如新 (NUS) 2003 Q1 法說會逐字稿

Good afternoon, my name is Jason and I'll be your conference facilitator. At this time I'd like to welcome everyone to the Nu Skin Enterprises First Quarter Investor Conference Call. All lines have been placed on listen only to prevent any background noise. After the speaker's remarks there will be a question and answer period. If you would like to ask a question during this time then please press star then the number "1" on your telephone keypad. If you would like to withdraw your questions, press star then the number "2" on your telephone keypad. Mr. Allen you may begin your conference.

Thank you very much. Good afternoon. We appreciate all those who are joining us today on this conference call and all those who are listening over the Internet. With us today in the conference call this afternoon are Mr. Steven Lund, CEO; Truman Hunt, President; Cory LindleyLindley, Executive VP, President of Greater China operations; Ritch Wood, CFO. After the management's discussion of the company's operation, the call will be offered for questions.

As a reminder during the conference call comments may be made which include some forward-looking statements. These statements involve risk and uncertainty and as you know actual results may differ materially from those discussed or anticipated. We encourage you to refer to a copy of our 10-K and most recent 10-Q and today's earnings release for a complete discussion of risks associated with these forward-looking statements on our business. I'd now turn it over to Steve Lund.

Good afternoon and thank you for joining us today. During the first quarter we reported revenue of $220 million and earnings per share of $0.16. We are pleased that true growth margin improvements and by containing SG&A, we are able to achieve our earnings target for the quarter despite lighter than expected revenue.

Our focus on the higher margin profits, the variable nature of our cost structure and continued efforts to automate orders are allowing us to protect profitability.

Several factors contributed to our revenue results. First the expansion of our China operations attracted the attention of many of our distributor readers who spent time in China during the quarter. This activity negatively impacted first quarter revenue as our leaders took their eyes off of their home market. Of course we view this investment by our distributor leaders positively as we need their help to establish a solid foundation for our business in China.

We also have expected a stronger distributor response to our marketing and promotional efforts in March. Our March promotions were well received in many countries including the US, Europe and many South East Asian markets and although our March sales still tract up well in Japan over February we expected a stronger distributor response at month's end.

Based on our results in March, we feel that we are seeing the impact of continued economic weakness and erosion of consumer confidence in Japan. Many of our initiatives and products introduced at the Japan distributor convention in March will roll out over the next several months.

We did launch a new skin treatment product, Nu Skin True face essence, that got off to a good start generating more than $2 million of revenue in the last few weeks of March. In addition, we announced incentives to motivate the individuals to successfully complete the executive distributor qualification process in the upcoming months.

First quarter revenue in South Korea was down 14% compared to 2002 results after a strong run over the past few years. We believe the primary challenge we face in South Korea is a difficult economic environment. Nevertheless, we expect to deliver a modest sequential quarterly revenue growth throughout the remainder of this year.

We were able to post solid revenue growth in Hong Kong and in Taiwan during the first quarter. Strength in these markets are encouraging because they are more closely tied to China. Our distributors there enjoy significant home court advantage in China because of cultural and language familiarity.

Most of other markets in South East Asia performed well. Thailand continues to be our fastest growing market with revenue up 83% from the first quarter. In Singapore and Malaysia we expected a year over year decline in our business which is typical in new markets as distributor leadership shifts from foreign and to less experienced local distributor leadership. However the revenue decline was amplified because many of our new distributor leaders in these markets invested their energy in China. Combined Australia and New Zealand revenue was up 28%.

We are encouraged by continued improvement in our US business. The Nu Skin and Pharmanex revenue was up 17% in the US during the quarter. Much of this growth was driven by distributor enthusiasm for the Pharmanex Bio-Protonics scanner.

We have talked a lot about this tool, which allows our distributors to non-invasively monitor the impact of our dietary supplements in skin tissue. In February, we delivered 30 scanners to distributor leaders in US; early results suggest the distributor to using this tool to increase sponsoring and to drive increased sales in the life pack, a laxative nutritional supplement.

During the first quarter US life pack sales increased 30% compared to the first quarter of 2002, much of the new demand is coming as automated monthly subscriptions of our products. During the first quarter, our automatic delivery orders in the United States increased 23% over the first quarter of 2002 and represented 39% of Pharmanex's US revenue. These automatic delivery subscriptions have a very positive impact on our business, increased significantly retention in distributors and customer.

Finally, although difficult to quantify the impact on our overall business we believe that the global concerns with SARS as well as geopolitical concerns in Iraq and North Korea have also negatively impacted sales in the last part of this last quarter.

Direct selling is a social business as you know and events to keep people from getting together tend to work negatively in impacting our results.

I have asked Cory Lindley to address the SARS issue as specifically today and as much you have insight in China and overseas our businesses in Hong Kong and in Taiwan. Ritch, then, will provide greater details to our financial results and Truman will conclude this call with our outlook for the second quarter and the year. Cory, you want to shuffle in.

Sure, Thanks Steve. It's great to be with you this morning from my time in Shanghai and it is pleasure to be here.

I wanted to address a couple of issues Steve mentioned. First, I will talk about our developments in our China business and second I will talk about SARS and issues in the region and how they may impact us.

Let me say that over the past nine months since relocating to China, teams traveled to the many parts of the country, we visited with countless regulations on both the national and local level. We have seen international leaders grow to understand our retail model and most importantly we witnessed the beginning of a unique retail model that has attracted a high caliber sales force to help us make this market into one of Nu Skin's biggest markets we believe. So things are going quite well.

We had initial challenges in January and February as the government, the media and our competitors came to understand that we were establishing the foundation that is poised to really be a formidable player in this market. The challenges which we had were expected and we have been able to see our business begin to grow and develop.

As we have explained many times direct selling is not allowed in China and even though we do not conduct direct selling activities, the fact that we are one of the largest direct sellers in the world raised concerns in the minds of the regulators and competitors. Therefore, we have aggressively worked to clarify our business model, which is on a solid legal foundation of employed sales people selling products from our 6 retail locations.

We have made significant progress on this front and while we expect there will be challenges from time to time, our outlook is extremely positive and it is based on feedback and guidance we received from local and national regulators.

I can assure you that operating the 100% wholly-owned retail business in mainland China is a bit of a challenge. However, the opportunity in this market is enormous. As we focus on building a solid foundation in this first year and work through the educational process required internally and externally, we are confident that are poised for tremendous growth in the years to come.

With the support of our international distributor leaders, we got off to a quick start in January but the sales then slowed due to Chinese New Year holiday which really occurs for about three weeks, and because of increasing government media and competitive pressures which all seemed to be wrapped together in China.

However as we have educated people on our business model, we have begun to gain the trust and confidence of the government as well as the media. We have still not convinced our competitors are yet pleased with our entrance in to the market but they are learning to deal with the reality that we are here to stay.

In any event, after Chinese New Year sales again picked up momentum and we ended the quarter on an upbeat note with sales in March about 40% stronger than February. We believe that sequential quarterly growth throughout the balance of the year is likely. Our break-even revenue in China is about $7 million to $8 million a quarter and we should be there by the third or fourth quarter of the year. So things are going actually very well for us today in China.

Now let me mention a few words about the impact of SARS here in the region. As you know this has become a world issue in late March and today following the reports of cases of SARS in Hong Kong, Vietnam, Singapore, Toronto in Canada and most recently the increasing number of cases in Beijing. We are also aware that this also started in Guang-Gong province, which is near Hong Kong last November.

Well SARS is not widely understood and is most likely still under reported throughout China. The mood among our employees and distributors is one of caution and not panic. This is particularly true in Mainland China where I found that most Chinese people are not overly concerned with the late reporting of cases by the government. They seem to take such issues in stride and never trusted the early reports of minimal cases in many cities anyway.

Travel throughout the regions has been significantly diminished and the number of meetings that distributors hold has been reduced. If this continues to occur, our revenue could be negatively impacted. However, having our distributors staying at home and working in their home markets is not necessarily a bad thing and as of right now we are seeing very solid results in Hong Kong, in Taiwan as well as in China during this month of April.

It should be remembered that we are company to market health products such as antibacterial cleansing gel and antiseptic hand sanitizer and also nutritional supplement to help improve ones immune system. We're carefully not to be overly promotional with these products as a cure for SARS but the unit volume of many of these products has really soared in recent weeks up to 5 times to 10 times the normal sales volume of some of these products.

In addition a growing percentage of our revenue outside of China continues to come through automated mechanisms specifically monthly auto ship subscriptions as well as orders over the Internet. People can still order products even if they are not visiting walk in centers to place orders.

So while the risk for the longer term are still better known, it will most likely remain unknown for some time. For now we are doing fine and we are on track to reach our second quarter target. So with that let me turn the call back to Ritch.

Thanks, Cory. Let me quickly provide the local country sales figures from our major geographies. Japan revenue for the first quarter was 14.5 billion yen versus 15.5 billion yen last year. South Korea was 16 billion won versus 18.7 billion won in 2002.

In South East Asia, revenue from Taiwan during the quarter was 610 million NT$ verses 587 million NT$ in the previous year and Hong Kong was 43 million Hong Kong dollars versus 39 million Hong Kong dollars last year.

The combined US revenue for Malaysia and Singapore was $10 million versus $16 million in the first quarter of 2002. Our US market generated $28.8 million of revenue in the first quarter compared to $33.2 million in 2002 and first quarter revenue in Europe was $7.6 million compared to $6.1 million in the first quarter of 2002.

Our gross margin improved 150 basis points to 81.1% compared to 79.6% last year. Distributor incentives were 40.1% of revenue versus 38.3% in 2002 but remained mostly even with our fourth quarter results.

The improvement in gross margin and the increase in distributor incentives are primarily due to shift towards our Nu Skin and Pharmanex product line which carry higher growth margins and pay out a higher level of commission.

SG&A expenses were 32% of revenue in the first quarter compared to 31.8% of first quarter of 2002. Approximately 180 basis points of the increase in SG&A expenses is related to our cost of our Japan convention which we did not have in Q1 of 2002.

We experienced a small gain of $600,000 in other income and our cash balances were impacted during the quarter primarily by annual tax payments.

We need to note a couple of things that will perhaps significantly impact our financial results going forward. We are transitioning most of our big planet telecommunication business from being an actual provider of those services to providing them through an agency relationship with major telecom carriers. We are also selling the professional employee organization we have recorded through big planet for the past two years.

The financial benefits of these decisions will begin to be recognized in Q3. But we are expected to increase our consolidated gross margin by approximately 100 basis points and improve our overall operating margin by about 20 basis points. However these steps will negatively impact big planet and company revenue by approximately $15 million to $20 million over the remainder of the year.

While we anticipate healthy sequential growth, we face a difficult second quarter 2002 comparison. The announced expansion of our China operations and distributor leaders qualifying for recognition of our international convention last year created increased activity during the second quarter of 2002 and this year we expect second quarter revenue to be between $228 million and $235 million with earnings per share of $0.19 to $0.21.

For the year we demonstrated in Q1 that we can generate earnings growth even during periods of flat revenue. All things considered as we look at 2003 including the loss of Big Planet revenue, we still are prudent to model revenue essentially even to 2002 results.

Due to our focus on improving profitability however, even at this level of revenue we are confident that we can generate earnings per share growth of 6% to 10% for the year, which would put earnings at $0.83 to $0.86 per share. With that, I'll turn the time over to Truman.

Thanks, Ritch. As we conclude our remarks today I'd like to reconfirm our priorities and objectives towards remainder of 2003. As indicated in our release our top three geographic priorities are Japan, United States and China.

As a largest market, our top priority is to maintain a vibrant business in Japan with new products and programs introduced at the March distributor convention rolling out over the next few months. Softness in our Japan revenue in Q1 was mostly of Pharmanex issue. To address we have new separate time lines for the launch of Reishix, a powerful product that protects and provides immune system which was previously planned for a fourth quarter launch in Japan. This product will now be introduced in June.

Reishix was introduced in United States and Taiwan last fall and has quickly become a leading seller for us. It's also a product by the way that resonates in today's environment given concerns about SARS in as much as it protects the body immune system.

In addition of significant interest, we have Bio-Protonics scanner generated in US goes well for the potential of this tool in Japan and other markets. We planned to have a few scanners in Japan distributors support centers by the fourth quarter of 2003.

In addition to the Pharmanex initiatives we're encouraged by the initial demand for Nu Skin True face essence. We expect these new products as well as new longer term incentives to avoid competitive distributor development, to help prevent further revenue decline in Japan throughout the remainder of the year.

We believe that the US market holds great potential for healthy revenue growth for us. United States is growing to become the largest drug selling market in the world now surpassing Japan. The environment here in our home market is good for direct sellers as baby boomers continue to get closer to retirement and face the realities that they can't afford to retire and periods of economic stagnation have also created positive environment for our distributor leaders to recruit new blood into our business as people choose to supplement or even replace the income.

And selling new products and the Bio-Protonics scanner are generated solid distributor activity in the United States currently. For the first time, it is about the science scanner consumers can easily monitor the impact of regular supplementation and healthy diet. We are seeing very encouraging interests in all our distributors in using scanner as a business building tool and we will be ready to put several hundred scanners in to the market in USA by end of the second quarter.

As we indicated a couple of months ago, we are in communication with the FDA currently after receiving an indication from a staff members that in his view the Bio-Protonic scanners will be classified as a medical device that should require clearance for commercially exploit it.

We disagreed with this characterization and believe with our outside advisors that we have a solid legal basis for marketing this scanner is a non-medical device. Nevertheless while we work out this issue with FDA, we have made a determination to go ahead and file an application to market the scanner as an over the counter device.

Hopefully we will not have to rely on their registration, which would expect to take 6 months to 12 months, but if we do then the wheels are in motion and we'll be well down on the path in the event the FDA ultimately makes a determination that clearance is required. We are also reviewing similar regulatory issues in time lines and other major markets.

As Cory indicated we continue to be optimistic about our potential in China. Our plans continues to be to make the China one of our top three markets within the next 3-5 years, opening 100 retail stores in China during the quarter was a significant illustration. We are encouraged with the progress that we are making on operational and the regulatory fronts. All of our recent contracts with our regulators indicate that our position there is positive and improving.

We are also encouraged by the $4 million of revenue generated in China during the first quarter and continue to anticipate that China will contribute $20 million to $30 million of revenue in 2003. With that I will turn the call back over to Steve.

Just a couple of additional comments before we open for questions. Today we announced two upcoming changes in our board of directors. Max Tinegar, a long time member of our senior management team and a member of our board of directors since 1996, has decided to retire. We have worked with Max for 15 years and it is sad to see him go but at age 72, we think he deserves a break and we wish him the very best.

As previously announced in order to complete a volunteer assignment for my church, I will step down as the company's CEO and as a member of board of directors on May 20th. I look forward to the service that I will perform but will miss the daily challenges running this dynamic business.

Truman Hunt will assume the role of CEO and has accepted to sit on our board of directors. We are pleased to announce that Joe Ferrera has accepted an invitation to join our board of directors. Many of you know Joe through his distinguished career with Avon. Joe has more than 20 years of direct selling experience. Prior to concluding his career with Avon in 2001, Joe served as the company's chief operating officer of international and business development and as a member of Avon's board of directors.

With his wealth of industry experience, we are fortunate to have him serving on our board. All of these changes are scheduled to take place on May 20th at our annual shareholders meeting and with that I would like now to open this call for any questions that you might have.

At this time I would like to remind everyone. If you want to ask a question, please press star then the number "1" on your telephone keypad. Your first question comes from Bill Stele(ph).

The second quarter outlook, I guess I'm kind of wondering which of the markets due you see somewhat deteriorating in the second quarter and then conversely what are you doing to cause them to kind of revert back the form beginning in the third quarter?

Bill, this is Ritch. I will take a shot at answering that. There is a really four market that we anticipate continued slowing in the second quarter, Japan, Korea, Malaysia and Singapore. Similar probably slow down races to what we have seen in the first quarter.

Basically holding even so Japan being down 6% in the first quarter kind of continuing in that range in the second quarter. We have initiated a couple initiative particular in Japan to get that market going back in the right direction, there is an initiative that is meant to grow executives, it is kind of ten year anniversary initiative that we are running starting in March.

Initial signs were positive there, we have seen good number of entrants back in to the executive track which should bode well for our executive numbers going forward.

Korea, we have seen some stabilization as well in that market in the first quarter and I think you know we are seeing some positive signs in that market. Singapore and Malaysia, clearly were impacted significantly by the opening of China in the first quarter. They will continue to be down, I would anticipate revenue for those market being in the probably the $30 million to $40 million dollar range for this year.

All right and with regard to the sale of the PEO and I guess the change at Big Planet into an agency size, are you are anticipating booking any sort of gains on those transactions.

There will not be any gains on those transactions. Sale would anticipate you know that those things will be finalized in the second quarter and there will not be any gain from the sale of that, but we do not anticipate a large negative impact either.

Great. Thank you very much.

Next question comes from Alice Longley (ph).

Hi. Good afternoon. Could you tell us more specifically what is wrong in Japan? Why is that business down?

There is you know several factors that we look to. Robert Conley who oversees that region has just been in the market trying to answer that question and make sure that we got it cleared. We think that we do understand there is no single thing we point to.

One issue has been outside of the things that you would expect, the economy softening there has impacted our China business. There has been a great deal of enthusiasm around the opening of China for some time. Much of the enthusiasm that has been fostering Japan's growth for a while has been built around expectation that they would be able to go and recruit in China on the doors there and build a business very quickly.

The reality has been a less robust than it had been hoped so the Japanese distributors took their eye off of the local market and went and did business in China. They found that they were getting a smaller return on invested time than they are used to getting, but it became evident that the Chinese build was going to be a slower build than they had anticipated and that has all taken a little bit of the air out of the emotional sales in Japan less than a piece of the business.

We are encouraged that now that the picture has clarified itself in China that as we talked to people there, they are still enthused about the Chinese future, just many of the executives that have qualified themselves to go participate in China have scaled back their momentum for now.

So even the Japanese were going over to China or that was their intention? The start of the Chinese operation? I thought it was more for Chinese people and Chinese heritage in Hong Kong that were going over to China.

Our Japanese leaders have participated in our openings around the world so there has been the China play has been a significant part of the Japanese recruiting environment for sometime. Robert, do you want to comment further?

Yes. China plays a bit of a role. We are also seeing some consumer confidence declines in Japan in general as you can see in newspapers and what not. There stock market is an all time low, although low for the last 20 years or 30 years and consumer confidence in general is a little bit down, but again as Ritch mentioned we do have initiatives in place that are showing good signs of building back an executive base right now and we are still confident in Japan going forward.

What kind of estimate are you using for China for this year at this point?

China is between $20 million and $30 million and that will be break even about the end of the year. So, at about the end of the year, we will hit the break-even level in China.

Okay. And then in the guidance that you gave for the second quarter on I think it works out the sales being down 2-3% in the second quarter and yet they were up about 2% in the first quarter. So, instead of the same trends in the second quarter, they really look worse year over year. What areas are worse year over year?

Actually it is about the same in terms of constant currency. So even though we are up 2% in stated currency in the first quarter, it was down about 4% in constant currency. That trend will continue in the Q2 and then we anticipate getting closer to even as we go in Q3 and Q4.

Okay. That is helpful. Now, also as far as the bottom line is concerned, if I follow your guidance, the mid point of the increase for the year would be up 8%, which would put you at $0.84 and that would require I think for you to be up 17% through the second half of the year. Is that right?

That is right. In earnings per share, that is correct.

And how do you think you can do that? I mean that is huge.

There is a couple of things. First of all, by getting rid of the initiatives that we talked about in big planet we'll see a pretty good increase in our gross margin and overall operating margin.

The second thing is we had a convention if you recall in Q3 of last year in the US, which was about $5 million spend, which will not repeat itself this year. We will continue to manage our SG&A very carefully. We are very happy at the level that that came in, in the first quarter. Our markets have done a good job of managing that carefully with some slow downs in the top line revenue and so all in all, we are still confident in those numbers that we have given.

In the final question, could you give us the sales in dollars for the major countries like Japan, South Korea.

Sure.

Why do not we do those two first?

Okay. Japan was $121.9 million and Korea $13.4 million, Taiwan $117.6, any others that you'd like? Those are kind of the major ones. US are $28.8.

What was Hong Kong?

Hong Kong was $5.6.

Okay. And Singapore and Malaysia?

$10 million combined.

Of Europe?

Europe was $7.6 million.

And Canada?

Canada was $2.4 million.

And I guess, Latin America?

Latin America was about $600,000.

Big Planet?

Big Planet was $4.1 million.

And I guess my final question was for the second quarter what would the sales comparison be in local currencies over year in you estimation?

As a percentage, it would probably be down about 4-6%. Sorry. I gave you the Big Planet US number, Alice. Let me just back up one step. Big Planet plus Signa was about $8 million in the US.

Okay. Thank you very much.

Your next question comes from Doug LaineDoug Laine(ph).

Hello. Two questions. One is on the businesses that you are moving out of the Big Planet in the second quarter. On an annual basis, what kind of losses were they running on the profit line?

And then my second question is in Japan there has been a decline of about 10% in your executive distributors since last summer, I guess the end of June quarter and could you may be address very specifically the decline in the executive distributors. What it is that is showing a reversal of the increase that you have been having really since year 2000?

Sure. Let me first of all jump in, Doug, and answer the losses associated with the Big Planet, the two Big Planet initiatives. Each one of those suffered about a $0.5 million loss last year, but that will be going away and in fact the agency relationship you know will be losing the revenue on both of those sides, but we both believes the losses as well about a $1 million of loss combined.

Let me just say in Japan quickly and then we can give a little more color on it maybe from somebody, but we would anticipate our executive number to begin growing with our revenue number here going into the second quarter. Executive number really tracks for the most part where our revenue's going and as we increase sequentially here from Q1 to Q2, we would anticipate some stronger executive numbers going into Q2.

Where are you looking? I thought you were looking for sales to be down again in local currency in Japan 2002?

I am comparing sequentially. So, going from Q1 I guess what I am saying we bottomed and will start heading the right direction now.

Got it. Okay. Thank you.

Your next question is from John Morrisani(ph).

Hi. Could you go over cash generation in the quarter and usage of cash?

Sure. We had some big tax payments due, which was the primary reason for our fall I guess in our cash balance. We still generated healthy cash from operations with the exception of about $15 million tax payment.

We also paid out $5.9 million and repurchased about $5.9 million of stock and paid out $5.6 million in dividend. There was about $6 million of investment in fixed assets primarily the scanner and some new offices that we moved into in some of our foreign markets and those were the primary areas of cash flow for this quarter.

Okay. The next question, you mentioned that you had actually filed an OTC device for the scanner. Can you just walk me through the timing on that and what is the timing in terms of the determination of the FDA and how is that working out in terms of whether they allow you to continue going here?

Yes, John this is Truman Hunt. We have not actually filed with registration yet. We are in the process of preparing it. We have felt quite strongly based on advice of the council that our legal position is very firm on this issue and continue to take that position.

We are in the process of running you know communication through various levels of FDA trying to get through this particular staffer into this person's superiors basically and into the general council's office.

We'll try to get a little more definition to what FDA's position is going to be on the scanner. In the event we do not prevail in our argument, we will have this application in process.

The last I heard, would have the application filed within the next two weeks and because this machine is no safety issue here and because we also now we face a very solid legal argument, we feel that there is a higher likelihood that FDA will not really get hostile on us here and require us to remove the device from the market.

We intend to continue on task to put several hundred units out into the marketplace by the end of Q2 and more even in Q3. So, we remain on track here with respect to the implementation schedule of the device while we run down this parallel pass with FDA.

Okay. And when are you starting to, regardless of what happens in the US, what about Japan?

Japan, we are early in the process of evaluating the legal parameters there. We are comfortable that we can put some units in our walk in centers and start to ramp up enthusiasm for what the device can demonstrate with respect to our products here in the near term.

The bottom line on the scanner really has to do with the type of claims we made with respect to what it is measuring and you know we want to be cautious and conservative in that regard and basically just put a consumer on to take a baseline measurement of the consumer, put that person on our products and measure the results in 60 days, 90 days, and 120 days.

We are very confident that 99% of consumers who were put on LifePak are going to see an increase in their keratinoid antioxidant level. So, we feel that we can let the machine do the talking without having to make a lot of claims with respect to what our products are doing or what this machine is doing necessarily.

Truman, forgive me for asking this, but can you sort of do a test with individuals at the same time that you measure this with your thing, you can take a tissue sample and or blood sample and measure it that way. Can you verify the backup that way?

Yes, there are other potential mechanisms to measure antioxidant levels and we are even working on a couple of alternative mechanisms. The issues, however are, with blood you know people can fight levels in blood relatively easily based on what they have eaten that day. So, the blood is not really a great measurement for antioxidants that are really getting into skin tissue.

The only comparable that would be as accurate as this device is would literally be to take a chunk of flesh and grind that in the machine and analyze that and so far people have not been really willing to let us do that, nor would we want them.

I was just trying to figure out is there a way, is there an actual solid test where you can actually not with 1500 people, but with 5 people or something like that, you can get volunteers that will corroborate your results?

If the question is that are we confident in the technology that we are getting good readings and that the readings stand for something, the science is very sound there. I think that we have collaborated and in fact, we have done numerous tests with other mechanisms to basically correlate the results we were seeing with the scanner.

Okay. And the last thing, I am just not familiar with the product that you were mentioning, something I could not quite hear. Was it reishin-x or something like that?

You know it is called Reishix and this is a proprietary product that is very compelling because it is significantly more potent than anything else in the market. We basically use a proprietary process to convert a particular mushroom into a reishi product that we have demonstrated to be hundreds of times more powerful than anything else that are in the market that is based on the same mushroom.

And this is you are introducing this at the end of June, is that I hear what said is right?

In Japan, mid June. We have introduced it in the US and Taiwan where it has done very, very well even though it is a relatively expensive product frankly. In Taiwan, it is particularly huge because this particular mushroom is very familiar in Eastern Pharmacopoeia. People are very familiar with it and our story there is very compelling because of the proprietary process we use in processing this product. Thank you.

Your next question is from Kris Ferrera(ph).

Just want to go back to Japan. I guess the concern is as of last quarter I think you did 4% local currency growth and we are talking about Japan being a 3-5% market. Now, as quickly as one-quarter turns, I can understand their economic difficulties are there a bit but this could be as one quarter turns.

Now, you have a 6% local currency decline in sales looking for that again next quarter and you are talking about you know trying to do things to stimulate distributive growth rather than you know just relying on the products doing, this on the top of it be a quarter in which you had a convention in Japan. I was just wondering if you guys were surprised by the trail off in revenue in Japan and you know I guess how we should look at it going forward and as far as consistency goes.

I will answer that Kris's question. Let me just clarify, first of all the convention happened the middle of March and we ruled out one or two products, but for the most part the initiatives ruled out over the next quarter or two. I think we were surprised that it was down a little bit more. I think it is impacted by China a little bit more than we had anticipated, had some flowing right off and more executive fall out and we have anticipated.

We see some signs of stabilization as there are a couple of key numbers that we look at. For example, the number of people entering the executive track, which seems solid now. So, we feel like we will let one off and we will start moving to right direction here.

We do not anticipate the 3-5% growth we had talked about earlier, anticipate revenues probably to be somewhere in the 3% negative for the year, around that range anywhere from flat to down 3% or 4%. So, we were a little bit surprised, but we are working through that and like some of the things were seen now, but certainly it is a big market for something that has a big impact on overall numbers.

I guess similarly with Singapore and Malaysia? I mean it was pretty clear, either to expect decline relative to China, but the 40% range seemed to be a lot more than what I had expected and was wondering if you guys that how much more was that would expected?

We had anticipated maybe a 15% decline that we were hard in those two markets as well. Again, I think we did $10 million in the quarter, we anticipate $30 million to $40 million for the year that we could see a little bit further sequential decline before we start moving in the right direction on those markets.

When it is China in there by saying that the bottom-line as we had a lazy month in the March?

In several of our markets, even though we were more optimistic about what we could do, in some of these markets with March's promotions and then reality proved out. When we set back and look at the numbers comparatively year over year, you know Japan is still tracked up in March at a higher level of February than it did in 2002. So, you know Japan has not gone away. It is just you know the strong month finished that we hoped it would have.

Is running promotional events at a greater rate than you are used to? You guys are doing that at a greater rate than you are accustomed to and you think that something would be more reliant ongoing forward, just relative to competition and other factors in the market possible?

No, I think we will be less reliant on it going forward.

Why is that?

We are not big promotion fans here. However we have recognized product promotions can be effective in properly constructed at retaining active distributors and active customers.

We're going to use promotions primarily to go after people who may be have been inactive for 30, 60, or 90 days and on the verge of perhaps being you know non-distributors at all. Those are the people we're going to go after with promotions.

Our distributors tend not to like promotions because you know they do not like being promotion dependent either. They want to build their business on solid fundamental without having to rely on this month's promotion to meet the numbers.

I guess one last question shifting over to China. You guys are saying $20-30 million in revenue and previously you said $30 million. Is there a change there or is that just a sort of broadening the scope or is something going on there that is against as you would have expected previously? You are still on the line when we take that one.

China has really ruled one out like we thought to be on with $20-30 million. We had said I think way back last year that we could do about $30 million. You know we still think we can do about $30 million, but if we get into and we are more focused you know $20-30 is a more relevant range.

Frankly, whether we do $23 million, $25 million, $28 million is not the leading factor for us and not the major priority right now. It is just establishing the foundation that we are going to grow up on in future years. So, we do not feel like the overall outlook and what is going on in China has really changed at all. It is really where we thought it would be and we are looking to expand in few years after we get this base established.

Got it. That's it. Thank you.

Your next question is from Doug Laine(ph).

Well again looking down the same path, I mean if you look in that China and they said $20 million or $30 million so it is may be a bit of hedge there. The Singapore and Malaysia falloff is sort of deteriorated steadily as the year progressed and Japan had this big reversal and both of those markets were attributing that to at least partially leadership interest in China and yet the China numbers coming off as well.

Are these distributors from Singapore, Malaysia and Japan getting discouraged with the China opportunity in just meeting the system altogether. Again, kind of trying to get at what the root cause is 10% drop particularly in Japan distributors since June of 2002. I am just trying to see a big picture thing going on here and that it relates to the perception of these distributors, their perception of the opportunity in China.

Yes, Doug, let us go back to this question of the Japan executive council specifically. You know that one of the dynamics in our business that's a little bit unique, is that these distributors try to qualify for 10 level advancement as the dates of our international conventions become closer.

So, you know we had one of these international conventions in Q3 of last year and consequently what you saw in Q2 was a spike in activity with people basically trying to reach for a higher level of status in our compensation level or even executive status to begin with so they could be recognized as such at our international convention.

So you know Q2 was a little bit of a spike over what we typically would have had without the distributor convention in the subsequent quarter. You know Malaysia and Singapore specifically I mean I have to confess that in my view there is a little bit of a feeling of disenchantment with respect to the short term potential of China.

I think that a lot of people went there in January and in February and frankly realized that this is a different market place where we are operating a different model, you know we are not able to implement our full grown that with marketing compensation plan, there are language and cultural barriers for people who are Non Chinese to overcome.

And you know I think that to a degree in some of these markets and I'd say South Korea and Singapore and Malaysia specifically, you know the hope of a short term hit in China and then subsequently some level of disenchantment with what they actually found there impacted the executive count in those three markets.

You know I do not think that it really had a dramatic impact on executive counts in the United States. Obviously Taiwan and Hong Kong not because we had decent quarters there and that is encouraging. You know we also came home from our annual team elite trip which we held at the end of March just a few weeks ago where we had 260 team elite member from around the world participating in this trip you know at that event and we have people there from virtually every country.

I was actually pleasantly pleased with the attitude that our people were expressing about the prospect for China. The senior executive in our range realized that China is a work in process that we have a different structure that will help us to be able to modify at some point of time and they realize that it is a project and in that trip and hearing from our distributor leaders were particularly encouraging.

But honestly, I do think that some markets were over hyped on the prospects of China, which under delivered, in the first month or two. I am actually quite certain that as China, as the environment continues to improve and as our distributors start to return the volume appear in there on their commission checks, they are going to realize that China is going to be a good market and we will get a lot of those people back.

But you know we are not losing leaders. I think what we have lost a weak executives who had hoped for quick hit that you know is going to be more difficult to achieve in this time.

Ok that is fair. Let me ask you just logistically with the China model, will it contribute executive distributors under its current configuration or is that title not really apply you know given the retail infrastructure there?

It does apply Doug. We showed 446 what we call full time sales representatives, these are full time employees who have gone through a qualification process and qualified to become full time sale reps, that is the number we really acquired and it will have a positive impact going forward on the number of executives that we report.

Just to clarify, the 446 that is the number that is going down the path towards executive distributorship?

They actually qualified for executive. We do not count the ones in qualification similar to every other market. We do not count those in qualification for executive. We do not count them until they actually qualify.

Okay. Thanks.

At this time there are no further questions. Are there any closing remarks?

We appreciate very much your participation with us today. Thanks so much. We will talk to you next quarter. Thank you for participating in today's conference. You may now disconnect.

END