如新 (NUS) 2004 Q2 法說會逐字稿

Good morning. My name is Deshanta, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Nu Skin Enterprises Second Quarter Earnings 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 "*" then the number "1" on your telephone keypad. If you would like to withdraw your question, press "*" then the number "2" on your telephone keypad. Thank you.

Mr. Allen, you may begin your conference.

Thank you. Good morning. We appreciate all those joining us today on this conference 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 discussions of the company's operations, the call will be opened for questions.

As a reminder, during this conference call, comments may be made, which will 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 our recently amended S-3 and to today's earnings release for a complete discussion of risks associated with these forward-looking statements and our business.

I will now turn the time over to Truman Hunt.

Good morning, everyone. Thanks for joining us today. We're pleased to announce another record quarter, this morning. Q2 results represent our largest quarterly revenue mark in our company's history. Revenue was up 18% from the second quarter of 2003 to $284.2 million.

Earnings per share were up 33%, to 28 cents or 29 cents excluding the one-time amortization charge, during the quarter. These results are ahead of our forecasts for the quarter and are primarily due to growth in China and in the U.S., as well as the positive impact of the BioPhotonic Scanner and our retention initiatives worldwide.

Let me first talk about the results in our large markets. We saw tremendous growth in Mainland China in the quarter; $30 million of revenue for the period represents a 400% improvement year-over-year and a 30% growth rate sequentially. China now represents 10% of our total revenue.

We continue to devote our attention to training an ever growing sales force, which is important to our long-term prospects in the market. We now have over 5,500 sales representatives and 190,000 preferred customers in China. This is an amazing figure, when you think we've only been operating in China for 18 months. As you know, the Chinese government continues to develop direct selling regulations, and we expect these guidelines to be published within the next few months.

We continue to be optimistic that the regulations will allow us to compete on a level playing field with our competitors.

During the second quarter, we were able to secure and upgrade our business license in China, which will facilitate expansion into additional cities and provinces, going forward. In addition, the construction of our Pharmanex manufacturing plant is well underway in China in preparation for a Pharmanex launch in early 2005.

We're also building a scanner manufacturing facility in Shanghai that will be operating by the end of the third quarter. So we continue to invest in China, and we remain very bullish on our potential there.

We're also extremely pleased with the Q2 results in the US with revenue of $33.5 million. This represents a 9% increase year-over-year. However, excluding the $5 million of revenue from Big Planet services that were included in the prior-year results that were divested in the third quarter of '03, this represents an increase of nearly 30% year-over-year. All of the key growth indicators in the United States have shown consistent double-digit year-over-year increases including our executive account, which was up 17% year-over-year.

During the second quarter, the US Pharmanex business accelerated a bit and was up 47% due to the continued impact of the BioPhotonic Scanner as well as distributor and customer retention programs that we're running.

Nu Skin personal care sales were also up 13% for the quarter, which is encouraging and reflects our ability to grow both sides of the business simultaneously. And we're very encouraged by the increased in monthly product subscription sales, which now account for about half of our revenue in the United States. So with results like these, we're well on track to achieve our goal of 20% growth in our core business in the US year-over-year; and, in fact, we should exceed 25% growth in the second half of the year.

Now, in Japan, year-over-year revenue was down slightly for the quarter and was even for the first half of the year. You'll recall that our expectations for Japan for the first three quarters of this year were flat, which is exactly where we are to the first half of the year.

We have been without a real growth driver in Japan for the past few quarters, as we've had to take some time to work through local regulations that impact our ability to use the BioPhotonic Scanner in Japan. As a result, we have not been able to use the scanner yet, even in our Japan lock-in centers. This has left our sales leaders in a bit of a -- in limbo, as we have not known for sure how we have positioned the scanner in Japan.

So the best news to me coming out from Japan is that, last week, we were able to resolve, with Japanese regulators, an approach to marketing the scanner without requiring medical device registration, which is obviously very encouraging to us.

Of course, the program in Japan will not be identical to the U.S. program; but we will be able to put scanners into the hands of our sales force there, beginning with the Japan Convention in November. And given the growth we're seeing in the U.S. as a result of this scanner, we're very optimistic about what the scanner can do in Japan in the next few years.

I want to also say that we're very confident that our Japan business is healthy. Our active distributor account grew 1% year-over-year, and our product subscriber base is growing nicely. It's just that the market has lapped a real growth driver, as our sales leaders have been waiting for the scanner; so during this period, many of our Japanese leaders have been attracted understandably to our rapidly growing business in China. This is helpful in China but distracts attention from China, and we expect this dynamic to change with the scanners introduced in Japan, this fall.

In many of our smaller markets, growth has resulted from incentives from our prior subscriptions as well as from the introduction of the scanner in those markets. As our press release indicates, product subscriptions globally are growing at a very health cliff, with 278,000 subscription orders filled in June, which represents a 57% increase year-over-year.

In Hong Kong, for example, automated subscription orders were up more than 200% year-over-year, and the market posted 71% year-over-year revenue growth. Similarly, in Taiwan, where local currency revenue was up 4%, product subscriptions are also up significantly as well.

So these product subscription in our ADP programs now accounts for about 30% of our global revenue; and as we've indicated in the past, we like this growing subscriber base, as these customers last much larger than non-subscribers.

As a result of these things, several markets that have been down year-over-year have reversed their trends and are now showing year-over-year increases. In addition to the US and Taiwan, in Q2, this reversal was also seen in Singapore, Malaysia, South Korea and Canada.

In Latin America, we're also beginning to see good indicators from our new business models in Brazil and Mexico. During the quarter, combined Latin American revenue was up 18%, despite significant price reductions on many of our products.

So we're seeing much higher unit volumes, which is encouraging for us there; and most importantly, distributor applications were up 75% in Latin America year-over-year. But these markets are still small and we're headed in the right direction and expect to have meaningful contributions from Latin American markets down the road.

We're also moving forward with some new market openings. Israel is on track to open in the fourth quarter of this year, and we've wanted to use Israel as a springboard into Eastern Europe, and this is still the strategy as we continue to target a mid-2005 launch in Russia, the market that has experienced tremendous direct selling growth over the last couple of years.

Now, before offering some thoughts on the balance of 2004 and look a bit into 2005, I'll turn the time over to Ritch to discuss some financial statistics.

Thank you, Truman. Good morning everyone. I'll quickly provide some local currency sales figures from our major geographies. Second-quarter revenue in Japan was 15.9 million yen versus 16.3 million yen in the second quarter of '03.

Quarterly revenue in South Korea in was 18.8 billion won versus 17.6 billion won in 2003. In Greater China, revenue from Taiwan during the quarter was NT$678 million versus NT$651 million last year while Hong Kong revenue reached a record HK$72 million, that's versus HK$42 million in the prior year.

In China, revenue was 247 million RMB during this quarter; that's versus 48 million in our second quarter of operation last year. In South Asia, the combined U.S. dollar revenue from Malaysia and Singapore was $9.9 million versus $8.6 million in the second quarter of '03. Thailand posted revenue, during this quarter, 259 million baht compared to 220 million baht last year.

Our U.S. market generated $33.5 million in revenue, during the second quarter, compared to 30.8 million in 2003; and again that 2003 number included approximately $5 million of Big Planet products and services that we no longer offer. Second-quarter revenue in Europe was 8.3 million in both 2003 and 2004.

Our active distributor and preferred customer account increased 30% to 808,000 at the end of the quarter; that's up from 621,000 in the prior year. And for the first time in the company's history, we reported more than 30,000 executive level distributors. Our gross margin improved approximately 200 basis points to 83.3% this quarter compared to prior-year results, but remained level with the first quarter.

The year-over-year improvement was primarily due to the discontinued low margin products and services again from Big Planet, higher gross margins in Mainland China resulting from in-house manufacturing, and favorable foreign currency exchange rates.

Selling expenses as a percent of revenue were 42.7%. This is an increase of 220 basis points compared to the prior year but essentially level with the first quarter. This year-over-year increase was due to discontinued non-commissioned Big Planet revenue and higher costs associated with employed sales representatives in China.

Looking forward, we believe that the gross margin and selling expenses will remain relatively constant for the remainder of this year. General and administrative expenses as a percent of revenue improved 170 basis points over prior year results to 28.3%. This improvement is a result of our ongoing effort to contain cost while allocating budget to focused initiative, which we believe will be strategic growth drivers to our business in the future.

Second quarter operating margin therefore was 12.3%. This is a 160 basis point improvement over prior year results. Again a very good quarter. We feel very good about the way things came out this quarter.

During the second quarter, interest expense was $1.5 million. We paid dividends of $5.7 million. We invested $7.9 million in capital improvement. This all generated cash flow from operations of $44 million during the second quarter. And we closed the quarter with approximately $170 million of cash on hand.

Now for those of you who are building models, let me give you a couple of quick details that will be helpful as you go forward here. We continued to model our 2004 Japan revenue with an average yen of approximately 110 to the dollar.

During the fourth quarter, Japan will host its distributor convention and launch the Pharmanex BioPhotonic scanner, this will add approximately $4 million to general and administrative expenses in that period, and that's obviously reflected in our guidance.

We're increasing our 2004 revenue expectations for China to approximately $120 million. We anticipate growing US revenue approximately 25% for the rest of the year and in summary, we expect 2000 revenue to be around 1.13 billion with earnings per share of $1.10 to $1.14.

We expect third quarter revenue approximately $280 million to $285 million with revenue per share of 29 to 31 cents. OK. Since we've discussed the review by the SEC of our registration statement in past conference calls and public filings, I'd like to provide you with a quick update regarding this matter.

We have now filed an amended registration statement and anticipate that this registration statement will become effective very shortly within the next few days.

As we previously indicated, one of the issues raised by the SEC involve the useful lives of some intangible assets. These intangible assets included various trademarks and product trade names; our distributor networks, marketing rights. These were all acquired in acquisitions dating back to '96, '98, '99.

With the adoption of FAS 142 on January 1st 2002, we re-evaluated the useful lives of such assets. As required by FAS 142, and changed the amortization period of some of these assets. Based upon input from the staff of the SEC, we reevaluated the accounting for these assets and adjusted the useful lives on some of the assets.

The net result is that we recorded a $1.2 million catch-up amortization expense, plus a current quarter amortization of expense of these intangibles for an additional $275,000 or approximately $1.5 million in the second quarter. We'll have ongoing amortization expense of approximately $275,000 per quarter, that's about $1.1 million per year through their remaining life of these assets and that's approximately 12 more years.

We reiterate that this adjustment is a non-cash non-operational expense. And finally, we reported today that we exercised the call option to purchase shares from members of the original shareholder group, who participated in the re-capitalization transaction last October.

You will recall, as part of this transaction we negotiated the right to purchase at the exact same pricing terms an additional amount of shares at a future date. In exercising the option, we elected as a Company to repurchase 3.1 million shares with 1.5 million shares being purchased by third-party investors.

We believe that this is an excellent use of our cash for our current shareholders and essentially eliminate any potential overhang on our stock. The founding shareholders remain locked up from open market selling until October of 2005.

At that time, they will be allowed to participate in restricted open market selling of no more than 350,000 shares per quarter. So following this transaction, approximately 70% of our Company's outstanding stock, which is approximately 71 million shares, will be held by public shareholders.

With that I'll turn the call back to Truman.

OK. Thanks Ritch. The balance of the year is very important to us for several reason and in order to turn two record quarters into a record year, we'll continue to concentrate our efforts on our three key geographies: Japan, the United States and China.

As I've indicated in the past, we've anticipated a flat first nine months of revenue in Japan. Q3 of last year was a strong revenue quarter. So as Ritch indicated, with a difficult comparison, we expect to be down slightly in Japan Q3 and then rebound to be slightly up in Q4, but level overall for the year. The Scanner is key to growth in Japan and based on success elsewhere, we're confident that the Scanner will trigger renewed growth in Japan through 2005.

In the United States, we're on course to continue to grow our business by 25% for the second half of the year. And by the end of the third quarter, we expect to know where the FDA stands on the BioPhotonic Scanner and whether or not we'll file a medical device registration, which we're prepared to do, if we have to. But obviously if we are not required to do this would be a welcome news.

Third, we need to continue to increase China revenues sequentially through 2004 and prepare for new regulations in the launch of Pharmanex in 2005. As Ritch indicated, again we're increasing our revenue expectations for China to $120 million for the year.

And as our press release indicates, we feel that even without favorable development on the regulatory front, we're comfortable articulating the revenue target of $180 million for 2005, given geographic expansion into new cities and the launch of Pharmanex, which will happen early in 2005.

Finally, we'll continue to develop our attention strategies and get much better and holding the thousands of people who are coming into the business as distributors and customers. So with the yen at 110 to the dollar and assuming the $180 million of revenue in China next year, we would expect 2005 revenue to be between 1.22 and $1.25 billion, which will generate earnings per share growth of 20 to 25% through the 135 to 140 range. So we're confident that 2004 and 2005 are going to be a record years for Nu Skin Enterprises.

OK. With that, we'll open the call for questions.

At this time, I'd like to remind everyone in order to ask a question, please press "*" then the number "1" on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Kathleen Reed of Stanford Financial.

Good morning. Just of couple of quick questions. First, just to be clear your -- the $1.2 million in additional one-time amortization catch-up that you took this quarter to settle the SEC review, does that mean you didn't have to do any restating -- there is no retroactive to the earnings or how they stand for '02 and '03?

That is correct.

OK. Great. And can you -- this is just an easy one but can you please just tell me the U.S. revenue dollar amount again in the quarter? I was writing so fast I didn't catch that one.

Yes, $33.5 million.

So when -- your guidance going forward for the US in the second half of the year, that was US or North America to be up 25% year-over-year and does that include or exclude the Big Planet comps, because I know Big Planet one way just in the beginning of third quarter, so is it non-issue going forward?

Yeah, you are right, the guidance was for the US market.

OK.

And there is only about $1 million of Big Planet revenue in Q3 of last year that we have to allow this year, Other than that, we fully anniversary this issue.

OK. Great. And then the new 1.5 million shares that you are also -- you're selling to third parties, will those be unregistered shares and what is the time period for those?

It will be unregistered shares and we will file a registration statement within the next 30 days.

And so, should we expect that since you resolved all your SEC issues with the last transaction, at this point should probably have no issue?

That would be our hope.

OK. And then lastly, just -- there was an article a couple of weeks ago just stating that the FDA was putting a ban on using any design materials in cosmetics production and I know color cosmetics are obviously not a big focus of your company but is there issues with that for your business or -- and if you can just talk about that?

Well, actually Kathy, Lori Bush is the President of Nu Skin, happens to be here this morning, so we are going to ask her to address that.

OK. Great thanks.

We had actually not encountered any requirement for regulatory restrictions, at this point in time, however, Nu Skin has been voluntarily over the last several years been facing out of the application of any animal derived ingredients in our cosmetic products both makeup and our skin care products.

There are still a few products that contain components such as nope lipid and certain animal components, which are not usually but the concerns associated with BSE, mad cow disease and such. But we're pretty comfortable with our position now. And a lot of our modifications have really been driven by our global expansion, where some of our markets particularly Muslim nations such as Malaysia, have really driven us away from application of most animal derived components.

Great. Thank you very much. I appreciate it.

Thanks, Kathy.

The next question comes from Doug Lane of Avondale Partners.

Yes Hi. Good morning, everybody.

Hi Doug.

I have three questions on China. First of all, can you talk about this convention in Hong Kong? This is -- I believe it's the first one sort of the Greater China convention, and how much do you think that's going to cause?

And then, secondly, can you talk a little bit about, in China, what you expect on the regulatory front to come down the pipe and how that's going to help your business and maybe provide upside to your forecast in 2005?

And then lastly on the nutritional business, how big is the nutrition market in China, how important is that should we expect China could be 50-50 nutrition skin care or there'll be one side is bigger than the other?

You know, those are really good questions. You know, first of all, on this Greater China convention coming up in September, it is a first of its kind, we have not ever gathered the region in this fashion, so, we're really pretty excited to be doing it.

People from the Mainland, Hong Kong, obviously, Taiwan, Singapore and Malaysia, Thailand and the Philippines will all be coming to Hong Kong for this convention, we expect someone in the neighborhood of 9,000 to 10G. Really limited only by the fact that we can't find a venue that will hold more people indoors otherwise we could even have a lot more people there.

But the expense associated with this convention will be in the $1 million range, so nowhere near the magnitude of our international convention or Japan convention, they're still be a very exciting event. On the regulatory front, yeah, I mean basically what we've articulated in the release is an expectation of a $180 million assuming no real material improvements on the regulatory front.

So, whatever happens in terms of the new regulations, which again we expect to have visibility on by the end of Q3, is just going to be beneficial to us. We still are really not sure how the regulations will come out, everyone has probably seen some news with respect to Avion and they seem to be talking about favorable regulatory developments that will help them.

We'd -- we view that news positively, because it should also bode well for the rest of us. So, yeah, it's just -- whatever we get on the regulatory front, it's just going to be added to our $180 million expectation. The nutrition business in China is going to be very significant.

The largest direct selling companies there, which is the Amway Organization, which will generate revenues somewhere in the $2 billion range this year, has stated that 65% of that $2 billion is nutrition. So, we are going to putting scanners into our walk-in centers early in the year and launching for our next products during the year. So, I think the nutrition business could be 50% of our business next year and it's just going to be a very substantial initiative for us.

Wow. I didn't realize that it was part of Amway, in fact Avon, wasn't Avon one of the companies that was grandfathered in China. So how would these regulations affect company like that, that were grandfather?

Yeah. Avon is one the companies who enjoys an assumption to the current regulatory probation on direct selling that they have not really been operating in a direct selling fashion and you probably have to ask them about the details of their business, but our understanding is that they've been operating more or less in a franchise model and has thousands of franchisees across the country.

So, they need to essentially convert all of those franchisees to direct sellers and that apparently is what the government has given them a green light to do. Although, the government hasn't made any official announcements.

I see. OK. Thank you.

Thanks, Doug.

Your next question comes from Joe Norton of Banc of America Security.

Thanks. Good morning.

Hi, Joe.

Hi. I actually have a follow-up to all of those questions about China. First of all, is the convention is going to be $1 million or $4 million, I thought in the prepared comments, Ritch said, it was going to be $4 million in the fourth quarter?

Yeah, it's $1 million in the third quarter.

OK.

It was a China Convention -- $4 million associated with the Japan Convention in the fourth quarter.

OK. Got it. And then, just going back to the change in the direct selling regulation, could you just talk a little bit more about, you know, given that there's a favorable outcome, what exactly would that mean for Nu Skin? In another words, would you continue to pursue kind of the store format and then in the secondary format to the direct selling or would it be a conversion on -- I'm just not sure, how that would actually change the strategy?

All right. OK. Well for us Joe, the stores that we are currently have in China will continue to play a very important role from the distribution perspective. So we don't anticipate doing away with those stores. We do anticipate building fewer of them in cities that we enter into in the future.

But the things that would most materially benefit us would be the ability to use independent contractors as sales people, which we currently can't do. We actually have to employ all our sales people and you can imagine that that's a bit of impediment to building a sales organization when you're telling people that they have to quit their job and join us full-time. But that would be a very positive development.

In addition we currently can't affect any sales away from our fixed retail locations. So basically our sales people have to essentially coax their customers to come into our stores as opposed to been able to service them from their homes. And so been able to sell away from fixed retail locations would also be very beneficial to us.

In addition to that, we are not able to implement a compensation plan that rewards our sales people to the extent we can in our Network Marketing program. So been able to implement in more generous compensation plan and really reward people for building sales organizations would be very positive.

And then finally, there are also restrictions on medium sizes. Our people haven't been able to gather together in really large formats. There are restrictions on a distributor or a sales person's ability to do business in other cities and cross-province. So if we're able to enable that that would also be very beneficial. So those are really the primary components. So whatever we get on any of those fronts is going to be positives for us.

OK. And then just one more on China, which is the Pharmanex business, how is that -- does that require any further approval by the government in terms of asbestos sort of ready to go or are there other regulations on the Pharmanex side that you guys need to resolve?

Yeah, the regulations there are primarily product registrations and all of that is underway and we don't anticipate any problem getting the products registered and really been able to launch Pharmanex products regardless of changes to the direct selling loss.

And that's going to include -- you're going to have Pharmanex scanners installed in the stores as well?

That's correct.

OK. And then just a couple on Japan. That is great news about the scanner being in that market. I am just interested if you can give any more details on the plan, I mean, you have an idea of sort of how many scanners would be installed there, what the timeframe would be?

You know, we anticipate -- put in 125 to 150 units in the hands of our highest sales leaders by the November convention. And then we'll roll out an additional probably 200 a month through 2005. So by the end of 2005, we would expect to have a couple of thousand units in the market.

OK. And just this is kind of -- what you guys are expecting to drive more growth in Japan in 2005. I mean, how do you gauge the interest level, it sounds like some of the distributors in Japan right now are more focused on China. How do you gauge their level of interest in this scanner and what makes you confident that that's going to drive more growth in the Japanese market?

While it's really two things John, number one this scanner has had such a positive impact on the U.S. and elsewhere where we've introduced it, even to a limited degree that gives us confidence that the scanner will have a positive influence in Japan. You know, and secondly, we spend time with our sales leaders and in fact during the second quarter, we had our annual sales incentives trip and had 100 or so of our highest pane level sales leaders in Japan together on that trip.

And I suppose to a great degree the enthusiasm that we here from them anecdotally for the introduction of the scanner is also -- makes us optimistic about its potential in Japan. We are just very excited to get it into their market because they see what it's doing elsewhere.

OK. Great. Thank you very much.

Thank you.

Your next question comes from Bill Schmitt of Deutsche Bank.

Good morning.

Hi Bill.

Just on U.S. turnover key, give me the number what turnover was in the US year-to-date, I guess, and then what you are targeting, I think one of your initiative was to further improve productivity and reduce turnover?

Yeah. In terms of our turnover, those aren't numbers that we release completely. What we said is, now over 50% of our revenue in the US is coming through subscription orders about 70% of our foreign revenue and about 50% of our overall revenue.

People who are joining us on the subscription program, we are now retaining approximately 50% of those after a 12-month period of time versus kind of 20% retention rate on distributor to just sign up with either distributors or wholesale consumers. So overall it's moving the needle on our overall retention. And that is really the primary driver in the U.S. business to our top line revenue growth.

That's a real pretty good number because in direct selling anything under 100 in terms of turnover is pretty darn good, isn't that kind of correct?

Yeah. We're very encouraged with that and frankly I don't think we've seen the full benefit of the impact of this will have going forward on our business.

Right. Thanks. And then can you just update us on your experiments down in Latin America and in Eastern Europe in terms of how you are building the business out and what have your learnt so far?

Yes. In Latin America we are -- we have basically decided to move our model a little bit towards more of a direct selling format. Its -- we certainly are not Avon or Mary Kay in those markets but we've inverted, in essence, the incentives of our compensation plan to reward people more on the front-end, where the mechanism is based on product movement, as opposed to the back-end, where the mechanism is based on building a sales organization.

So, we just felt that we wanted to, you know, I guess, I'll use the phrase water down our compensation plan a little bit in those markets to promote product distribution. We've lowered our price points on our products, and are really trying to compete and make our products very relevant in those markets. So, it's a slower growth business model, but it's one we think is necessary in the long run.

In Eastern Europe, we have a similar experiment brewing in Poland, and frankly, we really feel that Eastern Europe and Russia, in particular, are still markets that are well suited towards network marketing. We have not concluded that, you know, we really need to implement our Latin American business model in Eastern Europe, and when we launch in Israel in this year and Russia next year, we're more likely to see our global business model in the Latin American business model.

Great. Thank you very much.

Your next question comes from Kathleen Reed of Stanford Financial.

Well, thanks. I actually just have a follow-up on your new market launches in Israel and Russia. Just to go back to what you just said, my understanding of your Latin American model, which is you're kind of reversing the way people got paid -- paying them more for what they sell unless they're recruiting.

So are you now saying that you expect the Russia model to be more like your global model, so you would incentivize people for recruiting efforts more highly so than products?

Well, yeah, Kathleen, I mean, we haven't really made final decisions about that, but we're leaning in that direction. And we don't feel that we need to make dramatic changes to our global model to build a robust business in Russia.

And what, just from your testing or whatever in Russia, leads you to believe, you know, just that you can -- that the year model will be more atypical than just a Avon's model there, but I don't believe they have their leadership program in Russia, which is their fastest growing market?

Yeah. Well, again its just, really, the work that we've done in the market so far. We're talking with a number of industry leaders in that market and just evaluating the economics of the market, you know, people's disposable income, what kind of opportunity is motivating to them from an income perspective.

And, you know, we still like the -- like in and around Moscow and St. Petersburg in particular, which is really where all the economics are in Russia, that network marketing has a real shot. So, we could always go that direction down the road if our global plan isn't as impactful as we think, but right now our inclination is to launch a model that's more consistent with our global model.

OK. Great. And when you do Israel, what quarter is that this year and what that will be more or like the Latin American model or more or like the global model?

Israel will be more or like the global model.

OK.

In Q4. And obviously, Israel is not a huge market. But we have seen already a high level of interest in the market from our existing leaders and in future leaders coming out of the Jewish communities, essentially in the U.S. in particular, and so, we are really optimistic that Israel is going to be an effective springboard in the Eastern Europe.

And what products are you going to launch in Israel?

Israel will be a little bit different because, for the first time, we're likely to launch some core Nu Skin products and some core Pharmanex products simultaneously.

OK. And would the price points be similar or they won't be like the discounted Latin American prices?

That's correct. They will be similar to our global model.

OK. And then just lastly, can you elaborate your North American revenue were strong. I just want to know if can you talk--when we start anniversaring the launch of the Scanner in the U.S., and then also just can you give us some more details -- you said you also had some distributor and customer retention programs and say it's what obviously you're driving your monthly subscription orders, but if you can just give us more details, what types of things you're doing there to increase the payouts or just new products or just what types of things you're doing to retain your distributors and your customers?

Yes. Let me tackle the second part of that question first and I'll have Ritch talk about the anniversary, the Scanner program. Really, what we're doing here in the US and elsewhere are really fairly simple mechanisms that we probably should have been doing for the last 20 years but haven't.

One of the things that's working very well for us. It's just simple couponing where we'll offer people at discount in the months after they sign up as distributors or as preferred customers and just even based on simple couponing mechanisms, we're triggering a lot of volume that historically we haven't seen from this customer base.

We have also implemented - we've built into our executive qualification requirements, the requirement to have a certain number of subscription-based customers in your group, in your customer base or in your sales organizations. So by requiring those subscription-based customers, we're just seeing those numbers escalate very quickly, and it's having a dramatic impact on retention.

So the short term impact of all of these things is probably not as significant, we feel, as the long term impact will be, because if I go back and look at the last 10 years or 20 years and say, wow, what would have been the impact of these simple mechanisms had we done them ten years ago.

We think that could be fairly dramatic. Now, at the end of the day, people like our products and, honestly, you know, we have not been very good marketers of our own products for the last 20 years, and so we're just getting a little bit more serious about marketing our products.

OK. Great.

And then on the Scanner issue, Kathy , we launched first batch of Scanners in the first quarter of last year in the U.S., approximately 50 of them and about this time last year, we had about 200 in the market. We currently have about 1,100 and so that's kind of the progress we're up.

OK. Thank you very much.

Your next question comes from Christopher Ferrara of Merrill Lynch.

Good morning.

Hi, Chris.

Hi. Can you guys talk a little bit about what you might be seeing in the second half of the year that may be a little bit different? I'm just looking at the overall outlook for EPS in the second half of year staying at 110 to 114 despite a good Q2 and the share buyback that was announced?

Sure. I'll address that, Chris. You know, we ended up picking up an additional $2 million of amortization expense for this year. So that's one impact, I'll think.

We also, as you know, in our second quarter actually had a foreign currency ahead of about $1.5 million and -- so, actually ahead a little bit of the positive thing that really did happen in the second quarter. So we've kind of been conservative as we look out at currency and what swings made impact us their and how to keep the guidance in the 110 to 114 range.

Whether most of stuff you decided was in Q2 already and you still made the high-end of number in Q2 despite that.

That's right. And going forward with the additional amortization still coming, you know and also I think it's important to know, we're going to continue to invest heavily in China. We're looking at several promotional and marketing programs that will help to build out our brand as we come into the New Year. So we're going to continue to invest in areas that we believe will drive the growth going forward.

What's the store count in China right now.

We have a 110 approximately.

So if you're around, I guess, 50 distributors per store where can that go if deregulation happens the way you want it to happen?

Well, right now, we have 5,500 sales reps in China and it's a deregulation grows the way we want it to. I mean the number of distributors that we have in that market could be in the 100 of 1000s and the number of executives that we have in that market could be, I mean could be 10,000 next year.

Its just -- its an enormous market with an incredibly high level of attention by the way to direct selling. And it's actually quite surprising to me how high profile the industry is even in the press. I mean people are aware that these new regulations are coming and there's this huge pent-up demand for opportunity there.

All right. And also you mentioned that the plan on using the scanner in Japan will be a little bit different than it is in the US. Just wanted to see if there is any read in that and will it be more restrictions on the scanners used in Japan than we see in the U.S. right now?

You know, its funny. It somewhat likes there is a completely different regulatory mentality in the way the U.S. regulators due to scan or whether Japanese regulator due to scan I mean. In Japan the primary differences will be that instead of generating a number when we scan some one, the scan result will actually show up on a color scale.

So the higher the level of carotenoid antioxidants in your tissue, the higher your scan will reflect on a color scale as oppose to splitting out a number. So that's really the primary difference. Apart from that, the regulators there will essentially promote or enable us to promote the scanner as a tool to measure nutritional status.

Where as there in the United States, basically all we can say about the scanner is -- it's measuring carotenoid antioxidants in the skin. So in Japan, we can go a little bit further actually and say that the scanner is actually a reflection of nutritional status, nutritional health, and so there is just a little bit of difference towards their too.

OK. And we could talk of, you know, some people losing focus in some markets like Japan, we guess China still good right now. Is there any sense that some of China sales right now -- and given its had a huge growth trajectory.

But is there any -- is there anybody quantify the people that are selling in China right now that might not be if they return to their home markets and is there chance that we see some sort of fall out like we did you know -- like you might typically see in a new market that opens?

Yeah it's -- I think we will see as soon as the start of the scanner launch as we will see Japanese leaders refocused in their intention on Japan I mean quantifying the impact is that on Chinese pretty tough. And I think that it's - I just don't even know how we'd take a swag at that -- at estimating that, Chris, to tell you the truth but there's so much room to run in China that I honestly wouldn't expect a significant impact in China for sometime.

OK. And just one last one, how is G&A so good year-over-year, I mean it's even better than it was sequentially when you normalized the convention expenses, and I know you said you've been able to leverage a higher level of sales but the sales aren't that much more significantly higher than they were in Q1, I was just wondering what else is in there?

Because Ritch's bonus is tied to operating margins.

Actually they really are.

Now we're just - he's just doing a good job of watching SG&A.

And I should mention too, Chris, at the same time we're really trying to make sure that we're spending in areas that we believe are really important. We're putting more money into China. We're putting money into Europe. We're putting money into Latin America today. We're putting money into new markets because we believe that these will be our growth drivers two, three, four years out in the future.

So, at the same time we're trying to be very careful with our maintenance expenses for our organic growth. We're trying to invest in areas that we believe will be very positive for us going forward.

Got it. Has there been any change to the outlook on CAPEX going forward?

You know I didn't give any guidance for next year but this year will continue to be in the $30 million to $35 million range. And next year that will probably push upwards of 40 million, again, primarily related to the Scanner, Pharmanex manufacturing facility that we're putting into China. So, it will increase a little bit but not anything significant.

Got it. Thank you very much.

Once again, if you would like to ask a question, please press "*" then the number "1" on our telephone keypad. Your next question comes from Mimi Sokolowski of Sidoti.

An easy one, I want to make sure I'm not missing anything on the share repurchase. So at the end of the fourth quarter, if I'm understanding correctly, assuming the share price stays about where it is, the share count diluted should be just over 71 million or so?

Yes, that's close, Mimi.

OK.

We had a bit of a jump this quarter because there were number of options that came into the Moni (ph) with the increase in our stock price. All the options are primarily in the Moni today, so we won't see a big shift going forward.

OK. And as for next year there is no material lock up expiration and the only real risk of an increasing share count again is from the original shareholders and it does have that limit, is that the correct understanding?

Yes, it shouldn't increase at all our outstanding share count. The founding shareholders locked up through October of '05 and have restricted selling ability after October of 350,000 shares per quarter. So, it shouldn't affect our outstanding share account.

And let me also chime in with one thought there that with these recent transactions of the members of our original shareholder group, those who have been most inclined to sell are also now reduced to the point where we wouldn't expect and have a meaningful impact on the open market anyway.

OK. All right. That was really it. Thank you for the clarification.

Thank you everyone for joining us this morning. We appreciate your participation and as always we remain available to answer questions you have. Thanks a lot.

This concludes today's Nu Skin Enterprises second quarter earnings conference call. You may now disconnect.