Nature's Sunshine Products Inc (NATR) 2005 Q2 法說會逐字稿

Good morning and welcome to the Nature's Sunshine Products, Inc. second quarter 2005 operating results conference call. Statements made during this conference call concerning the Company's business outlook for future economic performance, anticipated profitability, revenues, expenses or other financial items and product line growth together with other statements that are not historical facts are forward-looking statements as that term is defined under Federal securities laws. Forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from those set forth in such statements. Such risks, uncertainties and factors include but are not limited to foreign business mix, industry's cyclicality, fluctuations in customer demand and order pattern, the seasonal nature of the business, changes in pricing and general economic conditions as well as other risks detailed in the Company's filings with the Securities and Exchange. The Company disclaims any obligations to update any forward-looking statements as a result of developments occurring after the date of this conference call. Our speakers today will be Douglas Faggioli, President and Chief Executive Officer, and Craig Huff, Chief Financial Officer. At this time all participants have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation. I would now like to turn the floor over to Mr. Faggioli. Sir, the floor is yours.

Thank you. Good morning and welcome to the Nature's Sunshine conference call. As you know, we're going to discuss the results of operations for the second quarter and six months ended June 30th, 2005. Hopefully by now you have a copy of the news release and some of the financial information that's contained in that and as usual we would like to give you a balanced view of the financial information and some other qualitative information that we feel is important to understand. This conference call is particularly important because I think there's a lot to understand behind the numbers and kind of where we are at this point in time that is very encouraging and that we're very optimistic about. At this time I'd like to have our Chief Financial Officer, Craig Huff, review the financial information after which I'll add some commentary.

Thanks, Douglas. I appreciate this opportunity to report on the second quarter and the six months ended June 30th, 2005. For the second quarter sales were 87.0 million, up 8.1% over last year. For the quarter operating income was flat with last year at 4.8 million and the net income for the second quarter was actually down 16% at 4.1 million. EPS was down to $0.26 from $0.31 last year. Let me just make sure that everyone is on the same page as we're talking about the quarter and the impact that last year's quarter had. As you may recall, last year in the second quarter we were required to book a tax benefit during that quarter that we thought should have gone over the year but our auditors thought that we needed to book that all in one quarter and so we ended up with actually a negative tax provision for the second quarter last year, which impacted us about $0.10 if we would have booked our normal tax rate of around 30%. We would have been about $0.10 lower in the quarter than what we were so we would have been about $0.21 so net income would have actually been up. EPS would have been up significantly and so-- and for the quarter we were impacted as you read the news release by the cost and Synergy that we feel that has now been brought under control and that we'll see the benefit for in the third and fourth quarter of probably about 1.2 million to 1.3 million that we should see come out of their expenses, but which caused their loss for the quarter to be-- they were about a $1.1 million loss for the quarter whereas last year they had income and so we feel that we've made those changes or are in the process of finishing making those changes right now and we see things going real well for Synergy in the second half of the year.

Year-to-date sales are 173.4 million. That's a 9.6% increase over the prior year. Operating income was 10.3 million, a 23% increase. Net income was 8 million. That's just a 3% increase remembering the tax benefit that we took in the first half of the year last year, and diluted EPS was $0.52 compared to $0.51 the prior year. Our total outstanding shares right now are 15,296,000 shares. Going through our segment information our international operations, which is everything except the United States and the Synergy operations, were 30.2 million. That is a 22.4% increase over the prior year. International now is about 35% of consolidated sales for the quarter. Year-to-date our international operations are 58.9 million. That is a 17.1% increase over the prior year.

Synergy worldwide, and this is-- there are some real positives here even though it looks like there are negatives. Synergy worldwide for the quarter was 20.4 million. That's basically flat with last year and as most of you are aware, last year we were shipping our product through a personal import program into Japan rather than shipping the product on the ground there through a warehouse in Japan and so one thing that was included in last year's numbers was freight charges that we were required to book those in the sales revenue line. By backing those out last year's prior year numbers had freight income in it. This year's do not and so that was about $2.5 million for the second quarter so in comparables we would end up with sales being about 22-23 million instead of the 20.4 million if we were doing comparable dollars. So we actually feel very good that Synergy is breakeven really with last year because of the decrease in the freight income so it's a real positive for us. We feel that Synergy has turned around and is moving in the right direction for sales so sales are growing there again. Next quarter is going to be another hard one. They were about 24 million in sales last year but that included about a little over $3 million in freight for the third quarter and so we've got to overcome that $3 million but we feel like Synergy is moving in the right direction and as Douglas talked about some of the specifics of that you'll see why we feel so good about that. Year-to-date sales are 40.6 million. That's almost a 14% increase over the prior year. Synergy represents about 24% of our consolidated sales now and they're principally in Asia, the biggest market being Japan, and then there are some other things that Douglas will talk about that I think people will be pleased with there.

Domestically we feel that things are going the way we had planned. The second half of the year we anticipate things to get a lot better but for the second quarter sales were 36.4 million. That's a 2.7% increase over the prior year. And year-to-date sales are 73.9 million, about a 2.4% increase. Considering where we've been in the past and things that we feel are going we feel good about where the U.S. is right now and expect a lot better improvement actually in the second half of the year.

Total distributors are 671,000. That's a 1% increase over last year or year-end but in light of the decrease if you remember in the first quarter there was about a 38,000 distributor decrease in Synergy in the first quarter so to be up over year-end, again very positive sign that things are growing again. Managers are 21,400. That's a 17% increase over year-end. So we feel that both distributors and managers are headed in the right direction, which points to some real strength for us going forward.

Balance sheet remains strong, no long-term debt. Our short-term debt at this point we have 5 million outstanding that is still from when we did our tender offer in November. As we are able to repatriate funds that's really not a problem just getting the funds back into the U.S. at the least tax rate we possibly can. Total assets are 150.9 million compared to year-end of 145.1. Cash and cash equivalents and long-term investments continue to go up. We're at 48.9 million compared to 43.9 and so we're continuing to build cash and as we can repatriate that we'll pay off that short-term debt and be able to use that cash for other things.

Inventory increased slightly, went up about $1 million. We have a major project that we put in place to be able to decrease that, get our turns back to where they should be. Over 2 is our goal right now which still isn't real good but it's something that we're shooting for right now to get those turns down to free up some more cash and assets of the Company that way.

Return on shareholder's equity, we're at 16.6%, book value per share at $6.68. We feel very good about percentages as far as cost of goods sold, volume incentives and SG&A that they're moving in the right direction. Year-to-date our cost of goods sold 17.1%, which is down from year-end, volume incentives 39.6% which is up slightly from year-end but overall those pretty much offset each other. We feel that things are going in the right direction in those. One area that we've talked about making a concerted effort is in the SG&A line. We are at 32.3 million. The actual dollars are up slightly. For the quarter we're up just about 3% in SG&A for the quarter. Most of that comes because of the launching on the ground in Synergy. As a percent of sales though SG&A dropped to 37.1% in the second quarter compared to 38.8% in the second quarter of last year and so we were able to pull a significant amount out as a percent of sales. Again, we'll reiterate our intention to continue to decrease that by the end of the year. Last year we were at 35.9% at year-end and we anticipate still being able to drop that by a couple percent by the end of the year. That's-- we are weighted very heavily in our expenses in the first half of the year and so we should see some significant improvement in the second half of the year. Year-to-date SG&A is 37.4% of sales compared to last year at 38.3 so we've been able to cut out not quite a full percent but real close to that on a year-to-date basis so we feel with things going forward we'll be able to stay in line with what we've been projecting in the past.

Taxes for the quarter, we were able to realize some benefits and so our tax rate was down for the quarter. Year-to-date it's at 21.8. We feel that going forward we'll probably be in around 30% for each quarter. We feel very good with where we're headed with our taxes. And so with that that's a brief overview of the financials so I'll now turn the time back over to Douglas.

Thank you, Craig. I'd like to make some further comments about the results of operations for the second quarter and the six months ended June 30th but I think Craig has done a good job of going through some of the numbers with you and hopefully you have a sense of why we're confident and pleased with a lot of the things that we see in this quarter that if you just read the financials you probably are not going to see so hopefully I can add to that so you understand why we're confident and excited about the future. We know that there's a lot of additional pressure and interest on the second half of the year and we certainly understand that. As we look at the results for this quarter there may be people who look at that and perhaps see some of the negatives but I'd like to go through and make sure that you understand why we're confident that we've kind of positioned the Company well, that we're poised for the growth that we expect going forward. Sometimes when you make changes people don't entirely understand those. I can tell you after the last year and a half or so we've made a number of changes and I'm quite pleased with what I see happening in the Company today and I'll just briefly touch on this.

I see much greater cooperation of the management and really the employees of the various divisions at Nature's Sunshine. It's something that I felt very strongly about and we've worked at and I see that happening and I'm quite pleased with that and I have to tell you as a percent we're probably-- I don't know around 85% of where I think we need to be in terms of management and the structure of the Company and so it's quite-- it's a good thing to see that the people in the right places and doing the things that they need to do to make this Company successful. We see the potential and we feel like we're starting to realize some of that.

Craig mentioned and I'll just touch on this briefly. One of the things that we see as perhaps the most important thing in the Company obviously is the number of sales leaders as well as the numbers of distributors. We see some very positive things happening there in the U.S., internationally and particularly in Synergy. That's why we've kind of talked about kind of turning the corner, seeing a renewed enthusiasm, a renewed excitement about really all of the areas of the Company so just to reiterate the numbers, the sales leaders at the end of the June quarter we're about 21,400 and that's an increase over the prior year of 25%. We think that's a very powerful indicator and a very strong thing for our Company. The numbers of distributors are up on a consolidated basis 9% compared to the prior year but as you break that down and look at the various entities I'll give you hopefully a flavor of that.

I'll talk first about Synergy. There's been a lot of concern and people interested in change that was made to going on the ground and could that have been handled better and that kind of thing and you know frankly, yes. It's a hard lesson to learn but it's also something that we needed to do as a company to position ourselves for greater growth in Synergy and particularly in Japan and we feel like that's something that's been accomplished and we've kind of turned the corner and I say that because of the recently I was able to attend a meeting with Dan Higginson in Japan and to see the excitement, the enthusiasm of the leaders that's perhaps the most important thing from my perspective. Obviously that is what we expect to see reflected in the numbers but that really is the key there and so I'm pleased with what I see there. The other thing and I'll just talk to you briefly. I think the numbers of leaders in Synergy is up a startling number. It's up like 91%. Numbers of distributors is up like 48%. So those are very positive signs and I'll also tell you that I feel very confident in the management team that we have in place at Synergy. I've mentioned this before.

Dan Higginson was the founder of Synergy. His strength is in his enthusiasm, his love of the business and I'm really pleased with what he's doing and he's built a management team around him that I believe is very solid and going forward we should see the benefits of that. So we like what we're seeing there, the shift in momentum, the renewed enthusiasm, the growth in the numbers of leaders and distributors and, as Craig mentioned, the sales really are doing fairly well. It's not a fair comparison because in prior quarters and prior years they had a great deal of shipping in there because it was predominantly a PI business but now we have the right mix of personal import and on the ground and we think that that's positioned well to go forward. So we look for some very positive things from Synergy in the third and more importantly in the fourth quarter and so what I was talking about before about being positioned and sort of the raised expectation for that particular part of our business. We are very pleased with that.

I'd like to talk briefly about our international growth and Craig mentioned the numbers and so he'll correct me if I say something that's not exactly right but if you look at the international growth it's something like 16% in sales and something like 60% in operating income. It's very favorable. I'm pleased with the leadership there and many of you know this that Bob Schaffer [ph] was put in charge of that and with his team has done a great job of kind of putting it together and moving this forward and I'm pleased with what he's doing there and the cooperation that we're getting really between the divisions is a very positive thing. The interesting thing in the growth in this international is you know sometimes you see that as a result of opening new markets. I'll tell you the growth in international for this quarter and year-to-date really is not the result of opening up new markets and so I see that as a very positive thing.

We have some markets that we're interested in and that we're working on and we think that will add to the growth in international as we go forward but if I could just briefly mention you know sometimes you look at a market that's well established and we'll talk about the U.S. as we go forward but we begin to think that well you know your expectations are not quite as high or that it's a mature market and it's not going to grow again. That's the beauty of this business. As distributors get excited about the opportunity, about the products, about the affiliation with a Company that they can rely on that can take off again, particularly when you have management that's focused on growing and understands the opportunity that we have going forward and so I point to a very well established market in Canada. I mean this last quarter their sales were up 19% and their operating income was up 37% so you see that potential of an existing market to start to grow again, to start to get the kind of results that we're interested in in having really as Company wide and so there are some very positive things happening.

I'll mention another one that's been established for quite some time, Columbia. Their sales were up 37%. Their operating income was up 62% and so you see that kind of happening in some of these other markets and I won't go through it market by market but one market I'd like to mention in particular is our Nature's Sunshine market in Japan. It's one that we've kind of struggled with in the past and some people had kind of thought that well, you know this is kind of where it's going to be and maybe there isn't a lot of potential going forward but our general manager in Japan has been very strong there working with his team and you know we're starting to see some results there and some growth that we're excited about and not only that, we see that there's a much greater future for our Nature's Sunshine business in Japan. And so their sales this last quarter were up something like 80% and their profits really compared to a loss the prior period was up something like 100% so we see the potential there.

Another market in our international that we're excited about is Russia. We have, as I mentioned, Bob Schaffer and his team and the people who are working on Russia see the opportunity there and continue to develop that market and see some impressive gains in both sales and in profits and as they expand through some of the countries that are part of the former Soviet Union there is a tremendous amount of opportunity there. The people are excited about the opportunity to be entrepreneurial, to have kind of their own business, which is the spirit of what we're talking about and so the benefits of the products and the opportunity for these people is something that they appreciate and so we see some of this happening and now we really look forward to reaching some of the potential that we know that we have and the belief that we have in what we're doing and in going forward. So I'll just mention international and what's happening there. I might mention that because of Japan and to a larger extent to Russia, the sales leaders international are up something like 32% so we see some things happening that are positive that gives us a reason to be optimistic about the potential and what we're doing as a Company. We feel like we're together and pulling together really each of the divisions working better together.

I'd like to mention a little bit about the U.S.. We're pleased that the U.S. is up. We'd like to see obviously greater growth but we think this is the start of that particularly as you compare this to a year ago. If you look at a year ago this quarter was down about 9% and so again what I was talking about before when you have a little bit more mature market some people tend to think well you know kind of that's a penetrated market. We believe we have a great opportunity in the U.S. particularly given the demographics, given our products, given our sales force and really the potential is there and we're starting to show some of that. We want to show more of that but I'll just give you a little bit of an insight into some of this as Craig has already mentioned the number but I think we're up what 2% I think in sales in the quarter and I mentioned we'd like to see more than that but if you look at the book sales, they're up over 4%. Part of the reason for the difference is-- and again this was booked a couple of years ago so it's not something that really was under the control of particularly the current management but our TAC's Rip [ph], which is our Top Achiever's Club, was at the end of June which prohibited us from really taking a lot of the orders from some of these top people at the end of the month and if anything we need to make sure we don't do something like that as we go forward but we had a particularly good TAC's Rip. There were something like 700 people that seemed to be enthused about the opportunity and where we're going and their businesses are growing and so there's some real interest and excitement and to go forward.

And I just mentioned we haven't talked about this before so I won't go into a great deal of detail but we tend to look at some of these regions and how they're doing and some that are particularly important to us and really all of these regions are important and I don't want anybody to get the wrong idea but an important market for us is California. And California tends to be the largest market for most direct selling companies in the United States but California and the Western Region were up something like 6.8% so we think that's a pretty good indicator of the direction of where we're going.

Another important indicator in the U.S. is the manager count. The manager count in the U.S. was up 12% compared to the prior year, very positive indicator for us so we feel very good about that. And something we've talked about in the past we've kind of struggled with was the exchange rates and kind of the level of sales in the Dominican Republic, which is really part of the United States. It's very positive since it's in the second quarter; it was up something like 30% in the second quarter, again continuing to contribute to the potential and the growth that we see that's possible for us as we go forward so I'm particularly pleased with the management overall particularly in the U.S. and, as I've mentioned, in some of the other areas so we feel like we've got a lot of things in place, made a lot of changes that people seem to be comfortable with as we go forward. But as you look at the manager count in the U.S. that's a very positive sign. I've mentioned before the Habit-of-Health. I won't dwell on that but it's a very positive thing for us in the sense that it continues to be an important recruiting tool. It's just now become available in the Dominican Republic and it's been very positively received and we think that that's contributed to the growth that we experienced in the second quarter in the Dominican Republic.

And so as you look at that and as we go forward it looks like a lot of things are in place to help us realize some of that potential so I just have to say that this is a great business to be in. I don't know of any other business where you can see the growth that people experience whether it's the sales leaders in particular, the growth that they experience by accepting the opportunity and working with people and recruiting and helping to improve their lives through products as well as introducing them to an opportunity and it's just a terrific business and I'm happy to be a part of this and I'm particularly pleased with the management group that we have in place now. And as I said before, we've made a lot of changes and I was a little concerned that people would be a little bit concerned about the changes and we think that those are being well accepted and as we move forward there's really a lot of benefit that the people are working together and sort of pulling together so we look forward to what we think we can accomplish. As Craig mentioned we kind of expect more, not kind of expect more-- we expect more in both the third and fourth quarters and we expect to have a great year. And so with that I'm sure there may be some questions. Obviously I haven't covered everything but, Genero [ph], I'd like to open the conference call up to questions with those who are participating in the call, what they might have at this point in time.

Thank you, sir. The floor is now open for questions. [Operator Instructions]. Our first question comes from Mr. David Block from The Seidler Companies. Sir, please pose your question.

Congrats on a solid quarter. My first question and probably the most impressive item in my mind from your Press Release was the increase in the number of managers in the quarter and I just know from experience that this sometimes is a leading indicator of strength ahead and you guys touched on that but if you segmented the distributor and manager growth-- and I know you've just mentioned that the U.S. was up 12% manager count-- but can you segment a little further by division the growth of the distributor and managers for the quarter?

Yes, I'll let Craig give you the segment information but you're right, David. That's something that I tried to stress that is particularly impressive to us because that's what drives the business and there has been some pretty impressive growth in the numbers of sales leaders during the quarter. Craig, do you want to talk about how you segment that?

Yes, okay international I'll say first. International distributors at the end of this quarter were 319-- almost 320,000 distributors compared to year-end at about 304. That's a 5.2% increase. International managers, 11,600 compared to 9,700 at year-end and these are round numbers. That's about a 19.4% increase. United States, 226,000 distributors compared to year-end of 223,000. That's a 1.2% increase. Managers, 6,000-- almost 7,000 compared to about 6,000 at year-end. That's about a 17% increase. Synergy, this is a decrease; there are 125,000-126,000 compared to 139,000 at year-end. That's a 9.4% decrease but that's one that you need to look to the second quarter where we were at 100,000 distributors at the end of the first quarter and so we actually have an increase from 100,000 to 126,000 in the quarter so about a 26,000 distributor increase in the quarter. Managers from year-end were 26-- almost 2,700 at year-end and now they're at a little over 2,800 so real positive across the board when you look at it, especially with the Synergy increase. We recovered three-fourths of what we lost in that first quarter because of going on the ground.

That's great and it seems like there's some momentum in that distributor and manager growth so that's great to see. Looking at the U.S. I guess I would have expected you guys would have had a little better quarter given a favorable price increase comparison this year versus last year, which presumably should have benefited your second quarter numbers this year and if I take a negative view maybe you did benefit from a favorable comparison and but for that benefit the market could have been slanted down. Is that an accurate assessment and would you mind giving some further color on what you're currently seeing?

Yes, that's a good question, David. Thanks for asking that. Rather than the price increase I would point to what I said earlier. You know we took our top leaders on a TAC trip, our Top Achiever's Club. Really the last over more than a week of the last week of June, which tends to be the busiest part of our month usually at the end of the month as it is with a lot of direct selling companies, and you know it probably wasn't well thought out to do that timing because you've got 700 of your top people and they're not placing the kind of orders they normally would. They're out of town. They're not working with their groups. We've kind of talked about that and sort of stressed then again it was not the current management that planned this because those are planned a couple of years in advance and so I think that was probably a bigger key that some of the orders that were placed on that trip didn't get booked until July and so they don't count for June. I think that was probably a bigger impact on our quarter doing that so that's the other reason I feel pretty good about where we are is that had that not been there it would have been stronger in the second quarter but we're still up. We expect to be up more than that and when I point to the number of sales leaders up 12% in the U.S., that's a very strong indicator of where we expect to be later on.

Okay great, so the third quarter we should expect to see something or at least some growth greater than what happened in the second quarter?

Yes, I think that's what you should look for is better in the third and fourth quarters, yes.

Okay and then shifting to a Nature's Sunshine product international, how much of the growth in that market was driven by Zambrosa [ph] and how many markets has the product been launched in to date?

Well that's a very positive thing as well because it has been launched in-- I won't say all of the international markets but a lot of them but the impact and immediately in some of these markets-- I mentioned Canada. I mentioned Brazil, is that it has immediately gone to the number one rank in some of these markets that it's been launched in so I think that's very favorable. If you look at perhaps maybe the third or fourth quarter we expect to see a greater impact but just some of the markets that it's been launched in, Japan and some others, it's either in the top five or number one and so we think as that begins to penetrate into some of these other markets better that that will reflect in the sales as well so that's a very positive thing for us.

David, one thing. The timing of when Zambrosa was introduced was the majority of the markets were introduced sometime during the second quarter, so it's just been introduced for the last-- some markets maybe for 3 or 4 months, most markets it's probably in the month, month and a half range, so--

So everything you're pointing to basically is a strong back half because it seems like the combo of the U.S. and Zambrosa being launched mid 2Q, it points for better things in the back half, which is great.

Yeah and as you know and if I could just add this. You know, Zambrosa is the equivalent of Thai-Go in the U.S. and, as you know, Thai-Go has been very successful and has stayed our number 1 product really for almost since introduction, so we expect to see that kind of result from Zambrosa in international markets and as Craig mentioned it's just kind of been introduced last month or so. So we'll get a better sense of a quarter in the third quarter and then for the last half of year, so we expect to see some good things from that product.

Great and then a last question for now is with Synergy I know you spoke about that it seems to have turned the corner. Can you just looking at Synergy Japan, is that it's staying true for Synergy Japan? Is that on a revenue basis flat to up and can you just give maybe some data on Synergy Japan specifically?

Well, I'll let Craig talk a little bit about the numbers if he wants to do that, but the thing for me is I've talked about the on the ground conversion and why I feel like we've turned the corner is particularly when you talk to the sales leaders and their level of enthusiasm and excitement of what we've done there because the on the ground thing and there a lot of people who understand it but some that don't, but the main difference is now a lot of these products that are on the ground can be resold. We were fairly limited in the PI business because, you know, it's not for resale and so now we think we can get a lot of that momentum and the fact that the growth and as Craig talked about and I'll just mention it again. The distributors were up 48% compared to the prior year. Sales to leaders were up something like 90%. That's really what's driving this.

As far as Synergy Japan sequentially it's going up every month and that's probably as far as I want to go and so sequentially I feel like Synergy is growing and that's even in light of the devaluations that have taken place in Japan and so we feel pretty good about that Synergy Japan is back growing.

All right, great. Well, thank you guys and keep up the good work.

Courtney Coles from Adams Harkness.

Good morning guys. A couple of questions following up again on the distributor count. Thanks so much for breaking it out in a little bit more detail. The-- you know when we look at-- when we put the numbers into our model it does appear that the sales incentives, the volume incentives are significantly higher than we've seen in the past. Was there any particular activity that drove this higher, any promotions that you had in place, or programs that we don't know about?

Probably the biggest thing that is Synergy, Synergy pays out higher than anybody else and then if you compare last year to this year you have that freight that was in the sales line, which caused their volume incentives to end up as a lower percentage of sales and so when you back that freight the volume incentives would say the same as a percent of the wholesale dollar, but because there's no freight in there it ends up being a higher percentage. It shows a higher percentage payout, so it's really not any changes in program other than the doing away with that freight had a significant impact on that volume incentive line. That's the one thing that impacted that.

And so, therefore, in terms of recurrence should we expect that higher volume incentive as a percentage of sales to be going forward?

It will-- it should stay about the same as what it was for this quarter, so it shouldn't go down. It'll be in the be in the 40%-- it should be in about the 40% range, let's say that, so maybe just a slightly higher than 40%, whereas year-to-date we're only 39.6, so it should be right around the 40% for volume incentives.

Okay and some detail on the tax benefit because you know if we use a normalized tax rate, obviously the bottom line doesn't look quite as in line as it does with the 12.6 rate that we calculate, so what exactly were the benefits from?

What that's from is from some one-time benefit that came because of-- we had an IRS audit and had some benefits that came because of that, so without getting into the specific details of each of the line items we cleared audit just fine. We had made sure that we were covered in anything that was an aggressive stance and cleared audit with that, so we can no longer justify having anything in there to cover those aggressive stances with the IRS.

Okay, thanks.

But going forward we-- with the tax planning we have in place we feel like normalized rate should be between 30 and 32%, so we shouldn't be up in the 35, 37% range, so it should be down around the 30, 32%.

Okay, thanks and just finally you know the SG&A control going into the back half of the year has been a topic these past 2 quarters and so what can we expect going forward in terms of that control?

Well, if you just look at the Synergy loss, Synergy $1.1 million loss, last year for the quarter they made about 700,000. That one item there is all in the SG&A line and so you will see a huge turnaround there, as they will be profitable for the third quarter. That's a promise-- I mean guess as much as I can promise that something is going to happen and I mean I really went out on the limb there but that is one that the management has taken control of that and we've put things in place where we won't have those loss. That will be huge. Brazil is another one and then we're just holding everybody else in line so that there's really not an increase in SG&A, so we feel pretty good about that SG&A is going to come in line with what we've been talking about.

Okay, terrific. Thanks so much guys.

Mr. William Nasgovitz from Heartland Funds.

Could you just comment a little bit about the landscape here of this whole space in terms of periodically you get reports saying Vitamin E is not as good as it once was thought and how that might affect your product line and also regulatory threats in terms of your space? Thank you.

Yes, I probably have a different view of this than most people that you may have talked to, but we have very good scientific people that sort of follow these studies and they see where there may or may not have been a proper study, or if there is something that might have affected that study. I'm not trying to discredit any of the studies, but we know that the products that we sell help people because we get to see it. We hear it and we're very-- I want to say that we're not negatively impacted by some of these studies that come out and try to purport that this isn't as good as it was thought to be and kind of thing because overall we know people are interested in health. We know these products help people with their health and obviously we have to be very careful from a legal standpoint as to what we can and can't say about the product, but those studies don't tend to negatively impact us as much as say other companies, mainly because of the dedication and commitment that we have from our sales leaders and as we look at that going forward we think that's one of the things that kind of separates us and I'm sorry I missed-- I forgot the second half of the question. Oh, the regulatory that's good, thanks Craig.

We've taken a position on the regulatory and we follow that very closely and we have been impacted by some things and our people both in sales and operations have worked very closely together to address those issues, so we think we stay on top of those, but by introducing some of the products that have begun to sell very well for us we think, both internationally and domestically we will be less impacted by some of the regulatory things that we see coming, mainly because we've gone to-- we've talked a little bit about this with Zambrosa and Thai-Go and some of those products that are a little bit more focused closer to-- and I say closer, not that they are, but they're closer to say foods and sort of regulated a little bit differently than encapsulated herbs, or really even vitamins. And so we think that's a way to position ourselves to kind of deal with that, but we've been through a number of regulatory things as a Company and I feel like our employees and our management have worked very well to mitigate the impact. Certainly it's something we're concerned about, we follow, we watch very closely and we feel like we've reacted to some of these things the best that really can be and so it's something we believe we can manage going forward.

Sir, does that complete your question?

Yes, thank you.

Mr. Brian Kuwalche [ph] from Westpark Capital.

Quick questions for you regarding the Synergy expenses, can you maybe help me understand a little bit better what the nature of the expenses involved in making this transition were and why you're so confident that they will not be recurring in the back half of the year?

Yes, the-- if you go back to last year we did not have operations in Japan. We had-- everything was shipped personal import in and so we had an organization that was built in the United States to really do 20 million in sales out of the United States operation. That was a fairly significant operation. In October we launched Synergy Japan, which was almost equivalent in size to what the US business was. To give you an idea of the-- let me make sure I've got the right quarter here-- year-to-date in Synergy our SG&A in Japan is about $4 million. The US business last year was year-to-date was about $7 million. Yes, it was about $7 million, but $6 million, but it's only decreased to 5 million. We're pairing back the US business to fit the size of the business and we also built Japan for the huge growth that we had anticipated going at the same growth rate that we were last Fall, which didn't happen and so we've cut the Japanese business back to where it's the right size and the US business we're cutting back to where it's the right size and so, it becomes very simple that we really doubled the organization to handle it and now we're cutting it back to where it should be, so that's a pretty easy one to get to.

Where are you making those cuts?

Across the board, you know, like we've got some contracts with providers for doing some things to help us with growing of the business. Those are disappearing. We've got employees that were staffed; about 50% of our costs were employee costs. Those are-- we're not laying people off it's just through the normal attrition. Most of them are now gone, where we were using temporary services to take care of our customer service, our order sales. We've trimmed back our management in the US by 3 people and those were fairly significant management positions. At the same time Japan added the same number of people to take care of the customer service order sales. We've cut those back to where they're the right size and so it's-- a lot of it's on the salary side is where a lot of it came in and the professional services that we were using to help us to grow that business in the short term so--

Okay, that's helpful. Thank you. Outside of your commitment to and statement that the Synergy operation will be profitable in the third quarter and your commitment to lower expenses going forward--

I went out on the limb on that one.

I understand and hopefully you can reach it, but would you care to offer guidance for the operation as a whole going forward?

As far as?

In terms of expectations regarding revenue and earnings going forward?

Douglas is the revenue guy, so I know that there are some analyst reports out for this year and I think if things go the way that we're anticipating this year that we feel comfortable with those numbers that are out there, so I think-- I can't remember the exact range was $1.25 to $1.30 range is where the year was I think projected between the different groups that are out there, so feel comfortable on the earnings side. Sales wise I'll let Douglas talk about this.

That's surprising because he knows I'm way too optimistic.

I know.

--to be talking about it but we see some positive things. I don't think I'd want to throw out numbers necessarily, but I mentioned earlier the trip that I had made to Japan with Dan Higginson who runs that operation and just the level excitement. The numbers-- I mean there were several thousand people at this meeting and I would say that I expect the momentum to pick up in the third and really even more in the fourth quarter in line pretty much with what Craig said is the analyst expectation.

Okay, thank you gentlemen.

Mr. Peter Reed [ph] from CL King [ph].

Couple questions, one on the freight cost side, if the Synergy Japan revenue no longer includes freight costs, or freight revenues I guess, presumably there's a lower freight cost now as well from servicing Synergy out of Japan. Is that true and where does that show up? Is on the gross margin line?

That's in the SG&A line. I will tell you this that freight was a very profitable business for us, so to make sure we were covered we did make money on freight and so that impacted us as we did away with the freight income. Even though the expenses went down we were making money on that and so that impacted us on the bottom line there, but the offset is in SG&A where the expense is. The income is in sales.

And then on some of these programs where people sign up for monthly Habit-of-Health, have you seen any impact from higher gasoline prices kind of eating into the discretionary income that allows people to do that on a monthly basis? Are your recent purchase ratios as good as they have been?

No, it isn't as good as they have been and I mentioned the DR where it has been just introduced there and what a terrific response we've had to that, but your issue of the higher gas prices is an important one. It's something we monitor very closely and we have had to look at that and say, "Okay, do we need to adjust our shipping to make sure that we don't fall behind that as well?" but I expect to see some impact to people, but as you spread that over a larger group of people-- our expense goes up pretty significantly, but if you spread that over individual distributor numbers, we haven't really had a lot of complaint about any adjustments that we've made there, but it's something that we follow very closely and it doesn't seem to have impacted the Habit-of-Health. You're talking about the auto shipments, right?

Well, yes and then the cancellation rate. I mean are people sticking with it after the first-- what do they signup initially for 3 months and then--?

Yes, initially for 3 months and we see some people that signup for more. The main thing on that, as you probably know, Peter, is that it's a way of getting people exposed to the product and feeling the benefit from it immediately so that they can then talk to other people and so it's partially offset by more people signing up. But we see that as a way to kind of simplify the business to make it so more people can do it and we think that it's having that impact, so we don't see a lot of drop off as a result of your original question is the rise-- is the change in gas prices.

Yes, well I guess-- yeah, I mean do you have specific data points to show that the renewal rates are holding firm on that or--?

Now, I looked at those and I'm sorry I don't have them in front of me right now, but as I recall they're pretty consistent. They kind of-- they may dip a little bit but they strengthen towards the end of the quarter as I recall.

All right, thanks.

Thank you. At this time I'd like to turn the call back over to Mr. Faggioli for any closing statements or comments.

Thank you. I appreciate your interest, your questions and understanding that this quarter, as I mentioned before, I'm very pleased with the management group that we have in place now and it's been hard, but we've made a number of changes that we think are going to benefit the Company going forward. We see the growth in managers and distributors obviously as the key. We feel like we've turned the corner with Synergy. We see some growth in the international markets as well as our confidence in the current market. I just-- now this might not mean as much to you as it does to me but we believe in what we’re doing. We believe in this Company. We believe in the benefits that people achieve through products and through the opportunity and we look forward to be able to report to you further on the third quarter and we appreciate your interest and your questions and frankly your support, so we'll be looking forward to the third quarter. Thank you very much.

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