如新 (NUS) 2004 Q4 法說會逐字稿

Good morning. My name is Angela and I will be your conference facilitator. At this time I would like to welcome everyone to the fourth-quarter and 2004 year-end results conference call. (OPERATOR INSTRUCTIONS) Mr. Allen, you may begin your conference.

Good morning. We appreciate all those joining us today on this conference call and listening over the Internet. With us on the 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 opened 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 today's earnings release and our SEC filings for a complete discussion of risks associated with these forward-looking statements and our business.

I will now turn the time over to Truman.

Good morning, everyone, and thanks for joining us today. Today we reported fourth-quarter revenue of 306.3 million, which is up 11 percent over last year's results. This represents our largest quarterly revenue level in Company history. Earnings per share for the quarter were 31 cents, ahead of Street estimates, but honestly a little bit lower than where I would have liked to have them come in.

Our fourth-quarter revenue growth was driven by healthy activity in our key geographies. In Japan, the recent launch of the Pharmanex BioPhotonic Scanner, coupled with the new distributor compensation incentives, helped us to post better-than-expected revenue results. These initiatives also generated good sequential improvements in the number of monthly product subscribers, as well as a nice sequential increase in executive distributors in Japan. Mainland China revenue grew 48 percent on a year-over-year basis, with sales remaining steady sequentially as we and the rest of the industry continue to await the implementation of new direct selling regulations. In the US we posted solid year-over-year revenue growth of 13 percent due to healthy 24 percent growth in Pharmanex and 8 percent growth in Nu Skin, and as a result of our continued emphasis on monthly product subscriptions.

On an annual basis, I am pleased to report the Company's revenues exceeded the $1 billion level for the first time, a significant milestone for our Company. Annual revenue increased to a record $1.14 billion, representing 15 percent growth year-over-year with earnings per share increasing 25 percent to $1.07.

As you know, our recurring revenue base is becoming a much more important part of our business. In the month of December we processed nearly 370,000 subscription orders compared to 226,000 in the prior year. This represents a 15 percent increase in 2004, with subscriptions accounting for about 31 percent of our fourth-quarter revenue. This recurring revenue base is really improving our customer retention rates significantly, and more importantly it's helping our distributor leaders build more stable sales organizations.

Taking a closer look at our key geographies, we were very encouraged by Japan in the fourth quarter. As we mentioned, last quarter we implemented some short-term enhancements to our compensation plan in Japan that cost us about $2 million in the fourth quarter, but they provided incentives for our distributors to fully integrate the scanner and our monthly product subscription programs into their business development efforts. These enhancements, coupled with the launch of the BioPhotonic Scanner, have proven to be a powerful combination. Initial results have been very positive, and include the addition of more than 10,000 new monthly subscription customers just in the month of December. This fourth-quarter activity in Japan was triggered by about 100 scanners in the hands of our sales leaders there just in the month of December. So in 2005 we will continue to fuel growth in Japan by distributing another 1,000 or so scanners to our sales leaders by midyear. In addition, we'll also leverage the latest products from the personal care division, including the launch of the Nu Skin Tri-Phasic White System.

Turning to mainland China, despite delays in implementation of the new regulations, our enthusiasm for China remains very high. We continue to believe that China will rival Japan in significance for us. It's our understanding that the new drug selling regulations are being reviewed by the highest levels of China's government, and that the new regulations could be published almost any time within the next few weeks or months. We remain confident that the government will enable us to compete on a level playing field with our industry competitors, and we look forward to being able to use independent contractor salespeople as opposed to employed salespeople, as well as to the opportunity to allow our sales force to conduct business away from our retail locations. In the end, whatever the details of the regulations may be, we believe that we can be very successful in this important market.

Meanwhile, we're going forward with significant business development in China. In January we began to sell key Pharmanex products in most of our stores throughout the country, and we've equipped these stores with BioPhotonic scanners. We also recently launched a product subscription program that is having a positive impact on customer retention rates. And during 2005 we'll also expand our presence in the market by adding 80 to 100 new stores throughout the country.

In addition, I want you to know that we're also in the process of constructing two Pharmanex manufacturing facilities in China. One of these will be online by year end and will produce the majority of our Pharmanex products that we sell in China, and the other will be online by the end of 2006 and will produce key Pharmanex products for export. These facilities will provide meaningful margin improvement on Pharmanex products in the future.

I will note here that we also expect all of this Pharmanex activity in China to distract a bit from the attention currently on Nu Skin while the overall impact to the market and to our global results will be positive.

Turning to the United States, the scanner launches around the world, as well as the Pharmanex launch in China, have had many of our key US sales leaders focus outside the US for the past several months. We continue to have a healthy business in this market. Encouraging to see continued growth in our nutrition business, with Pharmanex revenue increasing 24 percent, while at the same time generating an 8 percent increase in Nu Skin revenue, something we also expect to be able to do in other countries after an initial period of scanner retention.

Although much of our focus is on China and Japan and the United States, our three major markets, we're also enjoying good growth in many of our other markets. For example, Hong Kong and Taiwan continue to see very positive gains. This is particularly encouraging as these two markets are relatively mature markets. During the quarter, Hong Kong sales increased 76 percent and Taiwan revenue increased 24 percent. Now while some of this growth can be attributed to the momentum and the prospect of China and product transactions to sales associates from China, we believe that a majority of this growth in these markets is internal organic growth. However, the Pharmanex launch in China this quarter is expected to have a slightly negative impact on revenue in Hong Kong and Taiwan as China sales reps no longer need to purchase Pharmanex products outside of China. Additionally, as you will note in our release, both Hong Kong and Taiwan are enjoying good increases in distributor leadership, with our executive distributor base growing 27 percent in Hong Kong and 14 percent in Taiwan.

I believe it's also worth noting the continued growth in our Latin American business. The region had an impressive 62 percent year-over-year growth rate in the fourth quarter, while in Mexico revenue was up 121 percent over the last year, with significant increases in new distributors. Perhaps most importantly, our executive distributor count in Mexico continues to climb, with an increase of 149 percent over the fourth quarter of 2003. While this region represents a small part of our business, it's nevertheless encouraging to see good results from our efforts to grow our business in developing economies where over the years we've struggled a bit in the past.

Just a quick word about new geographic markets. As we previously announced, we opened Israel in November. And we're moving forward with additional expansion plans, including plans to open Indonesia in mid-2005. Given the strength of our business in Asia, and frankly the attention that our Asian sales leaders are applying in Indonesia, we believe that Indonesia will contribute something in the order of $10 million or so of revenue in 2005. We also continue to work on Russia. But given the attention of our sales force on China and scanner rollouts globally, it's more likely that we will push the opening of Russia to the spring of 2006 and just make sure that we have adequate distributor attention on what we feel could be a very significant market for us.

With that, let me turn the time over to Ritch Wood to review some of the details of the financials.

Good morning, everyone. Let me first provide the local currency revenue results from our major markets.

The fourth quarter revenue in Japan was 16.5 billion Yen. That's versus 16.9 billion Yen in the same quarter of 2003. Quarterly revenue in South Korea was 19.6 billion Won versus 18.8 billion Won in 2003. In the greater China region revenue from Taiwan during the quarter was 796 million NT Dollars versus 642 million NT Dollars in the prior year; Hong Kong revenue at 93 million Hong Kong Dollars this year versus 53 million Hong Kong Dollars in 2003; and mainland China posted revenue of 220 million Renminbi during this quarter versus 149 million Renminbi in the fourth quarter of last year. Combined fourth quarter revenue from Malaysia, Singapore and the recently opened Brunei market was US$10.5 million as compared to US$9.3 million for the same period in 2003.

Thailand declined slightly, posting revenue during the quarter of 246 million Baht compared to 281 million Baht last year. The US market generated $33.5 million compared to $29.6 million in 2003. Fourth quarter revenue in Europe was $11.1 million versus $8.5 million in the same quarter of 2003. And finally, Latin America revenue was $1.5 million for the current quarter compared to $900,000 in the same quarter of 2003.

Our fourth-quarter 2004 gross margin was 83.0 percent. That's compared to 83.4 percent for the prior year. This slight decrease in gross margins primarily related to an increase in current-year amortization of scanners, which amortization, as you know, runs through our cost of sales. However, gross margin for the year improved 110 basis points. That's up to 83.2 percent. The year-over-year improvement was primarily due to discontinued low-margin products and services, higher gross margins in mainland China resulting from our in-house manufacturing capacity there, and favorable foreign currency exchange rates, all this slightly offset by scanner amortization.

Fourth-quarter selling expenses as a percent of revenue were 43.0 percent, an increase of 80 basis points compared to the prior year. This increase is related primarily to the short-term enhancements to the Japan distributor compensation plan. These enhancements, as you remember, will end January 31, 2005, so they actually ended a week ago. The selling expenses for the year, they were up 160 basis points over 2003. This increase is attributed to the short-term enhancements we just spoke about, as well as additional expenses associated with having to employ our sales representatives in mainland China.

General and administrative expenses as a percent of revenue were 29.1 percent for the fourth quarter compared to 27.6 percent for the prior year. Current general and administrative expenses were higher due to a $5 million of expense associated with our convention held in Japan. This convention is held every 18 months and was not held in the prior year period. Also, regulatory compliance expenses, primarily related to the Sarbanes-Oxley compliance audit of controls, were about $2 million higher than the prior year period. Annual 2004 G&A expenses improved to 29.3 percent of sales versus 29.4 percent for 2003.

Fourth quarter operating margin was 10.9 percent. That is a 270 basis point decline over the fourth quarter of 2003 and primarily due to the expenses associated with the Japanese convention, as well as the short-term distributor incentives that were implemented in Japan the first of September. For the year operating margin improved to 11.1 percent, and the tax rate came in at 36.4 percent for the year.

Interest expense during the third quarter was $1.3 million -- I'm sorry, for the fourth quarter -- was $1.3 million. We paid dividends of $5.6 million, generated cash flow from operations of $35 million, and closed the quarter with $120 million of cash on our balance sheet. For the year cash flow from operations reached $127 million and capital expenses were approximately $35 million.

This week we closed on the borrowing of approximately $30 million in Yen-denominated 10-year debt. This debt will carry an interest rate of 1.72 percent. As you are aware, we began repaying existing Yen-denominated debt in 2004 and continue to feel it is beneficial to have a national exchange rate hedge through Japanese Yen-denominated debt. This funding will be utilized for consideration in further investment and state-of-the-art business tools such as a scanner, an investment in further nutrition manufacturing capacity in China, additional stock repurchases, and potential early retirement of higher interest rate debt here in the US.

The Board of Directors also approved an increase of $20 million to our existing share repurchase authorization. This brings the total share repurchase authorization to $27 million.

As we model for 2005, we anticipate that the increased number of scanners in the field will have a slightly negative impact on gross margin percentage. We estimate that the weighted average gross margin percent for the year will be approximately 82.4 to 82.6 percent.

This scanner revenue will benefit selling expenses as a percentage of sales, as no commissions are paid on the lease revenue from the scanners. We guide Q1 2005 selling expenses to decline to approximately 42.7 percent as the enhanced commission expenses in Japan terminated January 31st. For the year we estimate weighted average selling expenses to be between 42.4 and 42.6 percent.

We anticipate operating margin for 2005 to be approximately 11.3 to 11.5 percent, and a tax rate of approximately 37 percent.

Cash flow from operations is anticipated to be approximately 120 or $130 million, in that range. And capital expenses for 2005 will be approximately $45 million.

Based upon the latest discussions, beginning in July, companies will be required to expense stock options -- stock based compensation expense. Under FASB 123, we have been highlighting this potential expense in the footnotes of our financial statements for the past several years. Based on this disclosure, we estimate such expensing of stock options to impact earnings per share by approximately 2 cents per quarter, or approximately 8 cents per year. We will continue to monitor these developments in this area. Currently our stock option expenses are not included in the 2005 guidance that we have provided.

We estimate first-quarter revenue to be approximately 275 to $280 million, with an estimated Yen rate of approximately 106 to the dollar. That will generate earnings per share of about 21 to 23 cents. For 2005 we project annual revenue to be approximately 1.2 to $1.22 billion, and we would guide earnings per share to be approximately $1.15 to $1.22. And this annual guidance estimates a weighted average Yen rate of approximately 108 to the dollar.

With all those numbers, I will now turn the call back to Truman.

Let me conclude by saying that overall it was a solid quarter and a solid year for Nu Skin Enterprises. So the question now becomes how do we keep things going and growing? There's no doubt that 2005 will be an exciting year for our Company. And we have the opportunity to have a truly great year if we can accomplish a few key objectives.

First of all, we need to continue to execute well on the scanner rollout in Japan so that we can grow Japan after a two-year decline. This is something we're very optimistic we will be able to do. Secondly, we expect the regulatory climate to improve in China so that we can take greater advantage of our business model, as well as the Pharmanex launch and further geographic expansion within China. Third, we need to continue to grow the US at its current growth rate through effective marketing campaigns, as well as through product launches occurring later this year. Finally, I think the progress we're making in other markets, specifically Europe and Latin America, as well as new markets down the road will play a meaningful role for us.

Let me conclude by saying that we're focused and dedicated to being innovative in both our product categories and within our direct selling business model. I'm very optimistic about the work being done within each of our divisions on new products and services. And in the upcoming months you'll see us take bold steps towards accomplishing our objective to become the world's leading direct selling Company.

With that, let's open the call for questions.

(OPERATOR INSTRUCTIONS) Doug Lane, Avondale Partners.

One thing I didn't see in the press release was a forecast for China sales, particularly in 2005. I think before you had said 130 million to 140 million, and I just wanted to know if you had revised that component of your 2005 outlook.

We really haven't revised our component for that yet, Doug. We think it's prudent until we see exactly how the regs looks like to hold our forecast at that level.

So you didn't lower (technical difficulty) because of the delay in the inaction of the direct selling laws? It seems to me you had built some cushion in there. How much -- I don't know how to quantify this, but is there some point where there's no action on part of the Chinese government where those numbers will have to come down? Or is there enough cushion where you could be in that range even under your retail model?

I think this is why we are guiding fairly conservatively in China, is that the Pharmanex launch is going to generate a lot of good activity and a lot of growth in China, and we also have lots of geographic expansion to do within China. So as long as the regulations as published are not negative, or overly negative, towards the industry, we should be able to hit those sales levels.

Okay. Shifting gears little bit, if I remember right your previous Yen assumption was 112 and it went to 108. We can do the math on the sales line, and Japan is about half your revenue, but what is the impact -- is there a number of what your total Company sales growth is ex-currency and what your EPS growth is ex-currency? How much of a positive impact are you looking for from currency? Is there any way to break that out into these two components?

With the currency at 108, there's really not a big impact from currency around the world from 2005 to 2004. So the growth that we've put basically in the numbers -- revenue being 1.2 billion to 1.22 billion -- that's about 5 to 7 percent growth over this year, is really even in terms of currency. There's no benefit or detriment there.

Lastly, on the China stores, you had mentioned increasing the China stores. I'm looking for the number; I can't find it offhand. But does that include -- oh, 80 to 100 new stores. Does that include franchise as well as Company-owned?

That number really is going to be mostly company-owned stores with some franchise stores. But the franchise model is also fluid just depending on how the regulations come in. The 80 to 100 number would be mostly Company-owned stores.

Kathleen Reed, Stanford Financial.

Can you just let us know basically what are the implications for China as a country if for some reason they drag their feet for another period of months? Is there any penalties for them in terms of their WTO status? In terms of China, what leverage do the direct selling companies have to give them a push to get the regulation passed?

That's a big question that we could talk about for a long time in a political science class. It's just really an interesting situation there Kathleen. And honestly, we are patient with this discussion because we want to make sure that the regulations that end up being implemented are as favorable as possible. So we have not felt a great sense of concern over the delay in publication of the regulations. We also know that they're working diligently on them. It's not a situation where they're ignoring their obligation to promulgate these regulations.

And in fact, I will share with you that we held a CEO council meeting of companies who participate in the World Federation of Direct Selling Associations in Beijing a couple of weeks ago. And while we were there, outgoing Secretary of State Don Evans happened to be in town. We were able to secure a meeting with him, and he then the next day met with Wu Yi, who is the Vice Premier in China overseeing this process. Before he even expressed any views on the industry's behalf, she volunteered that she knew that he was there to talk about direct selling among other things, and that they're working on it, and that they'll get there.

So at the end of the day, if they fail to do something, the United States could file a WTO protest. And honestly, I'm not even sure what the process is for filing a WTO objection. But the US trade office has been very supportive of us. The Secretary of Commerce himself has been very supportive of us. And so I think we will get there, it's just a matter of time.

Great. Does any of this with the delay -- does this change -- at the meeting that you had in November that you had expected to get your license by mid-'05? Is that still on track? Are you still hoping for that, just based on your comments that you expect your regs in just a matter of a few weeks?

We're still hoping for mid-2005. But it could go into the third quarter of 2005, or potentially even the fourth quarter, worst-case scenario. But in the meantime we're doing what we can to continue to develop our business here. And sooner or later the regs will be in place, and sooner or later we will be able to compete on a level playing field. And it's just literally a matter of time. We continue to hear that the regs could be published any day now, any week now. And there's just a lot of lobbying going on, a lot of politicking going on, a lot of political pressure coming to bear. So we're just being patient through this.

Your 130 to 140 million forecast for China, that did not include any changes to direct selling, is that correct?

That's correct.

Moving to Japan, your Japan results, I thought, were really strong this quarter. They improved dramatically. They were down 8 percent local currency your third quarter; now you're only down 2. Have you changed your timeframe of when you expect Japan actually to turn positive on a year-over-year basis just based on it seems like great acceptance for the scanner and your new comp plan?

We were very encouraged by the results in Japan, actually. We're still, though, fairly new into our scanner launch. We're two months into the launch. We are in the process of changing some compensation plan initiatives and so forth. Because of that, we felt it's prudent to keep the same guidance that we gave earlier. We're very confident in that guidance. We continue to feel like we will be at least even with year-over-year results by the second quarter of this year; should see slight improvement in the first quarter, and then even in the second quarter. And hopefully with a good strong scanner launch over the next few months where we're bringing in a lot of new scanners, we can actually exceed those results.

Finally, just a quick one on your tax rate. Your fourth quarter was a bit little lower than your 37 percent. What was the reason for that?

We were able to permanently reinvest some earnings from China back into that market. It allowed us to get a little bit of a benefit that came through in the fourth quarter. There may be an opportunity to do a little bit of that next year as well. So we have kind of guided to a 37 percent rate right now knowing that if we're successful at some tax planning opportunities we may be able to bring that rate down slightly.

Thanks very much. I appreciate it.

(OPERATOR INSTRUCTIONS) Scott Van Winkle, Adams, Harkness.

Just a follow-up on that Japan question. If you had to break out the improvement you saw on a sequential basis in Japan between the comp change and the scanner, could you or couldn't you do that?

It would be a little bit theoretical, but I would say that the scanner is probably 60 percent of the equation and the comp plans change probably 40 percent of the equation.

I think from our guidance we had anticipated Japan to be down about 5 percent in local currency. We really had a nice strong November and December from our convention and launch of the scanner. So the new executive kicking in from the comp plan changes would have started breaking in December, because the initiative started in September and it's a three-month qualification process. So I think the two different initiatives really helped to get Japan back on the right track.

Should we assume that December was much stronger than November and November up from October?

Yes, that's a good assumption.

On the subscription orders, can you give us a little more detail? I heard a of couple numbers; maybe I didn't get them down right. What was the percentage of revenue company-wide that is now subscription orders?

31 percent in the fourth quarter of our revenue came from subscription-based orders.

What percentage of your subscription orders are Pharmanex products? Is it almost all?

About probably 90 percent (multiple speakers) to 90 percent.

Is that changing at all?

We're doing all we can to try and encourage Nu Skin products to move through the subscription program as well. I think we're starting to get some good success. We have initiated some promotions and so forth in the US that seem to be working well. And we will continue to try and find products and opportunities to get the Nu Skin products as a higher percentage coming through these automated orders as well.

It's just that the Pharmanex products are so well suited to monthly supply because they come in a month's supply, whereas Nu Skin products, people use them all at a different rate. So it's just a different product usage rate.

Thanks. Ritch, what was the ending share count at the end of the quarter? And can you give us the dollar impact from options, rather than just the EPS impact, if you have it?

Sure. It's about $8 million on the options for a year. So we're looking at approximately $2 million a quarter. The year-end share count was 71,246. For the quarter we were 71,246. Yes, that's right, for the year. And 71,246 was our number for the quarter.

What was the actual ending share count at the end of the quarter?

I'm looking for it to --.

We’ll pull it here. Just one second. I will give it to you. 69.7.

Thank you much.

Chris Ferrara, Merrill Lynch.

I was wondering, the Sarbanes-Oxley expense, is this the first quarter that you guys have recorded any expense there or is it just the biggest that you have had? And will there be any more going forward?

Certainly there will be more going forward. This is not a process that will be ongoing for all companies. We had recorded expense throughout the year as we were involved, but the bulk of it really came in the fourth quarter as we were coming into the finalization process of our first-year audit here.

On a going-forward basis, this is clearly a lumpy quarter. We're not going to see that level of an expense going forward either, right?

That's exactly right. I think going forward we would anticipate somewhere in the $1.5 million range per year, and that would be spread out throughout the year as opposed to this year the bulk of that hitting in the fourth quarter.

Just on Japan, your local currency sales are definitely better than what I've been looking for too. How much of that from the scanner side of it -- and obviously it wasn't out in the marketplace, so I guess you do have some element of just buzz building around it that is bringing people into the business, right? It's not just the compensation stuff; it's people getting excited about the scanner? Is that a good way of thinking about it?

I think that it's a majority -- a majority of the growth is based on the scanner. There's just a lot of enthusiasm for it. It's a tool that plays very well there. And as I indicated in our remarks before the Q&A, we only had 100 scanners in Japan in the month of December.

How well would you think people understand the scanner and its ability to drive sales? I guess what I'm trying to get at is there any risk at all that you see sort of extra excitement build around something that ends up proving maybe a little bit disappointing to people? Obviously results have been great, and they probably will be. I'm just trying to get a sense for whether there's any sense of the possibility of that happening.

From our perspective, the question really boils down to what is the right number of scanners to have in the market to make sure that the supply isn't so great that we've flooded the market to such a degree that the scanners are no longer a useful business building tool. And as we indicated in our remarks, we anticipate having about another 1,000 scanners in Japan by midyear in an environment where we have about 14,000 executive level distributors versus a market like the US where we have about 2,500 executive distributors and about 1,500 scanners out in the marketplace. So even with another 1,000 scanners going into Japan by midyear, that's still a very light level of penetration. And I wouldn't expect a huge degree of minimized enthusiasm for this device for some time.

Is there a way to sort of quantify how many of those executives actually get the scanner and in what instances you have certain executives that are really higher level sort of leasing a number of scanners? What percentage of the executives in the states would you say actually lease scanners themselves?

I'm not sure I quite understood your question. Clearly there is a difference in effectiveness between someone who -- the different executives who use the scanners. Some are simply better at using the scanner as a business building tool than others. That's part of why we're engaged in a lot of training processes and training programs right now to increase scanner effectiveness. Was there another aspect to your question there I'm missing?

I'm sorry for not being clear. I'm just trying to get through -- you said you have 2,500 executives, 1,500 scanners in the states. Obviously that's a large number of scanners per executive. But I get the sense that not all 1,500 of those executives are actually -- or not all of those 2,500 are actually leasing scanners themselves. I was trying to get a sense for what percentage of the executives actually are leasing scanners.

Most of the scanner leases -- we really aren't leasing multiple units to a single person. It's very rare that an executive would have two scanners. That's just not happening, because we have so much demand for them that we can't afford to give multiple scanners to the same person. Now sometimes within a particular sales organization you will have executives team up and do events where you might see three or four or five scanners at work, but they are all leased by different people.

Got it. Thank you very much.

Rob Schwartz, JL Advisers.

Congratulations on the quarter. I'm just still a little confused on China. Can you walk me through how the process works in terms of once the regs pass what type of initiatives do you have to put forth before you're direct selling in China?

Once the regulations are published and implemented -- and this is all based on what we understand today, so all of this is subject to change based on the final rules -- but there will be a process that all companies will have to go through to qualify for a direct selling license. And some of the qualifications will include a minimum level of capital investment in China, which won't be a problem for us, but might be a problem for smaller companies who want to enter the market. Companies will have to establish a certain number of retail stores in each province in which they want to conduct direct selling activities. And we don't anticipate that this will be a problem for us either because we're now very experienced in building and operating these retail stores. But the licensing process, as we understand it, will happen at both the central level, as well as the provincial level, as companies qualify with the requisite number of stores and what not.

So we would anticipate the qualification process once the regs are implemented to take a period of several months. The application will be reviewed by multiple government agencies. And that's really about all we know right now.

Do you currently have the spending investments and the retail layout already in place to then apply for the direct selling application or will you first have to build that out?

No, the capital investment we've certainly adequately met. The requisite number of stores we meet in a couple of provinces currently, but not in all of the provinces. So this is again why we're proceeding with another 80 to 100 stores throughout China so that we can get 10 stores or so in each province as quickly as we can to qualify for the requisite number of retail stores.

Based on the 130 to 140 million guidance for the year, even if the regs get delayed another months or two, based on your retail productivity right now that number would be fine, even if you're not getting direct selling benefits until 2006?

We think so. We think so, and we think we've got some good ammunition with the Pharmanex launch in January to propel the business, along with new cities and new stores. And frankly, our optimism too is just based on the fact that those who are currently licensed to conduct activities that more resemble direct selling in China than what we're able to do today are just enjoying incredible levels of success. And I think we can compete favorably with them.

Last question. Does it matter to your plan going forward whether it's multilevel or single level? And do you have an expectation as to what it will be?

Certainly we would prefer that the regulations enable multilevel compensation. This is one of the issues that is being debated and lobbied heavily in China right now. And I honestly don't know which way it's going to go. We see rays of hope that China will implement regulations that are consistent with world standards. No other country in the world prohibits multilevel compensation, and so that's why we're optimistic that China will decide to fall in line with world standards and regulate the industry in a similar fashion. If we aren't able to implement multilevel compensation, we have designed plans and basically built a business model that we think will enable us to continue to grow at a healthy clip without specifically being able to apply multilevel compensation.

Thank you.

Basically, I will add, the way that we do that is by continuing to employ a certain number of our highest pin (ph) level sales leaders, and base a lot of their compensation on productivity and volume that's generated just as a multilevel compensation plan would do.

Actually, I guess in November, I guess we'd expect that it would be multilevel. Does it -- in terms of the long-term potential, you think you could be just as successful with single level as multilevel?

I think long-term potential, I think clearly we would enjoy a higher level of sales if we could implement our full-blown business model. But I think in an environment where everyone is subject to the same regulations, we will be able to compete very favorably with our industry competitors and still have a very substantial business in China.

Thanks again.

Doug Lane, Avondale Partners.

I guess following on Rob's comments, can you enlighten us as to how Amway goes to market now? I know they grandfathered under the -- when the ban was lifted. But do they do multilevel comp now in how they go to market?

Amway is obviously very successful in China. I believe in their last fiscal year which ended in the fall, they announced sales results in excess of $2 billion in China. So they are huge there and have grown very, very quickly.

They implement a sales compensation plan, as I understand it that also varies from their global standard. And I'm not sure in every respect how their China sales compensation plan differs from their global model. But their compensation plan there is more multilevel-ish than ours is currently, certainly.

Regardless, you both have to tailor your plans to the new regulations, correct? Amway is not grandfathered from the new regulations; they would have to go through the application process as well.

That's right. Everyone will be playing by the same rules. And that's why I think we'll be able to compete favorably no matter what the rules are.

Just a couple other quick follow-up points. One, where do you source the nutrition now for China until these plants are on line? And secondly, did you buy back any stock in the fourth quarter?

Pharmanex products currently in China are sourced through a local Chinese third-party manufacturer with a lot of the raw ingredients being sourced by ourselves directly. But the products are being blended and encapsulated at a Chinese plant.

We repurchased about $1.5 million worth of stock, 1.3 million I think exactly, in the fourth quarter.

Thank you.

Kathleen Reed, Stanford Financial.

Can you just talk a little bit about the new scanner plant that went online in China and just what the output is and your expectations for that plant?

We actually had a ribbon-cutting ceremony just a couple of weeks ago in Shanghai, and the plant is a beautiful facility. We have significant manufacturing capacity in this plant, which is now generating scanners as we speak. We anticipate that these 1,000 or so units that we will be putting into Japan will come from that plant. And so we certainly are very close now to the moment in time where manufacturing capacity is no longer a restraint on our ability to put scanners into the market.

Between the US manufacturing, which I think you're not going to get rid of -- right, you're going to keep that? -- and the China, do you have like a total number that you can make a year?

Well, yes. We will keep the US plant running just as a safety manufacturer. And honestly, if we wanted to we could ramp up our China manufacturing facility to be manufacturing a couple thousand units a month.

Lastly, I just wondered on the US business, in addition to the scanner, do you have any significant new product launches going into the US market to continue to drive growth in 2005? And what is your expectation for growth in '05 for the US?

I referenced that possibility in my remarks. Actually, to tell you the truth, I'm very excited and very optimistic about the ammunition in the pipeline for Pharmanex and for Nu Skin and for Big Planet as well. We have not yet made any public announcements about any product launches specifically, but one of those product launches is likely to happen in United States within the next month, and so you will be hearing about it soon. And as you know, every 18 months international convention is in October of this year, and that is where you'll see additional product launches, significant product launches, from each of our divisions. But we haven't made any public announcements about these yet, although some of these are of such significance that I think we will likely make announcements before even our international convention about the types of things we're working on. And I'm just really happy with the work that the divisions are doing in this regard.

We look forward to it. Thanks again.

Let me conclude by thanking you all for joining us on the call. As always, we stand by to answer whatever questions you have. Thanks so much.

This concludes today's conference call. You may now disconnect.