如新 (NUS) 2005 Q3 法說會逐字稿

Good afternoon. My name is Jamie and I will be your conference facilitator for today. At this time I would like to welcome everyone to the Nu Skin Enterprises third-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 session. (OPERATOR INSTRUCTIONS) Thank you. Mr. Allen, you may begin your conference.

Thank you. We appreciate all those joining us today on this conference call and listening over the Internet. With us on the call 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 risk and uncertainty 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'll now turn the time over to Mr. Hunt.

Thanks, Charlie, and good morning everyone. Thanks for joining us. As you know, we've already previously released our high-level financial results for the quarter. And we also had many of you in Salt Lake City just a few weeks ago for our distributor convention. So much of what we discuss today may be old news but I want to take a minute to talk about what is going on in our business as well as our outlook on our growth opportunities.

As you know, our 3% revenue growth in the quarter was a bit softer than anticipated. While we had a solid quarter in many of our markets including South Korea, Taiwan, Latin America and Europe, our three major markets were softer than we had anticipated. In Mainland China in particular, we faced some challenging business dynamics this quarter. First, the compensation plan changes we made on July 1 in order to lay the ground work for the long term had an obvious negative impact on short-term activity.

And second, following the publication of direct selling regulations in September, there remains a level of uncertainty in the marketplace. It's frankly difficult to know the extent to which each of these factors separately is impacting our business, but clearly both factors have been negatives in the short term. In addition, there is still some debate about what the new regulations do and do not enable. But most agree that the new regulations will enable single-level compensation paid to independent contractors working either full time or part time who will be allowed sell away from fixed retail locations.

Now as a result of the new regulatory framework, we plan to pursue a dual business model in China. We will apply for a direct selling license and employ a single-level compensation system for our independent contractor sales representatives and for those who are interested in generating higher levels of income, we will continue with our current employed sales force business model. I think you'll see other direct sellers following a similar approach and I believe we will enjoy an operational advantage over others because we've been doing this for the past three years.

So we continue to communicate with our sales force and train them on the compensation plan changes made earlier this year and we're communicating with them our plans going forward in light of the new regulations. We really expect the dust to settle on both of these issues in the fourth quarter so that we can move forward with growth in 2006.

And finally just to reiterate our continued optimism for China, let me emphasize our belief that this market holds enormous potential for us and for direct selling generally. As you know, China is literally a wash with potential in this opportunity and if anyone has the ability to tap that potential, it's going to be us.

Looking at the United States and Japan, we believe these markets were negatively impacted in the third quarter by the fact that our global distributor convention was held one week after the quarter closed. Coming to our convention is a major expense for our sales force; in fact we estimate that our sales people spent in excess of $20 million just for travel and lodging costs to come to convention. So this expense obviously takes a lot of spending power out of the pockets of our distributors and likely impacted us negatively right at the end of the quarter.

With respect to Japan specifically, our efforts to generate growth in Japan through the introduction of the Pharmanex BioPhotonic Scanner have worked with Pharmanex sales up 10% or so in 2005 versus 2004 on an already large business base. But we obviously lost a bit of the Pharmanex growth through a decline in sales of personal care products. And the Scanner impact has perhaps also been a bit muted as a result of the regulatory environment in Japan.

On the one hand we're pleased that the government allows us to link the Scanner measurement to a general help assessment which is something that we're actually not able to do in most of our markets, but the regulatory restrictions also inhibit our ability to tie the Scanner measurement directly to the consumption of our nutrition products. So it appears that these restrictions have resulted in a bit of a slower market response because our distributors can't use the Scanner in exactly the same way we're able to use it outside of Japan. But we remain confident that the Scanner is still a powerful tool in Japan and elsewhere that continues to differentiate us from our competitors. And with any traction at all, in light of the new initiatives I'll discuss here in just a moment, we will begin to grow the overall market in Japan in 2006.

Now we're also delighted with the continued strong growth we're experiencing in Latin America and in Europe. These are major direct selling markets that we have yet to tap and they contributed significantly to our results in the third quarter and will continue to do so to a larger degree in the future as they grow as a percentage of our sales.

Now looking forward then, our growth in the fourth quarter in 2006 is going to be based on several things. First, we have significantly improved the functionality of the BioPhotonic Scanner; it is smaller, it calibrates and scans much more quickly and is really the unit that we hoped the original unit would be. We envision the original unit's gravitating toward fixed locations while the new unit becomes the portable device for our sales force.

We believe that the new Scanner will have a positive impact around the world. And I really want to emphasize this point because I think there may be a temptation for some to conclude that the BioPhotonic Scanner has run its course. We really do not believe that and in fact I believe that the impact of the Scanner has only begun to be felt. The reality is the demographics in all our markets point to a greater and greater application of the Scanner as our societies continue to age and as boomers everywhere continue to fight the aging battle. So I believe that in 2006 with the introduction of the more user-friendly Scanner and through our continued promotional efforts and refocused efforts on Pharmanex on the Scanner in particular, we will see a resurgence of Pharmanex growth in the United States and elsewhere.

Second, given the successful impact of the Pharmanex Scanner, our Nu Skin team has developed a similar tool for skin analysis that we're calling ProDerm. Now this will assess different skin characteristics such as wrinkles and pore size and skin texture, discoloration, and will enable us to customize a product regiment and subsequently demonstrate product efficacy in the same fashion we do with the BioPhotonic Scanner. This we anticipate will be a tool similar in impact to the Pharmanex Scanner.

And were really proud of ProDerm because we developed it in house and we have high expectations for its impact on our skincare franchise. In fact, the response to this tool at our convention was outstanding. We're very optimistic about the impact at ProDerm on our personal care business globally.

Third, we have several new products to role out globally that include G3, our nutrition drink, that has done well in the United States. This product will role out globally in 2006. And at our recent convention, Pharmanex also introduced a new formulation of our leading selling product, LifePak. The new product is called LifePak Nano and from the name, you can tell that the formulation incorporates nano-sized nutrients to increase the body's ability to absorb the significant level of nutrients that are found in our products. We are already noticing that these nano ingredients also make it easier for people with sensitive stomachs to be able to tolerate the heavy dose of nutrients contained in LifePak.

On the personal care side in addition to ProDerm, one of the exciting Nu Skin launches will be of a new product called Tru Face instant line corrector which provides temporary but impressive relief of lines and wrinkles. This product was a best seller for us at our convention a few weeks ago which bodes well for it going forward. And for Big Planet, the development of our Photomax services will lead to continued impressive growth for Photomax and for Big Planet in 2006.

And finally, we have -- we're still planning on our first half opening of Russia which has become a significant market for several direct sellers. We believe that Russia will contribute meaningfully to our 2006 numbers and beyond. I spent last week at meetings of the direct selling industry's international trade association were it was apparent talking with my contemporaries from other companies that Russia as well as several other Eastern European markets have become very vibrant and large direct selling markets. There is a lot of demand for opportunity in these environments. And given the activity that we are already seeing emerging in Russia and Hungary and Romania and a few other markets, we anticipate good success in this area of the world.

So as you can we see we have lots of ammunition to move our business forward around the world. And just again quickly this list includes the S2 Scanner, LifePak Nano, G3, ProDerm, Instant Line Corrector, Photomax, Russia, Europe, Latin America and a growing product subscriber base that Ritch will talk about in a minute.

But ultimately our success will be based on our ability to engage our sales force to actively promote these initiatives. So this is why events, which are costly such as our distributor convention in early October, may be costly but they are also very important. And after participating in this event a few weeks ago and seeing the commitment of our sales force, I'm left feeling very optimistic about our future and about the impact of these growth initiatives that I've enumerated.

So with that, I'll ask Ritch to address the financial results in detail.

Thank you, Truman. Let me first provide the local currency revenue figures from our major geographies. Third-quarter revenue in Japan was 15.5 billion yen. That is even with prior year results. Quarterly revenue in South Korea was 21.5 billion won versus 18.3 billion won in 2004.

In Greater China revenue from Taiwan during the quarter was NT$755 million versus NT$716 million last year while Hong Kong revenue was $83 million Hong Kong versus $98 million Hong Kong in the prior year. Note that sales in Hong Kong in the third quarter of 2004 benefited by approximately $15 million Hong Kong from sales at the Greater China convention.

In Mainland China revenue was 195 million Renminbi during this quarter versus 221 Renminbi in the third quarter last year. And our newest market Indonesia, contributed $1.8 million in the quarter since its opening in early August.

The U.S. market generated $34.1 million of revenue during the quarter compared to $33.6 million in 2004 and third-quarter revenue in Europe was $11.1 million versus $8.7 million in the same quarter in 2004. And finally Latin America revenue was $2.3 million for the quarter compared to $1.0 million in the same quarter of 2004.

The local currency revenue numbers for all our markets by the way can be found under our investor section of our corporate web site, nuskinenterprises.com. We invite you to look there if you have any additional questions.

Our third-quarter gross margin was 82.3% compared to 83.2% for the prior year, the year-over-year decline can largely be attributed to increased appreciation from our leased Scanner unit which runs though our cost of sales line. Subscription orders continued to grow during the quarter generating 43% of our sales during the period. We really like this dynamic in our business and we believe this will continue to provide strength to our business model and continued improvement in our retention statistics.

Selling expenses as a percent of revenue were 41.7%. That's an improvement of 130 basis points compared to the prior year. The year-over-year increase is largely attributable to temporary incentives paid in Japan during the prior year; compensation plan changes in China and the increased Scanner lease revenue which is revenue upon which we do not pay commission expense.

General and administrative expenses as a percent of revenue were 30.3% compared to prior year results of 28.3%. Continued investment in Mainland China, Scanner amortization related to the acquisition costs of our Scanner technology and the investment in new markets including the August opening of Indonesia all contributed to a higher level of general and administrative expenses.

Third-quarter operating margin was 10.3% compared to 11.9% in the prior year and our operating margin is lower because of lower-than-expected sales for the fairly fixed level of G&A expenses.

Interest expense during the quarter was $1.5 million. We paid dividends of $6.3 million, invested $6.9 million into capital improvements and repurchased $7.6 million of the Company's stock during the quarter. The generated cash flow from operations of $16.1 million, a bit slower than usual due primarily to increased inventory purchases in preparation for our global convention and the water purifier launch in Japan which is a big ticket inventory item for us.

We also announced earlier that the Board of Directors has authorized an increase in our stock repurchase of about $50 million and that was announced in early October.

The Company's tax rate for the quarter increased to 37.5%. That is up from 37% last year. Looking to the fourth quarter, we forecast Japan revenue to be even or slightly ahead of the prior year in local currency. We've modeled a yen rate of 114 to the dollar for the fourth quarter. And note that in the prior year fourth quarter, the yen was 105.6. This weakening of the yen will negatively impact our reported revenue in the fourth quarter by approximately $12 million when using the same exchange rate in the prior year. That is factored into our guidance that we provided already.

It's difficult to forecast China's revenue for the fourth quarter due to both upside and downside opportunities there. For modeling purposes, we have built a sequential decline into our guidance. We anticipate the U.S. to be up approximately 10% for the quarter, excluding approximately $4 million of convention revenues sold to international distributors. Overall we estimate fourth-quarter revenue of 300 to $305 million and we anticipate gross margin percentage to be level sequentially and selling expenses to be in the 41.5 to 42% sales range.

Overall G&A expenses will increase from the third quarter by about $5 million. This is due strictly to our global convention held in October.

We expect earnings per share therefore to be about $0.23 to $0.25 after approximately a $0.03 to $0.04 impact from the net expense from our convention during October. Therefore based on our Q4 guidance, 2005 revenue is anticipated to be approximately 1.19 billion, up to 1.195 billion representing 5% growth over 2004. And EPS for the year is forecasted to be $1.05 to $1.07.

We plan to give updated fourth-quarter and detailed 2006 guidance at our analyst investor day scheduled for November 30. I would like to invite all of you to participate if possible. Here our key management will discuss our specific growth plans and our revenue drivers in our markets and our divisions for 2006.

And with that, I will turn the call back to Truman.

Thanks, Ritch. Just prior to taking some questions, I want to say that we and I in particular remain deeply committed to our business and to the direct selling industry. Last week at our association meeting, some of you are likely aware that I was elected to serve a three-year term as Chairman of our Global Trade Group. This is a great honor for me to be elected to this position following Dick Demos from Amway and Jim Preston from Avon, who served in the same position. I think it is also a reflection that Nu Skin Enterprises is being recognized as one of the world's leading direct selling companies.

I'm hopeful that this position will be helpful to us in countries such as China where we will compete with other companies to become licensed as a direct seller. And I will also probably represent the industry globally as I've become convinced of the tremendously positive impact that direct selling can have on the lives of its participants. This is a healthy industry. Direct selling growth rates are outpacing the rate of growth of traditional retail channels. So globally we can and do have a significant positive economic impact and it will be an honor for me to work to promote us and to promote the industry globally.

Okay, with that let's open the call for questions.

(OPERATOR INSTRUCTIONS) Kathleen Reed of Stanford Financial.

Good afternoon everybody. A couple of quick questions. First of all can you comment a little bit more why your forecasting if its conservatism or if you are seeing something else more negative media or etc. -- why your expected sequential decline just 3Q to 4Q for China?

As Ritch indicated, Kathy, it is frankly difficult to forecast China right now because there is upside possibilities in the market. And yet we continue to face some risks and continued confusion about the state of direct selling and we continue to communicate with our sales force about the recent compensation plan changes. And so it's honestly hard to forecast China for Q4. But for modeling purposes, we feel that it's best to have people model a slight sequential decline just to be prudent.

I think you also said in your prepared remarks that there was some ambiguity with regards to be regs and I'm aware of the service center definition which remains unclear. But other than that, is there other issues that are still kind of up in the works or --?

The interesting thing is that I don't believe that there is an official English language version of the regs that have been published yet. And so it's interesting because as I talk with various people about their translations of the regs, in some instances it's almost like the translations are so different that you are wondering whether you're even talking about the same provision. And so we're all just really awaiting I think clarity on an English language version of the regulations. But I think with respect to the big issues, that the direction as we've articulated that it is fairly clear.

Next just on Japan, again, your fourth quarter it seems also I guess a bit conservative, flat year-over-year in fourth quarter if it was flat in the third quarter and up slightly in the first two quarters of your year. I mean besides the Scanner and just I know that's slower growth there with Pharmanex -- what other products are going into Japan in your fourth quarter? I mean, aren't some from the convention going to go there, that should help drive local currency sales?

Yes. The next big product launch in Japan is going to be G3, Pharmanex nutrition drink. That doesn't launch until the first quarter of '06. And we also have a Japan convention early next year around which a lot of product launches are being taken.

One other thing too, Kathy, if I can butt in. Just mention that there will be about 1.5 million to $2 million of purchases from Japanese distributors happening here in the U.S. during the quarter. So all things considered, I think we try and forecast that into our model as to where we will be landing in the fourth quarter.

So that 1.5 to 2 million is part of that 4 million that you said was from -- that will be included in North American results?

That is right.

Okay, great. Just finally on two other questions. First on Russia, can you to just talk about what products you're going to be selling there? If it is your same higher end products or if you're going to kind of adapt the different model kind of what you do in Latin America?

Yes, it's a good question. And actually it continues to be the source of a lot of internal discussion. We typically, as you know, will only open new markets with an offering of Nu Skin personal care products and then introduce other products subsequently. But there's just a lot of discussion going on right now about what the right compensation plan, dynamics will be in Russia. I think consequently what the right product mix will be in Russia.

Initially there will certainly be Nu Skin premium products in the market. There will probably be some Pharmanex products in the market and whether or not we introduce from the get go a line of lower-priced personal care products is yet to be decided.

Thanks. Just finally, really quickly. When is your next -- you said you're having a Japan convention -- is that in the first quarter?

It is in March.

In March. And then when is the next time you're having a global convention?

We typically space our global conventions out every 18 months which creates some really weird comparisons. But really because of the expense associated with our global convention for both us and our sales force, we've decided to give the next one -- have the next one 24 months out instead of 18 months out. It will be a little bit better from a comparison perspective and we think meet the needs of our sales force better as our local conventions and our original conventions which we've started to hold in Greater China in particular become more important to them.

Kathleen Reed. So maybe no -- we won't have another one until the fall of '07?

That is right.

Thank you so much.

Courtney Coles of Adams Harkness.

Thanks. Just a few questions on the AutoShip program. Nice to see that ticking up slightly sequentially. What percentage of Japan is on AutoShip right now?

I think it's right about 40%.

And I know that you introduced the AutoShip program to Japan or the subscription plan -- excuse me -- to Chinese distributors. What percentage of sales are on subscription plan there?

I should mention our subscription plan in China is a little bit different because we can't actually ship the product. So what happens is kind of a loyalty program where there is incentives for continually repurchasing month after month. On the program there, we have approximately 85 to 90% of our sales coming through these subscription orders over the last few months.

Wow. Impressive. Okay, now if we consider the issue of China and the modeling of a sequential drop into Q4 -- if we look at the drop in executive distributor count and active distributor count this quarter, we saw a pretty dramatic drop in executive distributor count. Any guidance on what that number might look like? Going forward do you think it's going to hold at around the mark we saw in Q3 or should we expect to see that fall off significantly again?

That number generally is going to track our revenue number.

Right.

But it is a good observation and I think just to add a little color on it basically what happened as a result of the compensation plan change was we washed out a lots of lower-level kind of weak executives. Fortunately, however, as I work in the market and talk to our sales leaders there, we really haven't lost our sales leaders at all. There was a significant drop in executive accounts but fortunately not in our leadership positions.

Okay, terrific. And then just a couple housekeeping items. The rollout of the Scanner in Japan I know we're sort of in a holding pattern right now as we await the launch of the new S2 Scanner. What is the rollout plan for FY '06? In Japan of that new Scanner?

The new Scanner will be introduced at the March convention. And Ritch have they forecasted a number?

Yes, they're looking at approximately 1500 of the new scanners to be rolled out during the year of 2006.

Okay, following March. So March to December, okay.

Let me just add by the way, Courtney, not only is the new Scanner more functional and more user-friendly but because we're using nonlaser light source in the new scanners, it is considerably less expensive. And so really some significant benefits as the result of this new unit.

Okay, terrific. And then my final question relates to China and I respect and understand the ambiguity with the translations. Has anything led you to reconsider the retail concept in China? Where do we stand in terms of number of retail store fronts now for you folks and has any -- has the rollout of that changed?

We believe that our retail concept actually gives us at a leg up in the market because we think that most direct sellers are going to have to implement a program similar to ours if they're going to be able to attract people who are interested in generating significant levels of income. We continue to open some stores. We continue to close unproductive stores. We have about 130 in the market right now and by mid next year, we expect to have about 150.

Terrific, thanks very much.

Doug Lane of Avondale Partners.

Hello. Question following up on the executive distributors. You saw a sequential drop of 2000, almost all of it came from Greater China which is a big number going from 9000 executives in June to 7000 in September. Is that all from raising the bar in Mainland China first of all? And then second of all, where is that bar in Mainland China relative to other countries in the region?

Right. Good question. I believe, Doug, that most of the decline, there are two factors as I said that have led to the decline. One is the change in the compensation plan and raising the bar on the requirements and the other was publication of the regs in early September. And I personally believe that the more significant factor was changing of the comp plan because we saw it hit immediately in July and August before the new regs were published in September.

And as you indicated we did raise the bar for our Chinese sales representatives. But that bar is still about half where it is for sales representatives outside of China. So whereas an executive outside of China has to maintain 2000 to 3000 points in sales volume, it's about half that level in China.

And that's monthly?

Right.

Will the bar be raised again?

No, no, I think -- we don't anticipate making any changes as dramatic as the last change for some time.

Okay. And you mentioned in the press release you expect to get a direct selling license in first half of next year assuming that December 1 implementation date is accurate. Does that include all the regulatory process or just the national license?

Well that is also a good question. And as you know we had anticipated having a direct selling license long before the first half of next year. It's a little bit hard to say but we are confident that at the central government level we will be able to go through the licensing process in the first half. And there is still processes to be fleshed out at the local level.

And so how is that going to play out next year if you could walk me through that as far as how you go to market today and how is that going to change as 2006 progresses?

I hope that by mid next year, I'd say by the end of the second quarter of next year, we're functioning as a direct seller in the major provinces in which we operate. That is going to be the Shanghai area, the Guanjo (ph) area and a couple of others that will represent a majority of our business. But it may take a little bit longer to become fully functioning in some of the smaller provinces.

Now you won't be able to hire somebody as an independent agent not fully employed -- somebody who can work as an independent agent until you get these licenses, correct?

That is correct.

So what would be the reason that you would even want to expand your employee base at this point given the more attractive economics of working with an independent agent force at the lower levels of your distribution network?

Well, yes, more attractive economics perhaps for us because we don't have all of the employment costs. But the more attractive economic opportunity for them is going to be as an employee. And so it's really a function of them wanting to pursue as much opportunity as they possibly can and we don't want to slow down any one in that process.

So just getting back to the new hurdles that you have there for qualification to be an executive. At those sales levels, it makes economic sense for Nu Skin even though they are full-time employees as opposed to independent agents?

Yes, yes, it does and some of that comes as a result, Doug, as you know, the fact that we enjoy a little higher gross margin in China. But when it all nets down to the operating income line it is still consistent with our global model.

And I should just mention, Doug, too, part of the changes that were made in China will help to bring that selling expense down over time. Right now we are still paying a lot of unemployment charges and I think even eliminating a lot of some of these sales reps that were maybe on the edge anyway we've kind of taken that hit. So I think we'll see that expense come down a little bit over time. And those who actually move from the direct selling model into the retail model will be less likely I think to turn over because they will have found success in the direct selling model. And then be really advancing to a more serious level as an employee. We're optimistic that that expense will continue to slowly come down as we move forward.

If I'm in China now, a full-time employee, a distributor not even an executive, nothing is going to change with the enactment of the new laws for me? It is just going to be the new people entering the system will come in as independent contractors?

Yes, what changes for you is the fact that we now have the ability to engage independent contractors where as we haven't in the past. So that is a positive thing. And the fact that all direct selling companies are going to be operating on what we understand to be a level playing field is also a positive thing because we haven't been on a level playing field with our competitors so far.

That's right. And can you give us any update on business at Amway -- who was operating grandfather, correct? So they were operating as a direct seller? Can you just give us a feel -- I guess we can also group Avon in there as well -- two big global players who were grandfathered. How is this impacting them versus where you're coming at it under the new regulations?

Well, I don't know. You'd have to ask them how their businesses are being impacted. I spent time with all of them last week and didn't sense anything in particular from any them except -- I mean I can tell you that Mary Kay, who is also a grandfathered company 455 company, is reporting that they continue to grow at as fast a pace as they always have in China.

I mean I think that its -- I'd be very surprised if in the case of Amway they didn't have some fallout similar to ours. But I'd also be surprised if they don't figure out a way to rebound in the new environment.

Okay, thank you.

Ilias Papazachariou with Lehman Brothers.

I was hoping you could tell me be the legal restrictions on the Scanner in Japan are significant enough to force you to revisit your long-term growth target in Japan?

Yes. You know, I'll just respond real quickly on the growth target. I think we're going to talk in depth about that as we come into our analyst investor day and speak specifically about where we anticipate things going. But again, we feel like and I think Truman highlighted in his discussion that we've actually been able to grow the Pharmanex side of the business pretty nicely. And so our challenge right now is to continue to see that growth happen with continued focus on the Scanner. But launch some pretty strong initiatives on the personal care side of the business to grow that side as well.

Do you see any competitive pressures in Japan and perhaps from companies that are not direct sellers like L'Oreal -- anything for on the Nu Skin side of the business?

I don't think that any of those pressures from non direct sellers are really negatively impacting our results there, Ilias. I think in Japan it is a question of the fact that the Scanner got the attention of our sales leaders. And Nu Skin suffered as a result.

Basically your guidance for G&A in the fourth quarter, it looks like that the imminent impact opening of Russia should not have an impact in Q4. Do you plan to enter Russia more like in Q2 as opposed to Q1 of '06?

The opening day currently is actually fluctuating between the end of Q1 to the beginning of Q2.

But we should see an impact in G&A in Q1, right?

No, the impact on G&A will be minimal in Q1.

Okay, great. Just a housekeeping item. In terms of tax rate, what would be the right tax rate going forward for our models?

I think for the fourth quarter it should remain fairly close to where it was in the third quarter, somewhere around 37.5% and then 2006 again we will give that detailed guidance. But probably more like 37%.

In terms of options expense for 2006, should we assume that's going to be about $0.10 or so as it is probably going to be this year?

Yes, that is correct.

Great, thanks a lot.

Olivia Tong of Merrill Lynch.

Good afternoon. First question is just about Japan and the timing of the conventions which is a little interesting. I'm assuming the sequence happens every couple of years where you have the U.S. global one in October and then followed it less than six months later with the one in Japan. Is that too early -- I mean is there any marginal benefit loss from them coming here and then so soon having another one there?

And if there isn't any loss from that, is there any thought to having something like that more often where you sort of follow-up your global one with Japan pretty close to that right after?

We're going through a transition period here with respect to the timing at our conventions as a result of our 24-month spacing now for our global convention. Perhaps ideally the Japan convention would be a few months later into the year instead of being so close in time to the global convention. But I don't think from a business perspective and from a distributor prospective having them close together is really a factor. It's really more a factor of just the expense associated with the conventions more than being a business factor.

Got it. But usually don't -- isn't part of the purpose of the convention to get them energized and if you have one -- have them so close together and then go through a long gap without having one, do you lose anything from that?

The plan is that each of the countries will hold their own conventions in the early part of each year. And so in Japan's case, they will have a convention in March of '06. They will most likely have a convention a year later in the first quarter of '07 and then we will do our global convention in the third quarter of '07. So they won't go for an 18-month period of time, they will go for more like a year.

And I guess that is the same plan for China/Hong Kong too?

For the major markets, yes.

Okay, got it. Second question was just inventory was up measurably and I assume some of it has to do with the sales shortfall in some of the key markets. But is there anything else that is driving that other than that?

Yes, primarily it was up because we had a number of products come in right at the end of the quarter in anticipation of the convention. And then second, we launched a water purifier in Japan during the month of September. And it's kind of a high ticket item for our inventory. And so we made several purchases there to get those in stock. And those two things really drove the majority of the increase in inventory. And I'd imagine over time that will start to come back down, probably at least in the first part of 2006.

Thanks. And finally, last quarter you mentioned that you might have to make some changes to promotion just because other initiatives like ADP had made some of your promotions less impactful. Have you thought about where you might be going as far as changes to promotions?

That's an issue that all of our markets are focused on right now. It's probably too soon to talk about specific promotion concepts because it's all tied up in the 2006 business planning process. But perhaps on November 30, when we are together in New York, we could give you an idea for what some of those promotion incentives are going to be.

Great, thanks very much.

(OPERATOR INSTRUCTIONS)

Operator, let's wrap up the call at this time. I just wanted to thank you all for participating. Again, we look forward to seeing all of our shareholders who can possibly be at our event on November 30. We welcome your participation in that. And know that we believe we have the initiatives in place to continue to drive our business forward and reach our objective of becoming the world's leading direct selling company. And that is where we are headed. Thanks a lot.

Thank you. This concludes today's Nu Skin Enterprises third-quarter earnings conference call. You may now disconnect.