General and administrative expense as a percent of revenue was 23.5% compared to the prior year of 25.1%. Our operating margin for the quarter was 10.6%. The other income expense line reflects a $500,000 gain compared to a $5,000,000 expense in the prior year. During the quarter, we generated $118,400,000 in cash from operations, paid $19,200,000 in dividends and repurchased $20,000,000 of our stock with $342,800,000 remaining in authorization. We also reduced our debt by $72,500,000 Our financial position remains strong, and we are confident in our ability to maintain adequate liquidity and flexibility to successfully navigate this current crisis, pursue our strategic plans and return value to our shareholders.

Our tax rate for the quarter was 24.7%, benefited significantly by increased U. S. Profitability as mentioned earlier in my comments. Ryan spoke earlier about our digital transformation and it is worth noting that we are applying this in all aspects of our business. For example, we have deployed AI powered predictive analytics to rapidly adjust product forecasts around the world, enabling us to better allocate our supply.

This key ability has helped us respond to surges in product demand and also become more efficient with our inventory levels in which our turns continue to improve. Due to our strong third quarter results, strengthening trends and the upcoming product introductions, we are increasing our annual revenue guidance by approximately $150,000,000 Our fourth quarter revenue guidance is $720,000,000 to $750,000,000 including $70,000,000 to $80,000,000 of anticipated sales from new product introductions. Earnings per share guidance is $1.1 to $1.2 This assumes a positive foreign currency impact of approximately 1% and a tax rate of 26% to 31%. Our 2020 annual revenue guidance is $2,550,000,000 to $2,580,000,000 with earnings per share of $3.35 to $3.45 This guidance assumes a negative foreign currency impact of approximately 1% and a tax rate of 27 to 30%. With that, we will now turn the call back to the operator for questions and answers.

Speaker 0

Thank you. Our first question comes from with Jefferies. Your line is open.

Speaker 4

Thanks. Good afternoon, everyone. Two questions for you if we could. The first is just on the significant growth you've seen in your customer counts as you prepare for the launch of Boost. Can you talk a little bit about your marketing agenda, how you expect maybe to approach the end market slightly differently than you did with LumiSpa just as a comparison?

And then the second question, Mark, really for you is just on the increase in guidance. Anything over and above the increase in the launch that's embedded in the guidance? Or are you seeing a lift to your underlying business as well, so a bit of a tethering effect in anticipation of the launch, but also in the underlying business? Thank you.

Speaker 1

Yes, Steph, maybe for the first question, this is Ryan. I'll take that. Yes, the customer growth that we're seeing right now, we're particularly pleased. Is that the customer growth is coming largely through this socially enabled business. Now applying the Boost global previews in Q4 and into the main global launches in first half of twenty twenty one.

We'll deploy a very similar model to how we deployed LumiSpa in those local launches will happen in the first half. I think social that socially enabled model will we anticipate will continue to foster that customer growth.

Speaker 3

Yes. And Steph, to follow on to your question around the guidance for the fourth quarter. Our number is really driven by assuming that the trends that we saw in Q3 would continue into Q4. And as you noted in our comments, we did $30,000,000 of boost in the third quarter and we're anticipating an additional 70,000,000 to $80,000,000 in the fourth quarter. And so you can add that incremental number of 40,000,000 to $50,000,000 of boost versus what we did in the third quarter to get to our number of our guidance.

Speaker 5

Okay. Thank you.

Speaker 3

Thanks, Steph.

Speaker 0

Our next question comes from Wendy Nicholson with Citi. Your line is open.

Speaker 5

Hi. Good evening. I had a couple of questions. First is with regard the evolution of the business to take advantage of this gig economy, which on the one hand makes total sense and it's fantastic. But my question is, what's your confidence that the people who are coming in to sell Nu Skin product now are going to stick?

Mean the whole idea of a gig is you do it and then you go on for the next. And so I'm wondering because we're seeing this type of elevated activity at several different direct sellers right now. And I'm just how do you think that we're sitting here from now spend retention and crash your sales force?

Speaker 2

Yes. Thank you very much, Wendy, for that question. I'll speak to it and Ryan can add on. It's an exciting opportunity really to participate and expand the potential of our sales leaders. They have an opportunity to reach to a lot more customers.

The key, I think, really is allowing them to progress through our sales leader pipeline. So allowing them to begin to earn commissions, build an organization and start to really be successful in that way. We keep them through our recognition programs, through our ability to continue to compensate them and have them continue to feel like there's upside in building their business, a steady flow of new products that are launching as well as customer rewards programs. So it's a fairly broad approach that we take in terms of helping somebody start as a customer and then progress all the way to a successful sales leader. But clearly, with a lot more people coming in, that's an area that we have to focus on and continue to get better at is this idea of retaining and motivating our sales force.

Speaker 1

Yes. And I would just add, Wendy, that from what's unique about our type of model is that it isn't a traditional gig in that to Rich's point, our model enables those additional opportunities. And so through our sales compensation program, Velocity, we do provide that gig like opportunity of sharing or selling products, but there are abilities to build teams of sharers as well as lead organizations. And so it does provide a more sticky framework than a traditional gig model does. And I think just based upon our historical context, this is really where Nu Skin has excelled over thirty five years.

And so in a way, I feel like the gig economy is a foray or an entry into what we've always known. But I think to Rich's point, our focus is to ensure that, that leader pipeline or the shares come in and those gigs that come in are able to find more opportunity through these advanced programs that traditional gigs do not offer.

Speaker 5

And do you have a sense for the people who are coming in now? Do you have any sense for the demographics in terms of I assume they're probably younger, but do have any sense for whether they are maybe former Nu Skin sales or last or are they just all new? Any color on that?

Speaker 1

Yes. With this acceleration, we're seeing we're definitely seeing an acceleration of from a demographic side of predominantly female, younger demographics than we've traditionally seen. But I would say if we were to track back over 2016, 2017, '18, there's just been a progressive trend towards this direction. And so it's not something that's happened in the last quarter or two quarters. It's been three or four years of progression to a younger sales force, again, skewing more to the female demographic.

Speaker 5

Fair enough. And then just one quick question, if I can. Thank you so much. On the gross margin, I totally get the headwind from mix, which is offset by tax, so that's fine. But just on the freight issue that you called out, I mean, looks like headwinds from a freight expense perspective might be with us for some time to come.

So, should we just expect there to be gross margin pressure from freight for a while? Or do you think you can raise prices? Or is this really just a COVID thing that regardless of the freight environment, as we get a normal more normalized business environment, you won't have to do as much expedited shipping?

Speaker 3

Yes. It's a really good question and one that we've looked at a lot. We are always going to look for ways to improve our freight. We're putting more products on ocean versus air. And so we will get some benefit there.

I do think the fourth quarter is going to be particularly challenging with freight as we enter the holidays and we've all seen the news on what's going to happen with freight and the challenges that will be there. So we'll certainly experience some freight pressure in the fourth quarter. I do think it will extend into next year, but we'll do what we can on our part to get more product to our sales leaders through less expensive methods.

Speaker 5

Terrific. Thank you so much.

Speaker 6

Oh, sorry.

Speaker 2

Yes. I was just going to add, Wendy, that there's a portion of that freight is just trying to keep the product in stock. That issue, we've really we're getting our arms around that and we've been able to catch up with the supply chain. And the COVID issues related to the supply chain in terms of actually building product and and having packaging and so forth to do it. Those are starting to loosen up a little bit.

So we're getting our arms around the expediting issue. It's really the other freight that will continue to lag into next year and be something we'll just have to continue to work through and figure out the best way to figure out how to get our margins back to where they need to be. Fortunately, there are other things that we can do. We can leverage our overhead and so forth. So we're still shooting for a 13% operating margin over the coming couple of years and believe that, that's right in our sights.

Speaker 0

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

Speaker 7

Yes, hi. Thank you. So a few questions for me. First, I just wanted to talk about this extraordinary growth that you're seeing in the West Region and why you're not sort of seeing a similar type of growth across Asia. And I know in China you have a different model, But I'm wondering if you can sort of maybe philosophically talk about what the differences are and why there's this growth in the West and that we are not seeing that in the Eastern markets.

Speaker 1

Yes, Faiza, maybe I'll just I'll answer it and Rich can add on if he'd like. Yes, so and you followed the company for quite some time. You know historically, the company has done very well in Asia through that more traditional direct sales model and has been lagging a bit in prior years in the West. What we're really seeing it from the social side is that there's a new and emerging leadership group throughout the West that are really socially the that

Speaker 0

S. And seeing And of well in Greater China.

Speaker 1

And And so so from our point of view, it's more of a transitory or transitional process where the traditional model is a little more strongly rooted in Asia than the social model. But we're seeing the migration happen. And as a company, we're fairly overt in identifying best practices and sharing best practices across our market segments. And so we are seeing that migration evolve. Also on our digital platform, we're ensuring that those tools that we're building are being deployed out so that those leaders, socially emerging leaders in Asia are able to take advantage of the model as well.

And so it's more of a transitional process to answer the question.

Speaker 7

Okay, great. And then if I could just ask about the manufacturing business. Mean, clearly, we've seen very strong growth. Like how should we think about the growth in that business going forward? Is there like where are you in terms of capacity in that business?

Like is there a ceiling? Do you expect to maybe invest more in manufacturing going forward? Just a little bit in terms of how you're thinking about that business.

Speaker 2

Yes. Great. Thanks, Faiza. The manufacturing business was an initiative we leaned into about three years ago with the real desire that we felt like we could secure our supply chain better for our own business, that we could speed up our go to market opportunities with different products and innovations. And then at the same time, we could really participate in an opportunity where there are a lot of companies growing and taking advantage of manufacturing.

So we would benefit from sales of our manufacturers to other customers. That is really playing out very well as we continue to lean in, give the right investment behind these manufacturers to expand so they do have capacity to grow both in terms of equipment as well as space, and it's working very well. The demand continues to come in both, I think somewhat from COVID as some of their customers are benefiting from COVID, but then a lot of new customers as well. So we see the demand continuing to go. Are there areas we can lean in?

There are certain areas that our manufacturers don't provide for Nu Skin, for example, powders and stick packs, things like that is not a capability that we have today in our current manufacturing partners. So we'll continue to look for opportunities where we can really gain synergistic benefits in the Nu Skin business. That's really the first and foremost decision we make. And then with an opportunity to continue to expand the manufacturing segment. So really twofold in terms of our expansion philosophy.

The first is to drive more success into the Nu Skin business. And then secondly, to look at expanding the segment.

Speaker 7

Okay. And then if I may just ask, I might have missed this in your comments, but the $30,000,000 in Boost sales, were those in a particular region? Were those in I don't know if you broke that out by region.

Speaker 2

We actually didn't break it out on the comments. About half of it was in the Greater China region, a little bit more than half and then spread around really the rest of the world.

Speaker 7

Okay. And then the incremental that you're expecting for 4Q, that's global? Or is there is that a particular region where that's we should expect that to be in?

Speaker 2

It's generally global. However, we're not launching Boost in EMEA or in North America. So those Boost sales will generally come next year in those markets. So it's more Asia focused in the fourth quarter than inclusive of the EMEA and North America markets.

Speaker 7

But you're launching the nutraceutical bioadaptive, right, in EMEA So North that's included in that incremental 50,000,000

Speaker 2

Yes, that's correct. That's It won't be as big of a launch. It's a relaunch, so it won't be the same sort of pop that we get from Boost. But we do anticipate that it will be a nice new product that the sales leaders will be excited about here as well.

Speaker 7

All right, great. Thank you so much.

Speaker 2

You bet. Thank you, Faiza.

Speaker 0

Thank you. Our next question comes from Olivia Tong with Bank of America. Your line is open.

Speaker 6

Great, thanks. Good afternoon. So lots of new sales leaders and customers, particularly in The U. S. And Western Europe, that's obviously accelerated pretty nicely this year.

So a few questions there. First, with all these new people, these people who are new to the brand, I'm a little surprised that you don't see more acceleration in growth from Q3 to Q4. Like obviously Q3 was very, very strong, but the sequential acceleration is a little bit lighter than I would have anticipated given the strength of Q3. So can you just update us a little bit on your expectations there? And within that, why are you waiting to launch Boost in Europe and North America?

Yes.

Speaker 2

Good questions. And we are really, really encouraged with what's happening in our West markets. A lot of times with our business, we'll see a real strong push as there's a lot of excitement, and then it will consolidate to some extent and get another push. The growth into Q3 from Q2 was continued to be really strong, but obviously not the same acceleration we saw in Q2. Q4, we'll probably see a good strong quarter as we continue to have new products.

We have Black Friday promotions in those markets and so forth that have been successful. So we'll continue to push. There's a great opportunity to because we're relatively small, I would say, in these large direct selling markets in the West, we think there's great potential as we continue to go forward and as the sales leaders continue to learn the business and the better ways to be effective in how they take our products to customers. So exciting opportunities there, and we think that growth is something that we can continue to sustain as we move forward.

Speaker 1

And then on the Boost, you had asked about, Olivia, the Boost timing for North American EMEA. That's really a product registration timeline. And so we've supplemented the BioAdaptive NutraSentials BioAdaptive launch in place of the Boost this year. And then as those products are registered next year, they'll roll out there.

Speaker 6

Got it. That makes a lot of sense. And then just following up on Wendy's question about how to hold on to all these new sales leaders when traditional work opportunities come back. Are you making any technology investments or compensation enhancements that will help them stay for longer?

Speaker 1

Yes, yes. I think that's really been at the heart of our digital strategy, Olivia. So yes, absolutely, our focus is all around providing these new leaders with the tools, the capabilities to run their businesses. Our goal, of course, is to empower them with a flexible opportunity. And we feel like these changes we've made over the last two years with the Velocity model, coupled with these digital tools, we're able to provide a home for them to and a flexible home for them to build their businesses on their terms here.

And so that's a major focus behind what's driving our digital strategy.

Speaker 6

Got it. And then just lastly, a question on selling expense. I'm a bit surprised that the expense relative to sales increased less than it did in Q2 despite the fact that your sales clearly accelerate more dramatically. So usually, I mean, we see this ratio increase as sales growth improves since your sellers are hitting new pay up over you. Is this just a function of you just have a lot of new sellers, right?

So they're just they're not necessarily increasing their basket size, it's just a lot more people who are buying. And if that's the case, can you just talk a little bit about what drives more sustainable growth in your view? Is it more about, adding more leaders and customers to drive that sales or increasing the basket size across the board?

Speaker 2

Yes. From our perspective, the sustainability of growth really is driven by a customer and sales leader growth that match each other. Sometimes we'll see, and particularly what we've seen as social selling has picked up, is we'll see a fast increase in customers followed by a sales leader growth that then supports that customer growth. But in order to be successful, for example, as we look at a Q4 launch of new products here, we have to be able to drive a bigger customer base and a larger sales organization. And that's what sustains the growth going into 2021.

So as we execute our plans and everything that Ryan talked about as we build up to this launch, it's allowing sales leaders to qualify and then participate in the launches and continue to build their customer organizations so that we can keep them for a longer period of time. So that's really the strategy through the product launch process that we follow. And then I would just say as the sales expense, it will fluctuate. Sometimes as a lot of new sales leaders come in, we'll see that expense push up just a little bit as people qualify for different rewards, incentives and so forth. And then it will settle down as the sales leader number settles down as well.

So it fluctuates as much as 100 basis points here from quarter to quarter, but generally we'll settle right back down around the 42% range.

Speaker 0

Great. Thank you.

Speaker 2

You bet. Thank you. Our

Speaker 0

next question comes from Doug Lane with Lane Research. Your line is open.

Speaker 8

Yes. Hi. Good afternoon, everybody. Rich, staying on that, I know that you worked a lot over the last few years to shift your marketing focus from the sales leaders right to the direct consumer to your end user. Can you explain that dynamic?

Because this is a little unusual where you're if I understood your last answer, you're actually looking to build a customer base that will then drive increase in sales leaders, is kind of counterintuitive than it used to be. So just can you clarify that just a little bit on what the strategy shift is there?

Speaker 2

Yes. I think three point five years ago or so, as Ryan and I put together our strategy to build the business, we've really felt like social the power of social on the gig economy allowed us to reach out to a lot more customers than we had ever done in the past through word-of-mouth marketing. And so we really built this strategy around these three Ps, the program, the product and the platform in terms of opening that funnel to be able to talk to new customers. And so we really shifted in terms of how we present our products, our pricing strategy to some extent, the compensation structure through Velocity to reach more and more customers and to be able to allow more and more people to benefit through a sharing program very similar to what an affiliate receives. So yes, we really focused on the customer.

We continue to be very focused on the customer. In fact, it's one of our three tenets to be customer obsessed, and we'll continue to focus on that going forward. And we see today a broader number customers per sales leader. We're doing more and more to capture data around our customers and leverage that to help our sales leaders be more effective. And that really is key to our success going forward.

Speaker 8

So the customer number that you give, each one of those customers has a sales leader. They're not independent sort of channels. It's not like an e commerce business and a direct selling business here. They are interacting. But the point is, with the customer growth that we've seen in the last two quarters in the upper 20%, if things go well, then we should see sales leaders come up, not the customer number come back down to where the sales leaders are.

Do I understand that right?

Speaker 2

Yes, that's exactly right. They are all purchasing from the company generally, but they all are connected somehow to a sales leader, who's the one who introduced them to the business. So that's correct. And those two numbers come together. Generally, we've seen some increased number of customers per sales leader, which would tend to drive the customer number a little bit higher than the sales leader growth.

But generally, those will come back in line with each other.

Speaker 8

Okay. Thank you.

Speaker 2

You bet.

Speaker 5

Our next

Speaker 0

question comes from Mark Esparchen with Stifel. Your line is open.

Speaker 9

Thanks and afternoon everyone.

Speaker 3

Good morning Mark.

Speaker 9

Wanted to ask about the thoughts or how you're thinking about the ability to sustain this momentum that you have in the business when lapping some of the lockdowns and peak COVID impact next year, just in terms of how we should all be trying to model this next year? And I guess related to that, any read on how China has performed as the lockdown ended and life sort of normalized to whatever the new normal is. And I say that partly in the context to understanding that China should get back to growth in 4Q, but the growth has been a bit sluggish because you've been coming out of that period. So I guess is there anything to read into that for the rest of the world next year?

Speaker 2

Yes. Great questions, Mark. Thanks for those. The COVID impacts have sort of been staggered all around the world. It's interesting that, for example, in Southeast Asia right now and Malaysia, there's quite a lockdown.

It just has seemed to sort of ebb and flow market to market around the world. What we've really, really focused on is getting better and better at working remotely, at providing digital tools that allow our sales leaders to do their training, to hold their meetings, to contact their customers and be more effective because we believe that's the way the world needs to shift anyway and specifically to China, where it was always our business was always driven through meetings. We've had and for whatever reason, those meetings would be restricted from time to time. So our focus over the last two years has really been to develop additional technology, which would make us less dependent on in person meetings and more and more effective at leveraging technology. So as we start to lap these numbers, I really, really like our product lineup for next year.

As you know, the West will be launching the Boost product in the first half. The other markets in the first half will be introducing the Nutrisential line. And then we have a strong product lineup for the back half of the year, which will roll out at the beginning of the year. We haven't laid that out in front of our sales leaders yet, but we've got a good product pipeline. We'll continue to focus on driving customer growth, which we think will continue to drive sales leader growth as we go forward.

This year's growth has all been done without, like you mentioned, without China. We do anticipate China will have a nice fourth quarter with the launch of Boost, and that should generate energy, which will help the business next year in China and allow China to hopefully participate in this growth excitement that we're seeing around the world. So we think we got very good plans to continue to drive growth in the business and see great potential.

Speaker 1

Yes. And I would just add, Mark, for us, COVID has really given us an opportunity to really lean into the digital first approach. And so as we talk about lapping some of these year on year comps, from a business model perspective, we're just leaning in full into digital first. And while there's going to continue to be uncertainty in various forms around the globe, Our focus will be very, very directly on this digital first approach. And so we feel while the world around us is somewhat tumultuous, from a strategy perspective, it's just very, very clear what we have to do.

I mean, we have go digital first. In China, we'll continue to go digital first. That's really the focus. And so I think as we continue to lean in, we continue to align our investments there, we'll have a greater ability to sustain growth and to proliferate it in some of these markets that have been lagging, like China, where that was more reliant on that person to person approach or face to face approach, I would say.

Speaker 9

Great. Thank you.

Speaker 2

Thank you, Mark. And it looks like that's all of our questions today. Thanks to all of you for joining us and for your interest in our company. We look forward to speaking with you soon and wish you all a good evening.

Speaker 0

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.