如新 (NUS) 2006 Q1 法說會逐字稿

Good morning, my name is Dorothy and I will be your conference operator today. At this time, I would like to welcome everyone to the Nu Skin Enterprises first-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). At this time, I would now like to turn the call over to Mr. Charlie Allen, Vice President of Investor Relations for Nu Skin Enterprises.

Thank you. Good morning everyone. We appreciate all of those joining us today on this conference call and listening over the Internet. With us on the call today is Truman Hunt, President and Chief Executive Officer and Ritch Wood, Chief Financial Officer and Dan [Chard], Head of Distributor Success.

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.

In addition, during this call, certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements prepared in accordance with generally accepted accounting principles referred to by the SEC as non-GAAP financial measures. We believe that these non-GAAP financial measures assist management and investors in evaluating and comparing period-to-period results of operations in a more meaningful and consistent manner. Please refer to the investor portion of the Company's website, NuSkinEnterprises.com, to find our first quarter press release containing a reconciliation of these measures. I will now turn the time over to Truman.

Thanks, Charlie, and good morning everyone and thank you all for joining us today. I am joined here today by Ritch Wood, our Chief Financial Officer, as well as by Dan Chard, our newly appointed head of what we call Distributor Success. This is the process that is now responsible for revenue results globally. All of our geographic regions that now report directly to Dan, who I am pleased to elevate within our senior management team. Dan has been responsible for European region over the last couple of years where we've posted terrific growth and have improved our performance considerably, so I'm pleased that his influence is already being felt in his new position.

Rich is going to present details of our financial results for the quarter, but I would like to begin by offering my perspective on the quarter and the direction of our business.

As you know, our consolidated business trends turned in the third quarter of 2005 when we started to see a decline in Japan and China. The continued decline in these markets obviates the critical importance of the business transformation effort which we initiated in the fourth quarter of 2005.

Now first of all, I know we all recognize that Japan and China are subject to entirely distinct circumstances. Our decline in China is a result of the fact that the timeline for the licensing process remains uncertain. This has also impacted other direct selling companies. While we had hoped by now to have much more clarity on the situation, we simply have little visibility on the timeline of this process. We have done and we continue to do everything we can to qualify for a license. Our application for a license has moved from the local government level into government offices in Beijing and we continue to be responsive to government inquiries we receive from time to time.

I also recently met with high-level government officials who indicated that we're in good standing with the government and these officials were quick to point out that China is now open for direct selling and that all companies who satisfy the licensing requirements will be licensed.

So in the meantime, we continue to be active in building out our manufacturing infrastructure and training our employees and salespeople to ready them for the addition of direct selling to our business model. We're also hosting a distributor convention next week in Hong Kong with about 10,000 distributors from the region, about half of those coming from mainland China. And these events are always very important to us where we introduce new products and new initiatives, and so we're looking forward to that event next week.

While the past few years of China development has been enough to try the patient's of any executive or investor, we continue to believe that China will be one of the largest markets in the world for direct selling and that we will compete favorably there. This situation is a matter of time.

Now with respect to Japan, we could spend a long time talking about this market, but briefly let me first address a couple of questions we've been asked lately. The first question being considered by some is whether our decline in Japan is related to external market factors and conditions such as industry trends or the economic environment generally. Without taking the time to discuss details, the reality is that some of our industry peers have declined, but others have fared well in Japan over the past few years. So while industry trends or certain market conditions may be slightly negative, the environment in Japan is not the definitive factor in determining success or failure for any direct selling company right now.

Second, a few have asked us whether we have the right ammunition to grow the market. This is where we say it's real aggravation frankly because the very ammunition we're using to grow our business in other major markets, including the U.S., Taiwan, Hong Kong, Korea and Europe, is simply not generating the same overall results in Japan.

Now to be fair, the use of our ammunition is a bit different in Japan. The scanner, for example, is used in Japan in a different fashion than outside of Japan because of regulatory factors. But again, we certainly have as compelling and I believe an even more compelling array of ammunition to call upon than our competitors who are faring better than we are right now in the market. So I feel we do have potential growth drivers in Japan and these drivers are in fact working elsewhere.

So what then are the major factors impacting our results? First, as you know, we have cited the negative impact of last year's compensation plan changes. Our field leaders identify this as the number one reason for their struggle over the past year and the changes that went into effect just last month to address these concerns have been very well received. The positive impact of these changes, however, will not be evident on our topline results for several months, just as the negative impact of last year's changes took several months to reveal themselves.

This issue, however, is really part of what I identify as the second reason for our recent decline, and this has to do with simple execution issues. We have had a number of execution challenges that have negatively impacted the market. Some of these challenges are caused by unique regulatory factors that have caused delays in product launches or growth initiatives, such as what we faced with delays we encountered in launching the S1 scanner. And most of these regulatory issues we've encountered are novel to us and even novel to the regulators we work with because we're talking about very innovative products and tools. But I think it's likely we could have done a better job of being sensitive to regulatory nuances in Japan after 15 years of doing business there.

Beyond regulatory issues, we have had simply too many fundamental execution failures, issues such as product formulation problems, stockouts, miscalculations on the impact of promotions that have hurt us in Japan. These blocking and tackling issues are not just a Japan management issue. On both sides of the water, we have not been as attentive to Japan's needs as we need to be.

So these issues led to the initiation of our business transformation in the fourth of last year. The changes we are making now are designed to align corporate resources to better support our largest market.

Now in addition to the organization and compensation plan changes that we have already made, we are prepared to do whatever else it takes to rekindle growth in Japan. Currently, we're taking aggressive steps in this market that include a few things I want to just mention quickly. First, we're improving access to our differentiating tools. We will infuse about 1500 S2 scanners into Japan in the next three months. Given the much lower cost of S2 scanner and the much higher functionality, we're also prepared to triple that number when this tool generates significant momentum. To further enhance our personal -- our Nu Skin personal care offering, we continue to prepare for the launch of the Nu Skin ProDerm Skin Analyzer, which we will introduce in the U.S. in the second quarter. And like the scanner, this tool will enable our distributors to demonstrate the efficacy of our skin care products. The S2 scanner launch to Q2 here is being done simultaneously with the launch of our new G3 nutrition drink that has generated good activity in other markets. G3 will launch in June and is already the subject of good field leader attention.

In addition, after evaluating market data, we have also initiated our first-ever customer consumer advertising campaign in Japan using traditional media, specifically newspaper and magazine ads in major publications. We have allocated about $4 million to this effort in 2006. And given that we have spent virtually nothing on this sort of brand building campaign in the past, this represents a meaningful step for us.

Given the last three quarters we've dedicated a tremendous amount of time and effort and resources to the development and implementation of a major business overhaul and I'm very pleased with the progress we've made to date on our business transformation initiative. We're transforming our business into one that is organized to achieve long-term and sustainable growth. There are three primary objectives to our transformation effort.

First, we're determined to become customer-centric, or in our case, a distributor-centric organization. We need to organize ourselves internally and be in a better position to identify and address the needs of our revenue drivers, our distributors. We also need to be more focused on the need to online our corporate marketing activities with the efforts of our field leaders in order to maximize the impact of both. Our recent corporate reorganization has resulted in a new corporate structure that is better aligned to help our sales force succeed and that effort started in the executive management ranks as I moved from 11 direct reports to seven direct reports in early February.

In addition, as I mentioned earlier, all of our geographic regions now report to one global head that is focused on and is entirely accountable for distributor success and driving revenue. We have also consolidated our product development and supply chain teams that were previously broken into separate divisions. They are now in one organization that's streamlined and better positioned to capitalize on operational efficiencies and foster a more collaborative culture of innovation. This is also designed to help us reduce the execution flaws that I mentioned a moment ago.

Next, our transformation is designed to enable us to simplify and clarify our growth initiatives in each of our markets. Over the past few years, we have had the tendency to overwhelm our sales leaders with too many products and programs emanating each of our three product divisions. This makes it difficult for our sales force to focus their time and energy on the few key drivers that with an aligned corporate effort will yield sustained positive momentum.

Going forward, we see crystal clarity in each market on the products and tools that we're positioning as our growth drivers with strong corporate programs to support a focused, simple approach to doing the business. This focused approach has already becoming evident in the catalogs and other marketing materials that we launched during the first quarter.

We have a good proof point of this approach, by the way, in South Korea. This is a market where we ran into regulatory challenges with the biophotonic scanner last year that required us to actually discontinue the use of the scanner for a period of time. Despite this challenge, the local management team partnered with local sales leaders around driving growth using the Nu Skin Galvanic Spa System as the primary growth vehicle. This partnership helped Korea to increase its year-over-year sales in the Nu Skin Personal Care category by nearly 40% in the first quarter, and equally as important, it helped increase new executives by over 30%. So clarity, focus, simplicity and alignment between corporate and field efforts are the keys to our ability to grow our market.

This leads to the third goal of our transformation. The recent restructuring efforts will generate significant cost savings for the Company. In 2006, the savings will be approximately $14 million and in 2007, the savings will be approximately $30 million. Now a portion of these savings will be reinvested into our business to promote growth. Our investments will be focused on our major markets and most particularly on Japan with initiatives such as the advertising campaign I mentioned earlier.

The impairment charges in connection with the restructuring will also enable an aggressive rollout of our second generation Biophotonic scanner this year. We anticipate infusing approximately 3 to 4000 S2 scanners into markets around the world by the end of the year.

So overall, the business transformation effort is really helping us become a more strategic, aligned and efficient organization and allows us to be more aggressive in our investment strategy to promote growth. While most of the restructuring is complete in our home office and while we have incurred most of the expense of the effort in the first quarter, we're really only about 40% into our transformation objectives globally. Our focus in the second and third quarters will be infuse the same level of focus and energy into our major global markets and into Japan in particular.

Okay I turn to the time to Ritch now to address financial results for the quarter.

Thank you, Truman. Overall revenue for the first quarter was $265.8 million compared to $289.4 million in the prior year. This represents a decline of 8%, or 5% on a local currency basis. Reported loss per share is $0.18 per share and this includes the nonrecurring charges of $0.32 per share. So excluding this nonrecurring charge, earnings per share were $0.14 compared $0.25 per share in the prior year period and in line with our prior guidance.

Here are the local currency revenue figures from our major geographies. In north Asia, first quarter revenue in Japan was 13.2 billion yen compared to 14.8 billion yen in the first quarter of 2005. Quarterly revenue in South Korea was 24.8 billion won; that's verses 20.0 billion won in the prior year. In Greater China, Mainland China revenue was 159 million renminbi during the quarter versus 220 million renminbi in the prior period. And revenue from Taiwan during the quarter was $713 NT million versus $699 NT million last year. Hong Kong revenue was $78.7 million Hong Kong compared to $84 million Hong Kong in the first quarter of 2005. And in South Asia-Pacific region, our newest market, Indonesia, contributed positively, posting $2.5 million U.S. during the quarter.

In North America, the U.S. generated $35.7 million in revenue compared to 33.7 million in the prior year period. Europe revenue was $12.5 million versus 11.2 million in the same quarter of 2005. And finally, Latin American revenue was $2 million for the quarter compared against $1.6 million in the same quarter of 2005. We remind you that all of this data as well as the revenue from all of our other markets can be found on the investor section of our corporate Web site.

Our gross margin for the quarter was 82.3%, and that is compared to 82.8% in the prior year period, and our gross margin was lower primarily because of a weaker Japanese yen. Selling expenses as a percent of revenue were 42.3% compared to 42.8% in the prior year period. The improvement here is largely attributed to the decrease in revenue in China where we pay higher commission expenses and also short-term Japanese sales incentive enhancements that were still in place during the first quarter of 2005.

General and administrative expenses as a percent of revenue were 33.9% compared against 30.1% in the prior-year period. As a percent of revenue, these expenses were higher because of a couple of things. First of all, we had a $5 million expense related to our Japanese convention and a $1.9 million stock option expense from the adoption of new accounting regulations. Neither of these expenses were included in the prior-year number. And also, lower revenue contributed to the increase in G&A expenses as a percent of revenue.

Our first quarter reported operating margin was negative 7.3%. However, excluding the nonrecurring charges, operating margin was a positive 6.2% compared against 9.9% in the prior year. Interest expense for the quarter was $1.1 million. We paid dividends of $7 million and invested about $9.2 million in capital improvements during the quarter.

Like Truman, I am very encouraged with the progress we've made in our transformation efforts during the first quarter. We've made changes to our organization to be process-driven to create more clear accountability and ownership of core processes and eliminated a fairly significant amount of overhead here at our corporate headquarters.

We incurred a nonrecurring expense of $36 million during the quarter as a result of these transformation efforts. Approximately $23 million of the charge is associated with the impairment of the original version of our scanner and is non-cash in nature. Our plan is to press forward in an aggressive way to implement and launch the new S2 units at a rapid pace. Just as a reminder, these units are much more user-friendly and cost less than one-third of the original unit to manufacture, and we believe this will have a very positive benefit to our benefit in the coming quarters.

The $13 million balance of nonrecurring charges relates primarily to severance payments where we reduced our Provo-based corporate and employee headcount by more than 15%. We have streamlined key processes related to product development and marketing, distributor success and supply chain in a way that will more properly focus our resources towards our competitive advantages and generate efficiency as we move forward into the future. Although continued organizational changes are likely, we don't expect to incur significant restructuring charges in the second quarter or the remainder of the year. We anticipate releasing approximately 3000 to 4000 new S2 scanner units into the market during 2006 and this capital investment will be approximately 6 to $8 million. We look towards about a 35 to $40 million CapEx requirement in 2006 in total.

The savings from our restructuring efforts will be significant. We will start to feel some of the benefits of the reductions in the second quarter and reach the full effect of the current changes we have made by the end of this year. The driving force behind our transformation was to generate, however, topline revenue growth. A portion of these savings which we've generated will be reinvested back into a turnaround plan in Japan in particular, and as Truman indicated, our plans will include brand-building initiatives, upgrade of our facilities, promotions and a compensation plan modification went into effect on April 1. We opened Russia in the latter part of April and will spend some additional investment to expand our presence there and in Eastern Europe.

Looking to the remainder of 2006, we estimate gross margins to hold in the 82.4 to 82.6%. And again, that is assuming that the yen remains in the 116 level. Selling expenses will increase approximately 30 to 40 basis points because of our compensation plan enhancement in Japan. We will therefore track in the 42.6 to 42.8% range for the remainder of the year. Our tax rate will remain in the 37 to 38% range for the year. And just as a reminder, our forecasting has been complicated given the uncertainty relating to the timing of the licensing process in China, as well as the softness that we have felt in Japan. Assuming a yen rate of 116 to the dollar, we project second quarter revenue of 270 to 277 million and earnings per share of $0.17 to $0.20. We expect 2006 revenue to be in the 1.08 to $1.11 billion range with earnings per share in the $0.41 to $0.51 range, or $0.73 to $0.83 when excluding the restructuring and impairment charges incurred in the first quarter.

As we're still in the early stages of our global transformation effort, our earnings per share range is larger than usual to provide for needed flexibility to invest in stabilizing our business, particularly in Japan. All earnings-per-share guidance reflects an $0.08 to $0.10 charge related to the expensing of stock options which was not required in the prior year.

So with that, let me turn the call back over to Truman.

Thanks, Ritch. As you know, it has been a challenging couple of quarters but we are confident that we're on the right track to move our business forward. As Ritch indicated, our business transformations are resulting in a more accountable and efficient corporate organization that is aligned to support the success of our sales force, our sales leaders and internally here at corporate. We're also becoming more focused on simple and powerful marketing drivers that will yield greater returns. And third, to our transformation initiative, we've been able to realize significant cost savings that will help us invest in long-term growth, including the investment in Japan, in mainland China and Russia, and the international launch of the S2 scanner and the Nu Skin ProDerm skin analyzer this year. These initiatives will ultimately result in improved growth and sustained profitability for the Company.

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

(Operator Instructions). Kathleen Reed.

I'm sorry, I have a cold, I apologize. The first question is -- on China, it appears that your sales slowed pretty steeply sequentially. And I think from your last conference call, you were saying that you were seeing some positive trends out of China. So I just wondered what the big fall-off was this quarter because with your 120 retail stores and I know you were doing some modifications already to change the compensation plan for your workers there, and I just wondered what the major issue was between fourth quarter and this quarter?

You're right, Kathy, we had seen improving trends in the fourth quarter of last year month over month. And as you know, the first quarter of the year is typically our most difficult quarter of the year and that has proven to be the case in China as well. We think because of Chinese New Year, which always wipes people out for almost a two-week period of time, February is a short month. And so we were softer than we anticipated being in China, but those factors augment the sequential movement there a little bit.

Okay. Avon stated on their call that they received their license on March 2. Are they the only company that you are aware of to get their license? And what do you think is the major hurdle for other companies getting the issue? Is it your product mix, is it the service center requirement, is there something specific that appears to be a question, or is it just they're dramatically slow in the process, in the approval process?

no, Avon is the only company to be licensed so far. And it was interesting for me to note that their decline in Q1 was almost exactly the same level as our decline in Q1 year-over-year. But the biggest hurdles are complying with all of the various requirements of the licensing process, and that is going to be a different issue from company to company. The service center requirement is a big issue, but one that doesn't have to be addressed nationally all in one fell swoop. That is an issue that can be developed from province to province.

So I don't think we can point to one requirement in particular that creates a bigger hurdle than any other requirement. It's just that it's a new process for the government, it's obviously a new process for all of us who are applying for licenses. The thing that has been a little been frustrating to us is just that the there is a 90-day timeline prescribed in the licensing process, but apparently that 90 days is kind of a rolling 90 days. So when the government asks for new information to supplement an application or for answers to whatever questions they may have, it appears as though they are either tolling that 90-day period during the response time or they may even be starting that 90-day period over again. And they just haven't answered that question clearly in terms of how that 90-day period works. And for us, that is our greatest frustration right now.

Okay. Avon also stated on their call that, since they were granted there license, they have become an advertising and consumer awareness program. Is that something that you are allowed to do even if you don't have your license, just so that you keep up your brand awareness in China? Or are you now at a little bit of a disadvantage because they are starting this new campaign?

Well, that is something that we could do. We could do some brand-building activities now even, and we have done some to a greater degree than we do in other market. And obviously the fact that we have 140 stores spread around the country, those stores get seen because most of them are visible from the street. But honestly, I think Avon enjoy a little bit of an advantage. Being out there, able to grow as a direct seller and presenting themselves as the only authorized direct seller in the market today is an advantage.

And this is a question for Ritch. Can you break down that your revenue revision for us, how much is your expectation for maybe weaker than expected local currencies in Japan versus China? Because it was my understanding that we had not really factored in much huge upside potential for getting your China license. So is it more the Japan expectations versus the China?

Yes, it's primarily Japan, Kathy. We dropped our revenue guidance by about $60 million on the top and bottom end of the range and most of that is Japan with a slight amount in China. We've kind of looked at China at this point in time holding fairly level going forward and feel like that is conservative where we are a little uncertain on the timing of the license.

Lastly, is there any -- what is the likelihood that you just won't get license at all? I think you said in your prepared remarks that you are in good standing, you're doing everything you can. Is there any likelihood that it just does not come or do you think that is pretty minimal?

It's just really hard to say, Kathy. I just -- we will obviously be flabbergasted if we end up not being licensed for some reason. What is the likelihood of that? I have no idea how to address that question. I don't know. All I know is, I met to two weeks ago with the heads of the two licensing agencies and they told me that we're in good standing in the country and that we are a reputable company, and that is comforting to me.

Okay, thank you so much. I appreciate it.

Doug Lane.

You talk a little bit about how the scanner is doing in Japan now? How many units do you have in the field here in early May? How did the rollout introduction go at the distributor convention in March? And where you think that number in Japan will be by the end of June?

You're talking S2 scanners?

S2 specifically, yes.

We have about 100 S2 scanners in the market right now in the hands of our field leaders. And by the end of this second quarter, we will have about 1500. So we're putting them into the market quite rapidly.

So that sounds like they're already made. Are they physically in Japan as we speak?

I'm not sure they're all physically in Japan quite yet, no I don't believe that they are. But we're making them in our scanner facility in China. And as Ritch indicated, they are just infinitely more functional and user-friendly and at a third of the cost, we're just really, really pleased with the functionality we're getting out of these devices.

I know this is a tough question, but can you characterize the reception at the March convention into Japan? Given that it is such a unique technology versus Scanner 1 and weigh that against the missteps that you took last summer with the introduction of Scanner 1?

I think the response at the convention is almost always anecdotal. It's distributors coming up to you telling you this is the best convention ever and they're all pumped up and fired up and ready to get to work, and we had that response at our March convention. What was a little bit disappointing at the March convention is that we were unable to launch our G3 nutrition drink at that event and had to push the launch of G3 into June. And we would have preferred to have G3 in the market a little bit earlier but the launch of G3 is coinciding with the launch of S2.

One thing I really want to point out here is that, in terms of numbers of scanners, the number of scanners in Japan versus the number of scanners in the United States is not going to look like it is very well coordinated, because the reality is that the population is very dense over there, as you know, whereas in the United States, our population is very diverse. And so we have a much higher need for a greater number of scanners in the United States. If you look at scanners per executive, for example, that number is going to be much higher in the United States than it will ever be in Japan because distributors in Japan simply have greater access to scanners in the large cities. So we don't anticipate ever likely getting to the point where we have 50% of our executives in Japan having a scanner as we do here in the United States. They simply don't need that many.

Okay. And what is the timing for the ProDerm in Japan do you think?

ProDerm in Japan will have a few units in the market by the third quarter of this year, and we will have hopefully final units in the market early '07.

Okay. And last question, the Hong Kong conventions you are having in this second quarter, how much do you anticipate that will cost, and was there a similar expense in the year-ago quarter?

The budget for the Hong Kong convention is about $2 million, and there was not a comparable convention in the year-ago quarter.

Okay, thank you.

Olivia Tong.

I was wondering if you could give more details on the turnaround plans in Japan, specifically advertising and the impact you expect from the scanner I always thought that advertising, sort of broad advertising, was something that didn't necessarily work in most markets. I'm just wondering what made you change your opinion on that. And then second, you had talked about some of the things with the turnaround, the impact that you expect from the scanner and with the limited abilities with the scanner in Japan relative to other markets, what are your expectations there?

Advertising first, you are absolutely right. We have not obviously been an advertising-driven business model in the past. And in fact, in Japan advertising is particularly sensitive because for whatever reason, many of the most reputable publications and newspapers, which are a very potent form of advertising in Japan, actually don't let direct selling companies advertise in their publications, for whatever reason. So we were actually very pleased to have secured the agreement of the Yomiuri newspaper publication for example in Japan which I believe is the largest circulated newspaper in Japan, to run full-page advertisements in that publication (technical difficulty) initiated that just prior to the Japan convention in order to draw attention to the growth initiatives that we're undertaking in the market and to generate some field confidence and some field enthusiasm behind these new initiatives, including the S2 scanner, our G3 drink, which is generating a lot of enthusiasm in Japan right now; the compensation plan changes which we initiated last month, as well as the upcoming launch of ProDerm. So we (MULTIPLE SPEAKERS).

Have you seen any uptick as far as a distributor count, whether active or executive, or any increased activity or productivity from the distributors as a result of the ad spend yet?

No. We have not yet even measured the impact of those ads yet, but we are running them in major newspapers, major magazines. And we just feel that after doing market surveys and just surveying consumer awareness and consumer perception of our brand, we felt that it was a good moment in time to go out and just do general brand-building fundamental advertising. And we are actually quite excited about seeing what the result is.

Got it. And then just with the question about the scanner, what is your sense of what the capabilities of the scanner are, given they are under the same limitations as the original S1 scanner? And then the sort of for ProDerm, from my understanding that you won't be able to give a quantifiable score on that one as well. And just sort of, what are your expectations for those devices, given those limitations?

Well you know I do think that it's fair to say, and obviously the results that we've seen in Japan for the last three quarters would bear out the fact that the impact on the scanner is diluted in Japan because of the fact that we cannot give a numerical score, nor can we tie an increase in your scanner result to the consumption of [Life Pak] as we do in other markets. So it's fair to say that the scanner and ProDerm will likely not be as impactful in Japan as they will be outside of Japan.

Right, okay. And then earlier comments, would say that Ritch, did you say that you expect China sales to stay flat from this point forward, like basically sequentially flat?

That is what we've built into our model.

So sort of the $20 million U.S. range per quarter for the remainder of the year?

That's right.

And then just trying to get a sense of, given sales coming in below expectations, have you guys reevaluated the way you forecast -- China is one particular thing, because it has a lot to do with the direct selling environment, but what about Japan? Have you reevaluated any of the ways that you sort of forecast your --reevaluate the way you come up with your assumptions?

You know, Olivia, we look at that regularly and try and do our best at really understanding what indicators are driving the future of the market. Typically, we've been pretty good and even on this last quarter, we were able to come into the range with Japan softening up. So we had some other markets strengthen up a little bit. Japan has just been really difficult to understand. We felt like things were turning a little bit. What we've done with our guidance going forward is really not build in fast turnaround in Japan for the specific reason of making sure we are conservative in looking at how that market is trending right now. So we continue to look at that and try and get better and better at forecasting. And typically we don't have the challenges that Japan being such a huge piece of our business, that is the one we have to forecast accurately.

Right. Lastly, what kind of disruption have you seen from employee cuts, if you've seen any? And then also, has there been any change in the way you service your distributors since embarking on this restructuring?

I think that our employee reduction at [Forrester] has been handled very, very well, and with very little disruption. There is always some. Most of the disruption we have dealt with has to do just with interfacing between Provo and our foreign offices where we have tried to address situations as rapidly as we could. I am really very pleased with the way the process has unfolded. We really have only lost frankly one employee who I would rather not have lost in the course of the last few months as a result of this process. And so I am pretty pleased with it.

Got it, thank you.

Scott Van Winkle.

Now that you have had a couple of conferences where you've talked about the ProDerm and the S2 scanner, do you have any better indication of what the field sales force thinks is going to happen? And what I mean is, is ProDerm going to cannibalize supplement sales kind of like we've seen supplement sales so strong over the last couple of years relative to skin care? Any better indication having some time now as to what is going to happen, how that dynamic will work between the two different segments of your business?

I think it really varies from market to market. In the United States, we think that we have done a pretty good job of segmenting the sales force a little bit and identifying and really aligning behind leaders who are predisposed to driving their business forward with either the scanner and Pharmanex products or alternatively Nu Skin products with ProDerm. In reality, those two product lines fit very well together. They are both -- it's all about healthy living and they should not compete with each other. And so I think actually with the realignment of our product divisions, we're in an better position to reduce the noise between those two product lines and make them work better synergistically than we have been in the past.

In Japan, the distinction between the product lines has never been quite as great as it has been in the United States. And our distributor force there really has less sensitivity towards promotions in one of the brands in particular versus another of the brands. But I do think it's likely that with the introduction of ProDerm, you will see a few distributor heads turn Nu Skin's direction. And as the spotlight shows on ProDerm and on Nu Skin products, there may well be a little bit cannibalization of Pharmanex products.

Truman, when you opened the call, you talked about the possibility or your opinion on external forces in Japan, certainly economic related. Have you looked specifically at the retail marketplace for selling nutritional products? Is there anything different going on in consumer views in nutrition products in that market?

Nothing has come to our attention, Scott, to lead us to believe that the consumer market for nutritional products has dimmed. We really see the opposite happening. The reality is, these populations continue to age demographically. Health continues to fail and the need for our products continues to rise. So I just don't think we can point to external factors as being the predominant reason for our results right now.

And the Japanese Direct Selling Association a couple of months ago had restated down their estimates for the size of the market over the last few years. Do you think that was just a recalculation, or do you think it's an indication that things were softer than we thought over the last several years?

It's true that has been a decline in the overall industry trends in Japan. And, okay, so we can take some comfort in that perhaps, but in reality there are also companies there that are growing at very healthy rates. And so even established companies, like the Amway organization, for example, after several years of decline has recently had meaningful growth in the market. So I just cannot accept that as an excuse for an inability to grow right now.

Okay. And turning to just a quick question on China, have you seen any disruption in the month of April before having this early May convention for greater China? Have people held off looking to see what happens next week?

We really haven't sensed that, no.

Okay, thank you very much.

[Elias Kafazacario].

I think that actually G&A was lower than my estimate. I'm sorry if I missed your guidance for G&A for the year. I was wondering what was the run rate for G&A in the remaining quarters of the year?

I think we will see about a $10 million decline year-over-year is what we're shooting for. And again, two big keys to that will be, number one, what is required to invest back into Japan. We've forecasted some for advertising and things like that. The other key is how fast all of the restructuring efforts really kick in. But I would look for an overall number to be down from last year, somewhere around $10 million.

Thank you. Have you seen any declines in your subscriber base in Japan, given the transition from S1 to the S2 scanner?

There's been a slight decline, I think certainly not at the same magnitude as our revenue level. I don't know that it's so much if the S1/S2 scanner transition, maybe more the fact that we did not have as many qualification activities and so forth going on to get new scanners where people are really out driving those new subscribers. But it has really a relatively steady over the last six to eight months.

Do you expect any meaningful increases, or do you think it will stay where it is?

We have good success with scanners driving new subscribers, so I think the influx of a lot of new S2 scanners will be helpful to drive that number forward.

In North America, there was a significant increase in executive distributors, I think it was about 17% or so, yet sales growth was only about 6%. Could you elaborate on this difference? Should we expect stronger growth going forward in North America?

Yes. We have good energy in North America right now from a sponsoring perspective, and that will translate to volume in future months. I think it's just that the distributor applications lead volume a little bit there.

Lastly, back to the weakness in the Pharmanex business which was down about 10%. Was Japan the single biggest driver of that decline?

Yes.

Thanks a lot.

Tim Ramey.

Good morning. A couple of balance sheet questions. Is the accounting treatment for the S2 scanner the same as S1? In other words, is there a potential of a write-off of obsolescence there should something else occur in the future?

We will treat the S2 scanner similar to the way we've done in S1, amortizing it over a three-year period of time. The cost of an S2 scanner runs just below $2000, so it's a much, much less significant expense and we will recoup that cost fairly quickly with about a $200 per month lease rate. And so the risk I think is much, much smaller than the scanners that we previously put on, which were costing us sometimes in excess of $7000 per unit.

Okay. And then, Ritch, also on inventories, they were roughly flat with 4Q, despite the sales decline. Is that at all a risk or is that just noise?

I don't think it's a risk. If you look at that level, Tim, we've really held at that level for the last several months and last several quarters even. And we hope that through the transformation frankly one of the things we're trying to address is our efficiency with inventory and trying to turn that quicker. We continue to hold the reserve as we always do, but I don't see any additional risk in terms of what's sitting in our inventory balances.

Finally, maybe back for Truman. Do you view your conferences as expensive, relative to say what Usana does, or your number of sales representatives is exponentially larger, I understand that. But it seems like you have more conference impact on a given quarter?

That may be true, Tim. I am honestly not sure what all of the other companies do in terms of conference expense. And this is one of the reasons why we have changed the format of our conferences recently, to go from where we were doing our global international conference every 18 months; we'll now be doing it every 24 months in the same quarter, and then hopefully parking our country our or our regional events in the same quarters too year-over-year which will help greatly from a comparative perspective, but which also helps reduce our overall conference expense a little bit.

Thank you.

[John Morisani.]

Good morning guys. First question, Truman, I did not quite get it. Why was the G3 product not able to be introduced into Japan at your conference?

As it turns out, the seed of the gak fruit from which we derived the G3 juice many years ago, I believe like four years ago, was registered as a pharmaceutical product in Japan. And so we had to go in and convince the government that, no, we're not using the seed, we're using the actual fruit, and that just took some time.

Just maybe a question for you or for I think it's Dan Chard, your new executive success. What is it that you see yourself kind of bringing to the party here that's going to do things differently? Or what can you -- what is the change that you're going to make, how long is it going to take for that change to take effect, and how long will it be before we start seeing the results of those effects?

Let me take a quick whack at that, and then I will have Dan chime in. This is really a great question, John, and I can tell you from the chair in which I sit that this is a huge step forward for us organizationally for a couple of reasons. Number one is that we have had tension and just kind of a lack of clarity, frankly, organizationally about who at the end of the day is responsible for driving revenue. We have -- when we ask ourselves the question -- are we organized around customers, or are we organized around product? We found ourselves answering that question -- well, we're organized around both, because we have had divisions and division presidents who are responsible for their product lines and their brands, but at the same time, we've had geographic managers who are responsible for their geographies. And we frankly just haven't had clarity on who owns what, and especially who's responsible for driving revenue. So the first objective here was to clearly make this distributor -- have a distributor-centric, a customer-centric organization and make sure that our geographic managers know that they are responsible for driving revenue.

Secondly, we have had way too much global deviation from what really needs to be a far more standardized and simple approach to the business. We have driven our sales force crazy with little nuances from market to market that just frankly don't need to be made, and especially from a compensation plan perspective. We really disable our international distributor executives from being able to work market to market with little changes here and little changes there, done on a local basis that happen through the local management teams that just frankly slow down the business and complicate the business. So more clarity and more accountability for who owns what, becoming a more distributor customer-centric organization and then just having far better global coordination and more simplicity at the distributor level is really what I'm seeing so far. Dan, do you want to chime in on this?

Sure, I would just add one thing to what Truman has said, and that is related to the nature of our business. We're in over 40 countries and have managers obviously all over the world. And through the process of working with our distributors, launching programs, there are best practices that will be developed in various geographies over the year. So part of the effort is going to be to transfer more readily some of those best practices and make them more consistent across the globe. So I think that's going to be an impact that we're going to feel fairly immediately.

Did I hear what you were saying, Truman, is that you're going to be looking at changing the distributor compensation formula again? Because it sure seems like the last couple of changes have not necessarily had the desired results.

What I'm saying is, we're going to get away from local changes and have far more global consistency than we have had over the last few years.

So were the changes that in retrospect may have harmed your business, we're those locally generated, or were those done at a top level?

Well, you know, John, the investment community only hears about the ones that don't work and not about the compensation plan changes that do work. But the one that has had the most dramatic effect on our business in Japan, for example, was a big one. And in that case, the was actually made with both the local and Provo management teams on board. So it's not fair to point, to allocate plan for that decisions just on the Japan management team because we all participated in it, including myself.

Alright, thanks.

Rommel Dionisio.

I have a question (technical difficulty) China license, but several other companies in direct selling have mentioned that several companies were asked to resubmit or reapply, resubmit their applications in January and February. Did that apply to you? And if so, could you discuss the timing of that and what the rationale was for that?

Well, I think there is perhaps a little terminology distinction here. In our case, I don't believe that we have been asked to resubmit or reapply. We have been asked to supplement our application with additional information or answer specific questions that the government asks us from time to time and they may be considering that a resubmission or a reapplication. We've been considering it mostly just continuation of our original application. But others may be characterizing it in a different fashion.

Okay, that is fine. And forgive me if I missed this housekeeping detail, but did you announce what the share buyback activity was in the quarter?

We actually had no share buyback activity during the quarter.

Okay, great. Thanks, I appreciate it.

Kathleen Reed.

Thanks. Can you just tell us when you consolidated your product heads, and if that now going forward just a little bit more color on I guess -- [Lori] is going to be a consultant and Joe Chang is going to run both divisions. Or are you getting away from the divisions? Because I also noticed in your press release for the first time I think you stopped giving that little paragraph where you would explain how Pharmanex performed versus Personal care?

We will probably refer to them more as brands than as divisions going forward, Kathy. And that consolidation really unfolded during the first quarter. Lori transitioned right at the end of the first quarter into her consulting role and began the Chairman of our Scientific Advisory Board for Personal Care products. But it's just really a step in the right direction from my perspective to reduce the noise between the two brands, get them working more cooperatively together and frankly improve our -- on execution issues.

And then lastly, I think in your prepared remarks you also commented that in Japan, in addition to the environment and just some of the other issues, you had some [own] execution problems there. And I wondered if with your headcount reductions, you made any changes to management in Japan?

We have made a couple of changes to mid-level management positions in Japan. We have not made any changes to senior level positions in Japan. And frankly, it's not an unfair question I think for anyone to ask. Why haven't we made changes to senior level positions in Japan? And let me just comment on that by saying that, first of all, we're not hesitant to make senior level management changes. And in fact, if you do a headcount around the world, I would say that 75% of our general managers have been replaced in the last three years. So we don't hesitate to do that. And it would be frankly tempting to for us here on this call to blame all of our problems on the scoundrels who are running Japan and get rid of them and make some changes there. But as I have indicated, that would not be a fair allocation of responsibility frankly. And we have had as many failures on this side of the water as we have had on that side of the water. And actually I think that today, it would actually pose a business risk to make an abrupt management change there. It may aggravate field concerns in Japan and so I honestly don't think it's in the best interest of the business to make an abrupt management change there right now.

Okay, thank you.

At this time, there are no further questions. Are there any closing remarks?

Just briefly, thank you all again for joining us today and we look forward to addressing any additional questions you may have one-on-one. Thanks very much.

Ladies and gentlemen, this does conclude today's Nu Skin Enterprises first-quarter earnings release conference call. You may now disconnect.