如新 (NUS) 2003 Q3 法說會逐字稿

Good afternoon, my name is Sherrette (ph) and I will be your conference facilitator. At this time I would like to welcome everyone to the Nu Skin Enterprise third-quarter investor call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions].

Mr. Allen, you may begin your conference.

Thank you. We'd like to thank all those for joining us for the analysts' conference call and listening over the Internet. With us on the call today are Truman Hunt, Chief Executive Officer, Ritch Wood, Chief Financial Officer. Following management's discussion of the Company's operations the call will be open to questions. As a reminder during this conference call, comments may be made which include some forward looking statements.

These statements involve risks and uncertainties and, as you know, actual results may differ materially and adversely from those discussed or anticipated. We encourage you to refer to a copy of our most recent filing with the Securities and Exchange Commission in (indiscernible) release for a complete discussion of risks associated with the forward looking statements and our business. During the call, certain financial performance measures may be discussed (indiscernible) comparable measures contained in our financial statement prepared in accordance with generally accepted accounting principles referred to Securities and Exchange Commission as non-GAAP financial measures. We believe that these non-GAAP financial measures assist management and investors evaluating and comparing from period to period results of operation in a more meaningful and consistent manner. Please refer to the investor portion of the Company's Web site at www.NuSkinEnterprises.com, where you can find our third-quarter press release containing reconciliations of these measures. I will now turn the time over to our President, Truman Hunt.

Good morning, everyone, thanks for joining us today. Pleased to announce positive quarterly results as well as a transaction that will significantly reward our public shareholders. Before I discuss the details of that transaction I'd like to highlight our solid third-quarter results.

We generated $250 million of revenue for the quarter and earnings per share of 19 cents. We feel good about these results for several reasons. First of all, our revenue results were ahead of the 230 to 240 million that we had expected. And excluding the loss of Big Planet revenue, which accounted for $5.4 million in the third-quarter 2002, we were able to post year-over-year quarterly revenue growth.

Second, excluding the previously announced onetime restructuring charge of $5.6 million, our earnings for the quarter would have been 23 cents per share - up 17 percent from 19 cents last year. As you know, the restructuring charge was the result of the sale of the Professional Employer Organization business and the expenses associated with our reduction of 8 percent of our corporate staff here at our headquarters.

Next, our three key markets performed well during the quarter. In Japan, we had anticipated a year-over-year revenue decline in the 4 percent range, but managed to post a 2 percent local currency or (ph) revenue growth. New products and introductions and special distributing incentive drove this extra [indiscernible] revenue which is very encouraging to us, given the importance of Japan in our revenue mix.

Now China had a huge quarter, generating nearly $11 million in revenue and 85 percent sequential increase and bringing the year total sales in China to just over $20 million. If things continue to tread as they are we will obviously exceed our expectations for the year.

As we all know, China is developing economically at a spectacular pace and is also quickly developing from a direct selling perspective. Recently, the Amway organization indicated that China would be their largest revenue market globally in 2003 which we assume will represent over $1 billion in revenue for them.

So we continue to have hope for a bright future in China for us as well.

Now we're going to open stores in for major new cities and in four new provinces in the next few months. And in 2004, we anticipate opening in two to three cities every quarter.

So we're excited about our expansion plans there and we're also pleased that we were able to reach profitability in China a quarter earlier than we had expected.

U.S. also continues to see good dynamics with revenue up about 3 percent with [indiscernible] results with comparable [indiscernible] revenue in '02. Good growth in our Pharmanex business in the U.S. was offset by anticipated declines in Big Planet and our third-quarter distributor convention in 2002 also masked the continued growth of Pharmanex in the U.S. A direct year-over-year Pharmanex comparison is a little bit difficult because of last year's [indiscernible].

We're comfortable saying that comparable Pharmanex sales grew at least 20 percent year-over-year in the U.S. And a 37 percent increase that we highlighted in our release in our global automatic monthly product subscription, the 37 percent growth year-over-year, is a good sign of our Pharmanex initiative at generating healthy activity in the U.S. and abroad as well.

So, we're heading in the right direction in the U.S. We're also seeing improving results in some of the markets that are most negatively impacted our overall results for the year. Revenue trends in South Korea continue to improve. During the quarter, we made a management change in that market and we believe that we will continue to post improving results in South Korea.

Similarly, we're also seeing improving results in Singapore and Malaysia which are trending much better than they did the first half of the year.

Also of note is what we've done with Big Planet. During the third quarter, we transitioned our telecommunication services to a more profitable outsource business model and we also sold the PEO as we indicated.

So all of our revenue will be lower as a result of these steps. These services were unprofitable. And this move will add to our bottom line.

Going forward, Big Planet is expected to enjoy growth margins in the same range as our Nu Skin and Pharmanex divisions. Let me provide a little bit of color on the transaction we announced today. For some time we heard repeated concerns from our shareholders about overhang issues and those concerns about [indiscernible] common stock as provided the original shareholder group with 10 to 1 [indiscernible].

We have long wanted to address these issues. So, today, we have agreed to repurchase 10.8 million shares of common stock in the original shareholder group with an additional 6.2 million shares being sold separately from the same shareholders to third party investors at a purchase price of 1295 per share - a healthy discount to market. When the full impact of share repurchase is reported in our 2004 results, its transaction will reduce our share outstanding by approximately 13 percent.

As part of this transaction we negotiated a conversion of all of our [indiscernible] class B shares to the publicly traded Class A shares. They will only have 1 class of shares outstanding and the voting power of the original shareholder group will go from over 90 percent to about 45 percent.

We also secured a long-term lockup agreement with no public selling, no open market selling, for two years and then restrictive selling capability after that period that will limit the number of shares any one of the shareholders can sell on the open market due to 300,000 shares per quarter.

As a result of this transaction, 55 percent of the Company's outstanding economic [indiscernible] interest will be publicly held.

Blake Roney - the Company's chairman - is participating in the transaction and reducing his ownership level from about 21 percent to 16 percent of the Company's total outstanding shares, with other disinterested shareholders reducing their ownership interest to a much greater degree.

We generate good cash flow from operations and have been accumulating cash for some time. To finance the share repurchase we used $45 million of cash reserves, $20 million from our revolving credit facility - which we plan to retire by year end - and we will borrow $75 million in long-term debt.

This debt will be U.S. dollar denominated and will be amortized over five to seven years with an estimated interest rate of 4.5 percent.

The post transaction will have about $100 million of cash on our balance sheet and approximately $162 million in long-term debt.

For reference we expect to generate $90 to $100 million dollars in cash flow from operations this year and anticipate an improved level of cash flow from operations in 2004. We don't expect that this transaction will impair our ability to get the (indiscernible) regular quarterly dividend.

As I mentioned, approximately 6.2 million shares in the transaction will be sold to third party investors. We will have about 12 funds (ph) participate in the transaction, all well known funds typically known for a long-term investing. The shares that will be purchased by these funds will be registered and [indiscernible] eligible for resale within 30 days.

Okay with that, Ritch Wood, our CFO, will address specific financial results.

Let me quickly provide local currency sales figures from our major geography. Japan's revenue for the quarter was 16.8 billion yen versus 16.5 billion yen last year. South Korea was 17.9 million yuan (ph) versus 19.3 billion yuan in 2002 and greater China revenue from Taiwan during the quarter was 610 million NT (ph) dollars -- (indiscernible) 703 million NT (ph) dollars last year. Hong Kong revenue was 48 million Hong Kong dollars versus 48.5 million in the prior year.

In China, revenue was 89.2 million RMD (ph) during this quarter. In South Asia the combined U.S. dollar revenue from Malaysia and Singapore was $9.1 million versus $16.5 million in the third quarter of 2002. U.S. market generated 26.8 million in revenue during the third quarter, compared to 38.1 million in 2002.

Now in 2002, our U.S. revenue included $6 million of sales to foreign distributors attending our global convention in the US and approximately $5.4 million of revenue from Big Planet services that we no longer offer in 2003.

Third-quarter revenue in Europe was $7.5 million compared to $6 million in the third quarter of 2002. Overall, the Company's growth margins improved approximately 215 basis points compared to third quarter of 2002 results. The year-over-year improvement in gross margin is related to the Company's divestitures of low margin Big Planet revenue and the strengthening of foreign currencies against the U.S. dollar.

Now that we changed the name to what we've previously preferred to as distributor incentive to selling expenses. This name more appropriately reflects these expenses now that we have China in our mix. As you recall, China we are required to hire all sales representatives as employees rather than independent distributors.

This line item will include all expenses, associated with our commission's plan globally including labor expenses to employed sales representatives in China. Use of several factors our selling expenses increased as a percent of revenue over prior year period and sequentially.

The primary reason this increase was the inclusion of sales employed labor and commission expenses in Mainland China which were previously included in selling general and administrative expenses. And which are slightly higher as a percentage of revenue than our other markets. In addition selling expenses as a present of revenue were negatively impacted by a decrease in revenue from the PEO business upon which you recall, no commissions are paid. And, finally, by the introduction of leadership incentive in Japan and the US as we discussed in the previous quarter.

Reporting all selling expenses associated with our employee sales representatives is more consistent and more accurately reflects the dynamics of our business. General and administrative expenses were $77 million, which included the onetime restructuring charge of $5.6 million. Prior year SG&A expenses were 75.3 million and those expenses included approximate $5 million expenditure for our global convention.

On a sequential basis the drop in general and administrative expense is primarily reflective shift of all our expenses associated with our China sales employees into selling expenses.

Excluding the onetime charges, we generated a 12 percent operating margin. In the other income area, the Company reported $400,000 loss which was a result of the strengthening of the Japanese yen at the end of the third quarter. Cash flow from operations was $43 million during the quarter, benefiting from a strong quarter and shifts in FAS 133 assets and taxes. And by improving our cash balances by $31 million for the second quarter.

During the third quarter, the Company paid by $5.6 million in dividends.

Estimating the yen to be around 112 to the US dollar we expect fourth-quarter revenue to be 260 to $265 million range. As a reminder, at the current level of yen exchange rate, and at our level of revenue in Japan, a 1 point movement in the yen equates to approximately $1.2 million of quarterly revenue. Or about $5 million per year.

The China operation's now profitable and the accretive nature on our stock repurchase transaction fourth-quarter earnings per share are expected to be 27 to 29 cents. These fourth-quarter results will allow us to post 2003 year-over-year increases in revenue and earnings.

We expect revenue in 2004 to grow 7 to 9 percent over 2003 results again, using a Japanese yen rate of approximately 112 to 115.

This assumes revenue growth in Japan to be 1 to 2 percent and revenue in China to be 50 to 6.0. million US dollars. Including these positive impacts of the share repurchase, 2004 earnings per share are projected to grow 20 to 25 percent or approximately $1.01 to $1.05.

Excluding the onetime charge in 2003 earnings growth would be approximately 16 - 20 percent.

We anticipate growth margins to improve in the fourth-quarter to approximately 83 percent - again due to a final shift away from Big Planet low margin with revenue and also some improvement due to the stronger yen.

We continue to model growth margins at or slightly above 83 percent for 2004. Selling expenses again previously referred to as distributor incentives will increase to approximately 42.4 or 42.5 percent of revenue due to their reasons previously mentioned. And then hold at that level going forward.

As you model 2004 general and administrative expenses, note that we have two major conventions. A global convention will be held in the U.S. in February which we would anticipate spending approximately $6.5 million and then a Japanese convention to be held in November with an approximate spend up for $4 million US.

With that, I will turn the time back to Truman.

I want to reiterate the optimism we feel in our business today. As our shareholders digest third-quarter results and consider the [indiscernible] we've seen in our business they, too, should also be encouraged. We got off to a relatively slow start in the first half of the year and now [indiscernible] solid fourth-quarter will generate year-over-year revenue and earnings growth, despite significant restructuring of revenue and related charges. Virtually all of our markets are [indiscernible] improving results. We freed up operating resources to allow us to redirect spending on promising growth initiatives. We cleaned up our Big Planet business and we've addressed the overhang in other important corporate governance issues.

With continued strength in our key markets we believe we will end the year strong and be in a position to generate record results in 2004.

With that, we have a few minutes to take a few questions.

[Operator Instructions].

Kathleen Reid (ph) from Sunprint (ph) Financials.

Couple of quick questions. Could you give us a little more detail place on (indiscernible) your improved local currency growth in Japan? It was up 2 percent - that's great. Just what some of the specifics are on your improved and distributor [indiscernible] in that region, and just the (indiscernible) new product in Japan and also new product set to launch in 2004 and other regions?

We actually saw some nice strength in Q3 in Japan. We saw good improvement month over month in our executive numbers. Again, we believe related to the initiative that we put in place to really drive new executive leadership growth. We also launched a very successful product in the Tru-Face Essence Product, we (indiscernible) launched that actually in March but quickly sold out of the product. Relaunched in July and been a very nice product so we just need some nice strike again coming off kind of a weak first part of the year and so internal we continue to grow. Other new products -- Kathy, we really believe that this [indiscernible] Tru-Face Essence product has a lot of legs and a lot of our emphasis in '04 on the [indiscernible] supporting launch of that product and continued to roll it out into new markets. But you will see it in our [indiscernible] convention and new product launches in a couple of very compelling categories. Microdermabrasion category that [indiscernible] division looking at closely and on the Pharmanex side, Pharmanex is really quite focused on the weight loss weight management category and have some announcements to make on that at our distributor convention in February.

Are your weight products currently available in the US?

Yes we launched earlier this summer - a little test market of what we call our (indiscernible) weight management system and what you will see what we will see in the spring is further enhancements to that weight loss system.

Secondly, can you just talk a little bit about Latin America and what you have seen since your launched your business model in September and what we can expect for that market in 2004?

Sure. You know that we hired a very capable manager in Brazil here, recently, who was [indiscernible] Maggioli, the former president of Avon Brazil. Brazil is a large and vibrant direct selling market - Avon's largest I believe in the world - and so we feel very fortunate to be able to hire Mr. Maggioli (ph) and we worked with him over the summer to put together a business model that is tailored for that market. We felt that to penetrate some of these Latin environments and some of the more emerging markets economies, we needed to customize our product mix and our business model for those environments. And so we launched a new line of personal care products in Brazil in Sept. 1st under the Nu Skin Living brand and we're doing a lot of local manufacturing of that line to get our costs in and get our price points where they need to be. And in September we had some very encouraging results. Revenue was up over August quite impressively and even more impressively, our unit sales count was up over August almost 60 percent - around 60 percent.

So that was a very encouraging month for us. In November, we are launching Pharmanex products for the first time in Brazil and that's really the category where we feel we can have some impact because - as you know - the big direct sellers in that market Avon and [indiscernible] really don't operate much in that category down in Brazil.

So our business model there is a slower growth model and Ritch I don't know if you're prepared up to (indiscernible) [indiscernible]

We really haven't gotten specific '04 numbers but we would anticipate by the end of the year having a better read [indiscernible] launched the Pharmanex products and what's going to happen in that market.

And just finally, also, can you -- I know you just thought about launching into new cities and new provinces in China. Do you have an estimate of the actual number of stores? Avon put out a (indiscernible) in the paper today said they're going to open 5 new stores, I know their stores are quite different than what you consider a store, but are you -- do you have any number you're hundred now next year into [indiscernible] total of that?

Yeah, in most of these provinces we're going to have one or two large stores in most of these large cities. And so [indiscernible] having a store on every street corner we have found in cities where we are operating currently we can get a lot done from one larger store as opposed to having 10 smaller stores. So as we indicated, we anticipate opening two to three cities only every quarter going forward through the end of '04. But I don't have the specific number of stores in front of me, but it is not going to be a number like the one Avon puts out.

Doug Lane of Avondale Partners.

Question on the restructuring charge in the third quarter. The savings from the headcount in Provo (ph)? Can you give us some sort of magnitude of that savings in the G&A line and where those resources will be redeployed both strategically and also in the P&L?

Yes great question. We will save approximately $7 to $8 million on total labor and benefits. That will be as we mentioned in last quarter conference call really redeployed in three areas. No. 1, looking into some new markets, developing some new models and trying to gain some market share in areas that we haven't been successful and Brazil being a specific example. That will be some additional SG&A that will offset some of the savings. We believe that right now putting some additional dollars into our distributor incentive area is a great area to try and generate some new executive leadership - we're seeing some good results from dollars that we spent. And also you will see an increase in our selling expenses this quarter because of that. And then, finally, just deployment of the scanner I think we're trying to push that forward, we see good results in the U.S., we believe it can have some positive results internationally as well so we're spending some money to try to speed up a little bit the deployment of the scanner.

Do you have a timetable for any kind of a significant rollout in Japan for the scanner?

No, we don't have a timetable yet. We are putting a few units into most of our foreign [indiscernible] centers and we will be doing that in Japan, hopefully, in the near term. We have units now operating in Hong Kong, Singapore and Malaysia for example and one of the reasons why we're seeing our count go up dramatically in our 82 subscription on that monthly [indiscernible] fact that the scanner program there is also having a positive impact.

Okay and lastly just can you talk a little bit about Europe, particularly Eastern Europe, what your plans are for -- ? That market seems like it'd be an ideal one for our Company which you modeled?

Yes - Eastern Europe is attractive to us and we continue to evaluate various alternatives in Eastern Europe. I will say that we do anticipate opening another country before the end of '04. It is probably not going to be in Eastern Europe - Eastern Europe is probably more on a '05 timeline. But new market expansion is really not built into any of our numbers yet. We do anticipate opening one country before the end of '04 and then Eastern Europe in '05.

Have you named what the new country will be in '04?

No, we haven't because we haven't announced it to our distributor force yet.

Bill Steele of Banc of America.

When I look at some of the numbers in the financial target you're putting out for '04, it appears to me that you're going to be spending some of the incremental savings from the share repurchase back into the business. And I'm wondering how you're going to redeploy that money? Are you to step up the initiatives, buying the (indiscernible) are there some structural changes to the business or are they new products?

You suggested we're being conservative on our estimates?

I don't know if I would ever advise you to be conservative on your estimate. Yes you are being conservative. The mouth (ph) doesn't work.

I think Ritch has given an idea where we expect to deploy some of this money but frankly Bill, I'd rather put out a number that we can hit than one that we can one that we can miss. And we're just going to be conservative.

Okay - just in terms of your (indiscernible). Is there more work to be done from a structural perspective at Nu Skin or do you think that most of that work in terms of the layoffs and the shipping of personnel -- is that for the most part done?

Yes. Yes - I think it is and I think we made a lot of the way in the quarter and, actually, I don't mind patting ourselves on the back a little bit on the [indiscernible] covered a lot of ground in the last three or four months on that front and I think we're close to being where we need to be going forward. There are a few things that I want to continue to tweak before the end of the year, but we're not far away organizationally from where we need to be.

Bill, one other comment if I can discern. I think our goal right now is to play offense. We tried to hit our structure and play and make sure that everything was in line and that's going to require a little bit of spending. We want to be successful in every market and we're going to go after that in every market. So we don't expect to see big savings from these SG&A reductions. We're going to try to deploy (indiscernible) in ways that will grow the topline revenue.

It also appears you have sufficient funds to invest behind [indiscernible] that may be unforeseen next year.

That's right.

Alice Longley with CSFB.

Can you tell us a bit more about the special incentive that you gave to the distributors in Japan that helped turn your executive numbers up there?

Yes we did actually two primary things. We announced these in March at our distributor convention there. It's our 10 year anniversary in Japan and we launched an initiative that - over the next several months - any new executive that could break and maintain their executorship without taking a great month bringing in a new person each month would get an additional payment each month of 10,000 yen. And we just found that it's done a good job of No. 1, bringing new people in and then holding them a little bit better through a real transition period in Japan. A period of time where it's easy to get focused on China and initiatives we have going on so that was the first one. Second one was a leader trip that we scheduled for November to Guam where, basically, if you were to increase your pin levels as an executive to specified levels, then you qualify for the trip. We have approximately a little over 200 people who qualified and I think it's been a good push to focus people on growing leadership in the market.

(indiscernible) results in the distributors in (indiscernible) selling ratio being higher in this quarter for Japan?

That's correct yes it did -- it did increase [indiscernible] about 15 to 20 basis points associated with that.

Do you think you will have to maintain this level of inducements to get [indiscernible] growing?

These were specific initiatives that have timelines, for example, the Guam trip that's kind of finished up now. The other one will go on for several more months but they're kinda one-time promotions. We will review the situation I guess at the time you start to rolloff and see if others makes sense and watched obviously the return on the investment we're making.

We can't look at the operating margins for Japan overall? Was it down because of that?

No really not. This was a very slight increase to the distributor or selling [indiscernible] didn't impact in a big way that number.

Okay and my other question was about China. Are there any ways in which you can reward the people who are employed in those stores for their future (indiscernible) wasn't directly for their sales and is there any way you can reward them for getting other people hired, so if there is any way of rewarding them for recruitment?

As you know, Alice, the rules there are different. And we're not able to do implement our full-blown direct selling model. But we're being as creative as we can and incent these people in a fashion similar to what we do globally without it being network marketing. One of the things I would like to do in upcoming months and, Alice, I know you've been a student of China for some time, I would like to -- we would like to put a little trip together and take those of you who maybe interested over to China and let you see what's going on there so you can get a better feel for how our model looks.

We really believe, today, that even in the absence of dramatic changes from a regular [indiscernible] perspective we can grow our business there to be very substantial. I think it would be helpful for those of you who may be interested to get a better look at what we're doing there in the next few months.

Can your review how you are incenting people there? [indiscernible] rules are different.

We pay our people based on a very modest base salary and then, we pay them in increasing commission level as their sales volume personally and within their group of sales people that they help us train and motivate generate. So we reward both their personal sales and their ability to be leaders and train to motivate other people.

But they are given something for their own volume but also on the volume of the group that they trained?

Yes. Yes that's right. And also what we do is they become a more effective leader and continue to train more and more people, we will increase their base pay to compensate them effectively for the importance they are to our business.

It's really been very exciting for us to watch the development there and in the month of September we had a distributor convention in Hong Kong. And we had 5,000 people in attendance. And of the 5,000 people there 1500 of them were from Mainland China. People who wanted to come down and basically get a better feel for who the Company is. And these are very hard-working, energetic and enthusiastic people who are thrilled at the prospect of generating a base level of pay but also having the ability to generate significant levels of income. Our leaders already in the China market have generated checks of about $10,000 a month in income and that's a lot of money in China. So those success stories do a lot to continue to fuel our growth there.

Is there any way you can sort of -- I know you can't add generations the way you do in a normal setup, but if someone is the store and she's trained other people in that store does she get something on the volume of those people -- can -- if those people in turn train people in other stores does she get something on the sort of expanding volume of the people that her downline people have trained?

No. No - it really isn't feasible to pay these people in the fashion we do elsewhere.

So there's no way you can go down generations or expand out into the Web in any way?

We're going to continue to be creative about that and we hope that as we approach the end of '04, the regulatory environment will enable us to have our model look a little bit more like it does elsewhere but even without it, what I'm saying, Alice, is even without our full-blown plan we're going to do just fine.

John Warasoni (ph) with ING.

Can you give me a little more information on what's going on the scanner? How many do you actually have out in the field now?

We have in the U.S. about 440. And we continue to turn them out at a rate of about 20 a week and we have about 40 to 50 units now in foreign markets and our walk-in centers in our corporate office in other markets.

How is the reliability going on that or the consistency?

We're making real progress, I think, on both the functionality of the unit, reliability of the unit, the reliability of the software tied to it and the manufacturing process. And we are refining the manufacturing process to a great degree. We are in the process of putting a plant together in China to build these machines at a faster pace. And, yes, we think from a manufacturing perspective things are coming together very nicely.

Any updates on the FDA's questions about this?

We don't have an update. They have not yet responded to our 513 application and are overdue on their typical timeline for (indiscernible) those applications. So we continue to be in communication with them and as we said in the past, even if we go ahead and file a medical device registration on this machine, while it may slow our deployment here in the U.S., we don't see that as necessarily a death knell by any means to what this device can do for our business.

What sort of a backlog -- if you were (indiscernible) how many of these things if you've got 440 out there right now, what do you sense your demand is right now?

If we could wave a wand, we could place thousands and thousands of these machines.

Last question - completely different subject. Is there anything -- are you doing anything in India? Talked about it a little bit in the past and I just can't remember if you've got preliminary studies going or where you are.

Yes we've with actually been studying India for a long time and continue to communicate there with people who are active in the direct selling industry and we see that as an interesting and potentially significant market at some point in the future, but we're really -- before we venture into an environment like that, we really want to refine our model and other developing markets. And that's why we're really focused on Brazil. On other experiments we have going on in other markets like Poland where we're running a little different program, in Mexico we're running a little different program and what we're finding in the model in the Philippines, too. And with what we have going on in just developing a model for developing economies. India, we think, holds some promise for us.

Do they have the same kind of multilevel restrictions that China has?

No they don't. It's a much more open market from that perspective.

Richard Sedara (ph) of Kennedy (ph) Capital.

Hi guys - great news today. You talked about China in the regulations and the [indiscernible] four or five that could change. What is it that you're looking for that [indiscernible] open up or maybe allow multilevel marketing more or not?

In China there are a couple of things that would really help a lot. No. 1, all of our sales currently have to take place at six retail (ph) locations and while we're able to deal with that currently, some of these locations are overwhelmed with volume. And so it would be really helpful for us to be able to essentially conduct the sales transaction away from the fixed retail location. And we believe that by the end of '04 China will enable that to happen.

Another thing is, that our -- the equivalent of our executive distributors in China - these sales leaders - have to be employed on a full-time basis by us because China currently doesn't allow part-time employment within the direct selling industry. And the ability to use independent contractors or part-time employees could also be huge for us which is [indiscernible] regulators take [indiscernible] by the end of '04. Both these things would be very positive developments. The third thing that would be positive would be the ability to pay people in a little bit -- in a fashion that's more consistent with our global model. On that point we're not sure how far the government will go. But we think there will be some improvement there. And then, finally, the other thing that would be nice, they don't like big meetings in China and so a distributor convention for example like the one we had in Hong Kong where we had 5,000 people, those are difficult to have in China. The government just doesn't like gatherings like that and so, we conduct business in very small groups.

So, those are really the major points that we're looking to improve for us over the next few years.

Given what you're seeing in China, in five years at a conservative rate how much business do you think you could be doing there if they loosen the regulations a little bit?

Well I don't know. We tried it and we have to temper our own expectations a little bit. We are a market leader in Taiwan, a market leader in Hong Kong and if we can do anywhere near what we do in those markets as a percentage of the direct selling industry, we're going to have a 3 to a $500 million business there.

At this time, there are no further questions.

Great. Thanks very much for joining us and feel free to give any of us a call if we can answer any of your questions in the next few days.

Thank you for participating in today's conference call. You may now disconnect.