如新 (NUS) 2003 Q4 法說會逐字稿

Good morning. My name is Mandy, and I will be your conference facilitator. At this time I would like to welcome everyone to the Nu Skin Enterprises fourth quarter and 2003 year end conference 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. If you would like to ask a question during this time simply press star then the number one on your telephone keypad. If you would like to withdraw your question press star then the number two on your telephone keypad. Thank you. Mr. Charlie Allen, you may begin your conference.

Thank you. Good morning, everyone. We appreciate all those joining us today on the call and listening over the Internet. With us on this call this morning are Truman Hunt, President and Chief Executive Officer, and Ritch Wood, Chief Financial Officer. Following management's discussion of the company's operations, the call will be open for 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 from those discussed or anticipated. We encourage you to refer to Amendment Number Two to the registration statement on Form S-3 filed on January 12th and today's earnings release for a complete discussion of risks associated with these forward-looking statements and our business.

I'll now turn the time over to Truman Hunt.

Thanks, Charlie. Good morning everyone. Thanks for joining us today. We're pleased to announce better than expected fourth quarter revenue and earnings.

The quarter's revenue was $276 million, our largest reported quarterly revenue total, and $10 million higher than we projected at the end of the third quarter. As a result earnings per share were 2 cents higher than expected at 31 cents.

For the year we generated revenue of $986 million, up 2% over 2002, and earnings per share grew 9% to 85 cents per share. We achieved this growth despite a $15 million negative revenue impact from discontinued Big Planet services and after taking a $5.6 million charge in Q3 related to the Big Planet restructuring and reduction in headcount at our home office.

Strong fourth quarter revenue is a result of positive trends in our key markets as well as favorable foreign currency fluctuations. China contributed nearly $19 million of revenue for the quarter.

In the last two months we've opened five cities and now operate a total of 23 cities in eight provinces. We like the way the business is trending in China month-to-month and continue to feel that we're just beginning to scratch the surface of our potential in this market.

As we have indicated in the past our goal for China is to make it become another Japan for us in terms of total revenue and so far we're on track to accomplish that goal over a three to five-year period.

In Japan quarterly local currency revenue was even with last year's fourth quarter results. As you know, in November we announced that our general manager in Japan was retiring and that Robert Conley would replace him. This transition has gone smoothly.

The BSE incident in the United States is an untimely development for us. As you know this issue's generated a significant reaction from Japan regulators. We believe that the underlying issue is trade-related as opposed to being health-related but we're being responsive to the regulators' concerns and moving quickly to deal with these issues.

You'll recall that Japan suspended the importation of nutritional supplements that are encapsulated in bovine-based capsules which includes many of our Pharmanex products as well as those of many of our competitors. Recently Japan took a further step and announced that they would also not allow these same bovine encapsulated products to even be sold by nutrition companies after February 16th.

So as a result, we've transitioned our production to non-bovine-based capsules as well as the tablets and we expect to stay in stock on all of our key Pharmanex products during the first quarter. Our Japan and Pharmanex management teams, I don't mind saying, are doing a terrific job navigating this difficult issue.

So while it's difficult to predict the financial impact of this issue, so far we've overcome the obstacle and looked to still generate the revenue and earnings targets stated in our release for the first quarter and for the year.

During the fourth quarter we also performed better than expected in the United States. Although we show a year-over-year decline overall due to the Big Planet restructuring, our U.S. Pharmanex business grew 46% in the quarter with light pack cells up 70% year-over-year.

We now have about 600 Pharmanex scanners in the hands of distributors here in the United States and that number continues to generate a healthy level of activity here.

In the United States our automatic monthly subscriber base also grew by 35% in the quarter. Globally our Pharmanex monthly subscriber base increased 46% compared to fourth quarter 2002.

So in the fourth quarter of 2003 we shipped about 650,000 orders to these individual subscribers. Positive benefits of this subscription program is substantial.

We've found that auto subscribers remain our customers more than five times longer on the average than non-subscribers. So as our subscriber base grows this increased retention rate has a very positive impact on our business.

Let me mention just a few other markets quickly. While revenue in Hong Kong and Taiwan was down year-over-year in Q4 we're actually quite pleased with these results.

As our competitors have gone into China they have cited significant decreases in Taiwan and Hong Kong. For us, Taiwan's local revenue is down 13% in Q3 and Hong Kong down by about 5% compared to prior year results. This is encouraging to us considering the increased level of distributor leadership that's focused on China.

Despite the Q4 year-over-year decline in Singapore and Malaysia, our businesses there continue to improve sequentially and we now run into better annual comparisons as well in the year ahead with these markets projected to be close to even with prior year results in the first quarter.

Another objective for us over the last several months has been to generate success in emerging economies, which historically haven't been great markets for us. We've been determined to adapt our business model to be more suited for these environments and we're seeing good results.

Over the past few years Thailand has grown to become a meaningful piece of our business. In its three-year period, our revenue there has tripled to $23 million and we now represent about 5% of Thailand's direct selling market.

Similarly as you may recall, we hired a new general manager in Brazil and launched a new business model there this past September. In the fourth quarter revenue in Brazil was up 27% year-over-year and 51% sequentially.

We're seeing similar results in the Philippines with revenue up 11% there year-over-year. So we still after lot of work to do in these markets but they're markets worth investing in, markets that can become very meaningful for us and we're moving in the right direction.

Okay, I'll offer some thoughts on 2004 in a few minutes but first Ritch will provide some detail on our financial results.

Thank you, Truman. Good morning everyone.

Here are the local currency sales figures from our major geographies. Fourth quarter revenue in Japan was 16.9 billion yen in both 2002 and 2003. Quarterly revenue in South Korea was 18.8 billion yuan versus 19.6 billion yuan in 2002.

In greater China revenue from Taiwan during the quarter was 642 million NT$ versus 748 million NT$ last year while Hong Kong revenue was 53 million Hong Kong dollars versus 56 million Hong Kong dollars in the prior year.

In China our revenue there reached 149 million rmb during the quarter. In South Asia the U.S. combined dollar revenue for Malaysia and Singapore was $9.3 million versus $15.3 million in the fourth quarter of '02.

Our U.S. market generated $28.3 million in revenue during the fourth quarter compared to $32.7 million in 2002. Our fourth quarter 2002 U.S. revenue number included $6 million of revenue from Big Planet products and services that are no longer offered in 2003. And fourth quarter revenue in Europe was 8.5 million compared to 7 million in the fourth quarter of 2002.

The company's gross margin as you noticed improved approximately 270 basis points compared to fourth quarter of '02. This year-over-year improvement in gross margin is due to the discontinuation of low margin Big Planet revenue, strengthening of foreign currencies against the dollar as well as improved gross margins resulting from the company's new personal care manufacturing facility in China.

You will remember from our third quarter release that we changed the name from what was previously referred to as distributor incentive to selling expenses. This may more appropriately reflect these expenses now that we have China in our mix.

As you recall in China we are required to hire all sales representatives as employees rather than independent distributors, and we now include those expenses in this line item. Our selling expenses increased 190 basis points compared to the prior year, primarily due to the discontinuation of the non-commissionable Big Planet revenue and then also higher selling expenses in China which were not included in the prior year results.

General and administrative expenses as a percent of revenue were 120 basis points lower in the fourth quarter compared to the prior year. This is reflective of the efficiencies that are gained in our operations as we achieve higher levels of revenue. And we're also benefiting from a continued focus on controlling our operating costs.

Fourth quarter operating margin was 13.6% and this is an indication of the level of profitability we can achieve as a company with sustained higher levels of revenue. For the year, operating margin was 11.4% which includes the impact of the one time restructuring charge taken in the third quarter of 2003.

For the quarter we reported a loss in other income of $700,000 which includes interest interest expense of $1.5 million. Our fourth quarter earnings per share growth rate was positively impacted by the significant share repurchase that we completed in October.

Our weighted average shares outstanding for the fourth quarter was therefore about 74.6 million shares and we expect this share count to be approximately 72.5 to 73 million shares outstanding in the first quarter and continuing throughout 2004.

Cash flow from operations in the fourth quarter was particularly strong coming in at about $46 million. This brings our cash from operations for 2003 to approximately $109 million.

Note that during the quarter we utilized $45 million of cash from existing balances to assist in the repurchase transaction completed in October. And then prior to the end of the quarter we retired $20 million of short-term debt also associated with this repurchase of shares, just prior to the end of the quarter. And for the year cash flow from operations was essentially even with prior year results.

We continue to work on supply chain efficiencies and this is evident in our improving inventory balances.

Now let me give a little bit of guidance going forward. As we stated in the release we expect first quarter revenue to improve from $220 million in '03 to 240 to $245 million in 2004, and that's assuming a yen of approximately 108.

Gross margin and selling expenses will remain approximately level with the fourth quarter results and general and administrative expenses now will go up sequentially because of the $6.5 million expense associated with the distributor convention which we will host here in about two weeks. So those things considered we expect earnings per share to be 17 to 18 cents a quarter.

For the year we're modeling a yen at approximately 110, and we expect Japan to remain level in local currency with 2003 local currency results. We plan to grow our U.S. business about 20% from its current level and we plan to double our revenue in China.

If we meet these goals, we'll generate revenue of approximately 1.60 billion to 1.80 billion and that represents about a 7 to 10% top-line growth and an increase of $20 million on the guidance we provided a quarter ago. Gross margin and selling expenses should remain relatively unchanged and operating margin should improve for the third consecutive year to be about 12%.

With the increase in our debt, our interest expense in '04 will increase to approximately $4.3 million, and overall we anticipate earnings per share of $1.04 to $1.08, which is up about 3% from the guidance that we provided a quarter ago.

I'd like to highlight that in the first quarter convention in the U.S. in addition to that we also have a large distributor convention in Japan in the fourth quarter that will cost approximately $5 million. So as you prepare your model, you can keep that in mind.

We anticipate capital expenditures for the year to be approximately 30 to $35 million, and depreciation and amortization expense of approximately $25 million. Again, generating strong cash flow from operations approximately $120 million for the year.

And with that I'll turn the call back to Truman.

Thanks, Ritch.

Our keys to a record year in 2004 are pretty straightforward. As Ritch indicated we need to hold and hopefully grow Japan's sales volumes slightly.

We need to also grow our United States business by 20% from our fourth quarter revenue level, and we intend to at least double China's revenue in 2004. In addition, we don't see any significant declines in 2004 such as those we saw in Singapore and Malaysia this past year.

We also intend to continue progress in emerging economies such as Brazil. And we need to continue to improve our customer retention rates through better marketing and programs such as our monthly automatic subscription.

We also continue to work on several potential new geographic markets. We currently operate in only 35 countries, and we note that our largest competitors, among our largest competitors, some operate in over 100 markets.

Some of these markets we're considering include Russia, Indonesia, India, all of which have good potential, and other smaller markets could include Israel, Vietnam, and several eastern European markets.

We continue to believe that the Pharmanex scanner can help generate additional growth in the U.S. and elsewhere. We started to build a scanner manufacturing plant in China and expect to put another two to 3,000 scanners per year into key markets over the next three years.

In 2004 we expect to also improve our operating margin another 50 to 60 basis points, approximately 12%, as Ritch indicated. We're also focused on supply chain issues and gross margin improvement.

We've been very pleased with the personal care manufacturing plant we operate in China now and believe that we can secure some gross margin improvement as we move in this direction in other markets.

Okay, with that, we'll open the call for questions.

At this time I would like to remind everyone if you would like to ask a question, press star, then the number one on your telephone keypad. Your first question comes from Kathleen Reed with Stanford Financial.

Good morning everyone.

Good morning.

Just a couple quick questions. First of all, can we get into a little more detail just on the issues with Japan? Is it just Japan or is it Japan and South Korea that have the ban on dietary supplements, the encapsulating part of it, and if they have further banned, I guess, just that entire material, even though I know you source it from India and not from the U.S., do you have factories already up and running in place, you know, is this going to be just a one quarter issue or is it expected to continue further?

Yeah, you know, the South Korean regulators typically tend to follow what Japan does, and they, it's my understanding, Kathy that they follow Japan's lead by suspending imports for the time being. However, they haven't gone as far as Japan has in other respects, and we've actually been working on this issue perhaps more rapidly than most of our competitors, and maybe it's because we have more at stake in Japan than most of them do.

But we have quickly worked with our vendors to transition our bovine-based capsules to non-bovine-based capsules, as well as to tablet. We will be able to stay in stock in Japan as well as in South Korea while we make this transition and at least on all of our key products we will face a couple of out of stock smaller SKUs, but I think we're navigating this issue pretty well. And to answer your question, I think this is a Q1 issue.

Q1 issue. Okay. Great. Second of all, what, you know, local currency sales I guess in Japan were flat in the third quarter they were up I think 2% in the third quarter, or 3% local currency sales. I know you've increased distributor incentives in that region. When can we see some good improvement in local currency growth in Japan, and then, and I actually just have one other follow-up question on China.

Well, this BSE issue hasn't done us any favors in Q1 in terms of trying to generate local currency growth. We were actually pretty pleased with what we saw in the second half of the year.

As you recall we were down 6% in Q1 and Q2 of 2003 and we think we made some good progress in the second half of the year. We're a big company there, and it's more difficult to generate meaningful revenue growth when we're as large as we are in that market.

We think that we can hold and hopefully grow modestly our Japan sales volume in 2004, but really the key for us to generate a really successful 2004 is to make sure we don't backtrack in Japan. And if we can hold our sales volume there and see the good growth that we're expecting out of China and the U.S. we'll be just fine.

Okay. Lastly, I believe at the end of this year in '04 there's some relaxation or some change in the direct selling regulations going on in China. What are those and how much of that have you factored into your expectations for the doubling of China revenue to the $80 million range?

There are a lot of factors at play in China, one of which is the regulatory situation that you cite. We are in the loop on the development of the new direct selling regulations in China, along with other major direct sellers in that market.

We're encouraged by what we hear. It's not yet known how far the regulators will go in liberalizing the restrictions on direct selling currently. They haven't published any proposed regulations yet. We expect to see those perhaps by mid-year, in another four to five months. But so far, things look good.

We think that the guidance that we've given for the year is conservative. We think we can do better, and our goal is to do better than the guidance that we've provided, but all things considered we would suggest that the market anticipate roughly doubling revenue this year.

Okay. And that is just organic growth in China, just for opening new cities, et cetera, et cetera, not any huge benefit from a change in direct selling regulation?

That's correct.

Okay. And then just really quick. Is there an update, do you have an update on the SEC review of the stock transaction?

Sure. Kathy, hi, this is Ritch. I'll answer that real quick. We continue to work with the SEC and to get this review completed and, you know, we would anticipate in the next couple of weeks it should be all wrapped up.

Okay. And we'll just get a press release, I guess on that when that comes out?

That's exactly right. We'll let everybody know as soon as that's complete.

Okay. Thanks very much.

You're welcome.

Your next question comes from Bill Steele with Bank of America.

Thanks, good morning. Truman, I was wondering if you could talk a little bit more about the U.S. strategy for '04, how you're going to drive revenue growth up 20%?

Yeah, really the, and we're talking here, Bill, about the Q4 revenue level in the United States.

Okay.

And so we're still washing through Big Planet revenue in the first half of the year, so the U.S. won't be up 20% year-over-year but up 20% over the Q4 revenue level. It's basically, it's largely driven by the Pharmanex scanner, and by new product introductions that will be coming out at our convention later this month, and through just nuts and bolts execution but the primary business driver in 2004 is going to be the scanner.

Okay. And then when I kind of look at the rev count trends in North America I noticed that actives are flat, and I understand that's probably because you're swapping out of Big Planet maybe for additional Pharmanex folks. But I'm also looking at kind of productivity at the executive level, which I'm sure you do, too, and I'm seeing that's kind of, it's sequentially down for four quarters. It seems odd that if you're swapping out Big Planet for Pharmanex that those numbers wouldn't be going up. What am I missing there?

That's a good question, and there are a couple of nuances that I would point out here. You'll recall that we define active distributors as anyone who's purchased product in the last three months. We're seeing an interesting trend in the United States where we have a growing number of non-distributor customers while at the same time, you know, a slightly decreasing distributor count, and this is really related to just the way we define this issue, and in 2004, Ritch correct me if I'm wrong, but I think we're going to correct this, and you'll see a little bit of a redefinition of our active distributor numbers so that those numbers will look a little more consistent with what's happening on the revenue line.

Okay. And then just touching on the fourth quarter the Cap Ex number was a little bit higher than I was projecting. I'm wondering what, and actually, it was a record quarter for you in terms of Cap Ex. What were you spending money on in the quarter?

It's primarily the scanner, Bill. As we continue to roll that out at a faster pace, that will grow, and that's reflective in the, kind of the increased number that we provided for '04, as well.

Okay. Then also --.

Let me just jump back one question on your issue about productivity of executives in the U.S. As we have a lot of new executives coming on board which is reflected in the growth rate you're seeing there.

The new executives don't tend to be as productive as those who have been around a longer period of time. So usually during a growth phase a little bit that productivity sometimes will slow a little bit and then pick up as those executives become more mature and develop a more mature group.

Okay. And then my last question, just broadly speaking for '04, how are you getting to 12% operating margins? Can we walk through those three? The gross versus selling versus general and admin.

Good question. The gross margin will continue to remain pretty level with where it ended in the fourth quarter, so right around the 83.3% range. Selling expenses remaining fairly consistent as well at kind of the 42.2 to 42.4% range going forward.

Let's see. We'll have our SG&A expenses which are going to come in somewhere in the 28% range, 28 to 28.5% range, and all in all that will leave us with operating margin of about 12%.

That's interesting, because you've got, now isn't the G&A where you book your convention costs? So you've got 6.5 in the first quarter and you've got 5 in the fourth quarter. So that's a heck of a performance to reach down to 28 when you're booking $11 million worth of convention costs. What are you doing there to get that leverage? Is that just the unit volume sales?

That's exactly right. It's the volume sales, as you recall we did some restructuring back here where we really addressed some cost issues at the corporate level, and, you know, this continues to allow us, Bill, even at these ranges, we feel, to invest back into our growth of our business, investing in Latin America, investing in new markets, stepping up in a pretty significant way our investment in China to build for our long-term goal which Truman referenced earlier.

These are numbers, as we mentioned earlier, that we believe are very doable, and I think you can see by our operating margin levels in the fourth quarter that as we grow that revenue base we can become, you know, much more profitable.

Okay. Then last question, I promise. You opened up another question. How much would you be spending in '04 for new market development?

About $4 million. And the way I would break that out is probably about $2 million in kind of redevelopment effort, in markets such as Mexico, Brazil, and then an additional $2 million in markets that will be new for us going forward.

Thank you very much. That's all very helpful.

Your next question comes from Chris Ferrera with Merrill Lynch.

Hi guy. I was wondering if you could talk a little bit about Thailand and what's going on there and how growth has grown so tremendously and how you've gotten I guess it's about 5% of the market you said now. What's driving that?

You know, it's really a combination of a couple of things. We've had a very solid local geographic manager there who is very experienced and is just doing a terrific job, has done a terrific job running the business.

But it's also a phenomenon that we see, Chris, whenever we see the creation of new leaders, new field leaders in a particular market, those people can just drive a lot of activity, and in Thailand, we kind of hit our stride a year or two ago with the creation of some new successful mature dynamic field leaders, and they are the ones who are basically driving the business there.

And I guess also moving over to the Nu Skin segment as a whole, it looks like ex currency I guess growth was about 2% and if I'm not mistaken, China sales are all Nu Skin, so if you back that out it looks like Nu Skin segment outside of China might be down year-over-year, maybe in the range of 5%. Is that math right, and if so, is something else going on there?

This is Ritch. I'll just respond quickly, Chris, to that as well. Part of that decline's going to be from Singapore and Malaysia which were primarily Nu Skin-based markets last year. We have introduced Pharmanex into those markets which has provided some stability but also taken away some of the Nu Skin sales in those markets. So primarily that's where it's coming from.

There is an increased focus right now with the scanner and kind of the buzz of the scanner throughout the world, and there's probably a little more attention today being placed on the Pharmanex division, but we do believe that we have some real strong products coming out in the Nu Skin business here at convention, and we'll continue to stabilize that.

The other thing probably driving the Pharmanex area is the automatic subscription orders that we talked about earlier, and those just continue to provide stability and growth in the Pharmanex division.

And those are automatic subscription, Chris are primarily Pharmanex and not Nu Skin given the fact that dietary supplements are well suited to monthly subscription.

You also mentioned efficiencies gained, I think, from your plant in China. Are you exporting to other geographies from that plant in China or is that just supporting your sales in China?

Right now it's just supporting sales in China but we're looking to potentially export a few products from China into other markets, but, you know, we really don't expect that to be of significant consequence in our major markets such as Japan and the U.S.

And one other thing. Have you quantified from an EPS perspective what the F X impact was on the quarter, in a sense, as far as how many pennies it might have contributed?

We really haven't. There are several factors that obviously impact that. It's certainly benefited our revenue, at the same time our costs are translated back a little bit higher. We picked up about 7% benefit on revenue which is going to be about $15 million and so if you factor that down through the P&L we probably picked up about 2 to $3 million of profit.

We also experienced, I should mention, about $1.4 million of hedging losses based on hedging contracts that were entered into in the prior year, so at the same time you pick up a benefit, there are certain, the hedging issues come into play and offset somewhat those benefits.

Thank you very much.

Your next question comes from Doug Lane with Avondale Partners.

Hi, good morning everybody.

Good morning.

Couple of questions on some of these topics. One, on your new markets that you listed, are any of those new markets '04, or are they going to be mostly '05 and beyond, as far as entry?

We're still flirting with that a little bit, Doug. If we do anything it's not going to be until Q4, and it's primarily just a question of timing between other major events, like the November Japan convention, got a large September Southeast Asia Greater China convention, and out in Asia you have holiday's and Ramadan and things like that, that could potentially impact an opening, so it's just going to be a question of whether we do something in a major market in Q4 of this year or perhaps Q1 of next year.

Okay. And on the mix between Nu Skin and Pharmanex is there any difference in margins between the two product lines? In other words, should we care if you're giving up sales on one line at the expense of rapid growth in the other line?

Really not, Doug. Both lines have very high margins, and so, you know, we certainly aren't concerned on our side because we don't see an impact of product shift from one division to the next.

Okay. And on the SG&A, refresh my memory. You had a conference, one of these functions in Japan in 2003, right?

That's correct.

So the fact that you actually have two in one year is a bit unusual because they come every 18 months. Isn't that right?

That's exactly right. This year we kind of get the double impact. Last year we had about a 3.5 to $4 million spend on a Japanese convention. This year we've got both of them which will total closer to $11 million.

But then in the following year, let me do my math, so the North American one will be in the fall of '04, but then you don't have the Japan one until '05, so we'll have an easy comparison in '05 versus '04, I'm sorry, Japan doesn't come back until '06.

That's a good point, Doug. These are significant spends. In Q1 of this year for example, $6.5 million makes for a very different number if we're dropping that all to the bottom line, which we didn't have last year, basically.

Okay. Have you quantified, refresh my memory, Ritch, have you quantified what the annual cost savings is going to be from the third quarter restructuring in Provo?

We didn't quantify exactly. I can tell you that we cut about 10 to $12 million out of the business here but we plan to reinvest the lion's share of that back into development efforts into some of these new markets and stepping up investments in other areas which we believe will produce good revenue growth going forward. So we haven't quantified a net number for that event.

I see. Okay. You did mention you were going to reinvest much of that. On China. I mean, the China number seems low to me, and this is why. If you did $11 million in the third quarter, going to almost 19 in the fourth quarter, then your sequential improvement to get to an annual sales number of $80 million is, you know, just a million or two a quarter.

Yeah.

And if you look at the ramp of Amway, I mean, it was a geometric kind of a ramp on a year-by-year basis, you know, 77 to 288, to 480. I mean, I understand you're being conservative, but aren't you being really conservative?

That's a good question, Doug, and I suppose we probably are, and hopefully the market won't beat us up too much for our desire to be conservative with our China projection. We'll obviously update this number as we see Q1 results and, you know, but you're right, it is a conservative number.

Thank you.

Let me also point out that we're really happy with the way the business is trending month to month, so, you know, nothing's really happened as the business has trended over the last few months to lead us to necessarily be conservative, we're just being conservative.

All right. Thank you.

Your next question comes from John Morrisania with ING.

Morning. Couple of questions. First of all, have you given any more thought to accelerating your option to repurchase those additional shares?

Yeah, we continue to think about that, John, and we really don't have an answer quite yet for it. We discussed it in our board meeting a couple weeks ago and we'll continue to evaluate that.

I mean, am I wrong in saying that it would be fairly anti-dilutive for you?

Yeah. Yeah, it definitely would be. It's just a question of whether we want to lever up a little bit more to do it at this moment in time or whether we want to preserve some borrowing capacity to do some other strategic things, and given the fact that the option is still out there for awhile, you know, right now we can tend to just monitor this on a quarterly basis.

Okay. And the second question was just, I think it's great you're getting all the scanners out there. Given that, I guess, the first ones really started to go out in the first quarter, other than onsies and twosies, what's been the, have you developed a pattern of ordering expertise from the people who have received them from their customer base?

That's a great question. We continue to learn from a marketing perspective what some of these operators are doing better than others to have their productivity be higher than others and clearly we have some scanner operators who are more effective at converting their customers to either Pharmanex subscribers or to distributors themselves than other distributors are, so this is definitely something we're taking a look at and we'll do a lot of education on this point and discussion on this point at our convention here in two weeks.

What's kind of your ship rate now on the scanners?

We anticipate shipping about 200 to 225 a month over the next three and four months. Our China capacity will kick in in May and June and will take a few months to ramp up, but by the end of the year we'll be shipping or be able to ship as many as 500, 600 a month.

And that is still being done on basically a cash flow breakeven for you? Is that correct?

We have wanted the lease terms on these scanner units to essentially pay for the unit over the three-year term of the lease. We're amortizing these over a five-year period.

Thank you.

Your next question comes from Pria Ori with Banc of America Securities.

Hi, how you are you doing?

Good morning.

I had two questions. One, is $6.5 million a good ongoing sales rate by quarter for Big Planet in '04?

Yeah, I think right now the 6.5 would be. We're going to launch, you know, and continue to look at opportunities to use Big Planet to leverage technology and make our distributors more effective. We don't anticipate and have not built into our numbers significant increases in the short-term in Big Planet, so I think that is a good level rate to use going forward.

Also my second question is, you identified several new markets that you could potentially look at. What's your priority since you [inaudible] about $2 million next year on your market development. Which countries are you targeting first?

Yeah, well, you know, we continued to believe, Pria, that Brazil and Mexico have a lot of potential. They're both in the top ten market for direct sellers globally, and consequently as Ritch indicated, we're making some investments in redeveloping those markets. Among markets that we have yet to open, probably the one that has the most potential in the short-term is Russia, and after that, probably Indonesia and then India.

Okay. Thank you very much.

Again, I would like to remind everyone if you have a question please press star one. You have a follow-up question from Kathleen Reed with Stanford Financial.

Thanks. I noted from your third quarter conference call that China actually made a profit in the third quarter, and I wondered if you could quantify that in the fourth quarter and if you could let us know how the margins in China compare to your overall company.

Yeah, that's a great question, Kathy. We're slightly higher than 10% profitability in the fourth quarter, and the margins continue to be as good as or better than any other market which actually is ahead of what we had anticipated at this point in our development of China.

We continue to reinvest fast in that market, so, you know, we won't anticipate significantly higher operating margins going forward. We'll continue to expand our manufacturing facilities and build out new opportunities in new cities there, and so, you know, we think we can hold the level sort of that we're at right now and still give us an opportunity to build a real strong foundation for, you know, our sort of long-term goals in China.

Okay. Great. Also, back to gross margin. Can you break out the components of gross margin between positive foreign exchange, your benefit from your China facility and not having Big Planet, if you can just say of that 200, that really impressive increase, just how much was the different components?

Sure. We picked up about, and it's a little bit difficult to quantify exactly but I'll give you kind of round numbers. We picked up about 150 basis points from the change in Big Planet. We picked up about 70 basis points from the foreign exchange shift, you know, the strengthening of the foreign currencies, and another 40 to 50 basis points in China's manufacturing, just for the China market. That was based on fourth quarter numbers.

Okay. Thanks. Did I, I guess I didn't hear someone say, I think someone asked you what was the total currency impact on sales for the whole company. Did you say 7%?

That's correct.

Okay. Then just lastly, can you just talk a little bit more about what you're doing in Brazil and what you expect that market to deliver in '04? I have also here in my notes that you also launched, in addition to selling some personal care products, I think you also launched Pharmanex in November, and just how that market is, you're seeing that play out in '04?

Yeah. We've been, perhaps, more bold in Brazil than we've been in any of our other markets in terms of modification to our business model. We have tried to restructure our compensation plan for distributors to be more viable in the local market there by putting more compensation for these folks on, you know, what we describe as the front end of our plan versus the back end of our plan. Make it more of a retail-oriented market than a heavy-duty network marketing market.

We've also moved to local manufacturing there. Which is a big step for us because it's one of the few markets where we've actually engaged in significant local manufacturing. Try to get our price points down.

And we've also modified both of our product lines. We've created SKUs and rebranded the Nu Skin product line with a Nu Skin Living trademark here in the upcoming months to hit some price points that are more viable in the local market there. We have introduced Pharmanex products but only to a small degree so far, and we're seeing good results from all of that. It's all working to drive the business there, we feel.

So the Nu Skin Living, is that only sold in Brazil?

Right now it will only be sold in Brazil, but it may well be the brand that we use in other developing economies.

Any expectations for '04 revenue? From other markets total, or, I mean, I guess excluding Europe or Brazil in particular?

Brazil in particular we would anticipate about 3 to $4 million, which is about, you know, in the last year we did less than 2, so it's about a doubling of our business in '04, and then continuing to grow from there.

Okay. Thanks very much.

At this time, sir, you have no further questions. Do you have any closing comments?

Thank you, operator. We appreciate the support of all of our shareholders and believe that 2004 is going to be a record and even a breakout year for us. So thank you for joining us today.

Thank you for participating in today's Nu Skin Enterprises fourth quarter and 2003 year-end conference call. You may now disconnect.