如新 (NUS) 2006 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the Nu Skin Enterprises Third Quarter Earnings Conference Call.

[OPERATOR INSTRUCTIONS]

I will now turn the call over to Mr. Charlie Allen, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning. We appreciate all those joining us today on this conference call and listening over the Internet. Today our conference call will be led by Truman Hunt, President and Chief Executive Officer. As a reminder, during this conference call, comments may be made that 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 complete discussion of risks associated with the forward-looking statements and our business. I'll now turn the time over to Truman.

Thanks, Charlie, and good morning, everyone. Joining me on the call today are Dan Chard, who's our Executive Vice President responsible for global sales, as well as Rich Wood, our CFO. Our comments this morning will be relatively short as we look forward to our Investor Day meeting, which is coming up on November 30, where we'll provide much more detail as well as guidance for 2007.

But, as indicated in this morning's release, the third quarter finished in line with our expectations. Continued strength in growing markets, improving trends in markets that had been a drag on recent results, combined with the impact of our transformation efforts on G&A and use of cash to repurchase shares, combined to set us up nicely for strong earnings growth in 2007.

For the quarter, revenue declined 5% year over year, with healthy growth in the U.S., South Korea, Taiwan, Hong Kong and Europe being offset by an 11% local currency decline in Japan and a 34% decline in China. Overall, we're encouraged with the progress we're making in our key markets. In Japan, the 11% decline is a slight improvement over the second quarter, and trends indicate continued improvement in results. Our improving trends in Japan are the result of four initiatives we have discussed in past calls that will continue to lift the market.

First, our g3 nutrition drink was launched in Japan at the end of the second quarter and has been very well received. Since the June launch of g3, we've sold approximately 300,000 units, making this product our second-best-selling product in the market. And 50% of these sales came with auto ship subscriptions, reflecting that the impact of this product launch will go beyond just an initial promotional sales blip.

The launch of g3 in Japan was accompanied by a first-of-its-kind brand-building campaign, which is our second key initiative to return growth to Japan. Key media placements, which are primarily print ad, are helping to drive consumer demand for g3 and have introduced potential consumers and distributors to our broader range of products and tools, including the S2 Scanner. Additional media exposure in 2007 will continue to promote our brand awareness and our brand image.

Third, you'll remember that g3 is a product that measures very well on our Scanner, allowing us marketing continuity with this important tool. During the third quarter, we placed approximately 750 new S2 Scanners into the market, bringing the total number of S2s in Japan to about 1,200. And we remain on pace to have 2,000 in the market by the end of the year. We also have, just as a reminder, about 1,000 S1 Scanners in the market. So by year end we'll have put a Scanner in the hands of approximately one of every four-and-a-half or so executive distributors in Japan.

Fourth, the modifications we made to our compensation plan earlier in Japan have been well accepted. While these changes have raised selling expenses a bit, in the long term they're important to stabilizing the market and returning it to growth. We certainly have more work to do in Japan, but we're on the right track.

The U.S. had a very solid third quarter. Last week we held a North American Distributor Convention and saw a tremendous amount of distributor enthusiasm and energy that bodes well for this market. Our U.S. field leaders are rallying their messages around the elements of our business that truly distinguish us from other direct selling companies, and core to this message is the fact that we provide tools to enable people to measure the impact of our innovative products.

We continue to roll out S2s in the U.S. to maintain vibrancy in the nutrition category. And the introduction of the Nu Skin ProDerm Skin Analyzer contributed to a 24% year-over-year revenue increase in Nu Skin in the United States. As in Japan, we're also evaluating ways to use media in the U.S. in 2007 to move our business forward. We'll address this issue specifically at our November 30 presentation.

Now, moving on to China, the big news, of course, was the granting of a direct sales license during the quarter. This comes as a result of years of hard work and significant investment in the market. We expect the license to contribute to improving trends in China beginning in the fourth quarter. We've been working diligently to initiate direct selling activities in Shanghai next month, and we're also focused on commencing direct selling in Beijing and Guangdong Province as soon as possible.

When these three provinces and municipalities are open for direct selling, we'll be covering about 53% of our existing revenue base with our hybrid business model, which includes both direct selling and our employed sales force model. Other provinces will follow throughout 2007, so that by late 2007 about 90% of our existing revenue base will enjoy both the direct selling and the employed sales force business model.

Now, as a reminder, the license we received enables us to direct sell in our city of incorporation, which is Shanghai. However, we are at work satisfying local service center and local license requirements in other provinces and municipalities. We remain one of only two U.S.-based companies who has received a license to direct sell in China.

As we capitalize on being one of the first to market, we will be operating under a hybrid distributor model that will allow distributors to be paid for their personal sales volume. Then, upon developing a successful sales organization, a distributor can choose to become an employed sales representative and be compensated for their personal sales volume as well as the sales volume of their group, which is more in line with our global compensation payout structure.

With the addition of direct selling comes additional change for our existing sales force in China, and, while they are excited about this development, we've also learned that this is an environment that sometimes struggles with change, so we're being as cautious and as communicative as possible in order to maintain order and minimize trauma during this transition. We view China as virtually a new market opportunity. While there will undoubtedly be some challenges to doing business in this market, we continue to believe that China holds huge upside potential.

During the quarter, we also saw impressive results in the majority of our other markets. South Korea, for example, continues to post very strong gains of 30% year-over-year. South Korea is quickly headed towards being our second largest market, and it's a very significant market for direct selling, so we feel good about what's happening there.

Europe also continues to perform well, up 30% in the quarter. This region is also becoming a more material contributor to our overall financial profile, and we've only scratched the surface of Europe's potential. As we continue to recruit and develop talented sales leaders in this region, we anticipate the market to continue to expand, and we're also seeing impressive results in Eastern Europe as well as in Israel.

Now, let me quickly address the increase in our selling expenses this year. As we've stated in the past, compensation plan changes in 2005 negatively impacted the business and decreased our overall commission payout, particularly in Japan, where our commission payout reached a low point in late 2005 and early 2006. We were simply paying out less in Japan than we had previously, and less than we do in other countries. This likely contributed to the sales decline we experienced in Japan. So we had to correct that situation, and, to minimize repeated trauma in the transition process, we double-paid certain commission components in order to ease this transition.

With the compensation plan transition done now in Japan, and with direct selling coming online in China, we would expect selling expenses to come down a bit, but they will likely stay in the 43% range for the next several quarters. For the most part, this increase in selling expenses will be offset in 2007 by G&A reduction and by a significant step towards profitability in several of our foreign markets that have been unprofitable for several years. We'll provide more visibility and modeling guidance on this issue and on operating margins at our Investor Conference on November 30.

So, all things considered, we're satisfied with our direction. Not only do we believe we're on the right track to growing revenue, we also feel that our transformation efforts are contributing to our overall results. The work force reductions that took place earlier this year have contributed to significant cost savings that are expected to total close to $15 million by the end of the year.

And, finally, we're pleased to have Board support for using our strong balance sheet to create shareholder value. In the third quarter, we increased our stock authorization and incurred some debt to buy back about 2% of our stock. We believe this is among the most positive things we can be doing to drive shareholder value. We have confidence that the prices we're seeing now represent a good value, and we'll continue to be in the market aggressively in the future.

Okay, with that, I'll turn the time to Ritch for some financial specifics.

Good morning, everyone. Thank you, Truman. I'll quickly provide the local currency revenue figures for our major markets and again remind you that these numbers and others can be found under the Investor section of our NuSkinEnterprises.com website.

In North Asia, third quarter revenue in Japan was JPY13.8 billion, as compared to JPY15.5 billion in the third quarter of 2005. Quarterly revenue in South Korea was KRW27.9 billion versus KRW21.5 billion in the prior year. In Mainland China, revenue was CNY129 million during the quarter versus CNY195 million in the prior year, and quarterly revenue from Taiwan TWD785 million versus TWD755 million last year. Hong Kong revenue was HKD85 million compared to HKD82.7 million during the third quarter of 2005.

In North America, the U.S. posted $35.9 million in revenue, as compared to $34.1 million in the prior year period, and third quarter revenue 2006 for Europe was $14.3 million versus $11.1 million in the same quarter of 2005. And, finally, in Latin America, revenue was $2.3 million for the quarter, which was even with the prior year period.

Our gross margin for the quarter was 82.5%, compared to 82.3% for the third quarter last year. This slight improvement is attributed to the shift from the S1 Scanner to the lower-cost S2 Scanners, which decreases the amount of Scanner depreciation which ran through cost of sales. And the benefit from Scanner depreciation was slightly offset by a weaker yen in the current period compared to the prior year.

Selling expenses as a percent of revenue were 43.7%, compared to 41.7% for the prior year quarter, and this increase is attributed to the compensation plan changes made in Japan on April 1, and, as Truman mentioned, includes some temporary transition bonuses which were paid for a five-month period of time. The transition bonuses accounted for approximately 30 basis points for the quarter and will not continue into the fourth quarter.

General and administrative expenses as a percent of revenue were 31.2%, compared to 30.3% in the prior year period. In dollar terms, we continue to make good, solid progress in our efforts to streamline our processes and reduce our overhead. Third quarter 2006 expenses totaled $86.3 million versus $88.1 million in the prior year period. And note that our current G&A -- current period G&A, includes approximately $2 million in stock option expense which was not incurred in the third quarter of 2005, resulting in comparative G&A approximately $4 million lower in this quarter than in the prior year, and, really, in line with what we had anticipated with our restructuring effort.

We paid dividends of $7 million during the quarter. We increased our share purchase -- repurchase authorization to $110 million in August and repurchased $24.1 million, or 1.4 million shares, during the quarter, again representing approximately 2% of our outstanding shares. That leaves us at the end of September with about $98 million on our stock repurchase authorization.

Cash flow from operations was $26.5 million for the quarter. We anticipate our gross margins to continue to be right around 82.5%. Selling expenses should decrease slightly in the fourth quarter to be around 43.3%. I would expect G&A to be approximately 31% for the fourth quarter.

Our prior forecast had the yen exchange rate at approximately 116 to the dollar, and, given current trends, we adjusted our forecast for the fourth quarter -- now project being a slightly weaker yen at 118 to the dollar. This adjustment in the exchange rate negatively impacted our prior forecast for revenue by approximately $2.5 million and earnings per share by approximately one penny. We project revenue trends to continue to improve in Japan and around the world, with year-over-year local currency revenue in Japan to be down approximately 8 to 9% in the fourth quarter, and overall revenues to be in the $279 to $284 million range.

We expect earnings per share of $0.20 to $0.22 for the quarter, and we invite you all to join us with our Investor Day, which will be held in New York City on November 30. During this meeting, we'll provide our operational plans and financial projections in detail for 2007. And, with that, we'll turn the time back to Truman.

Okay, operator, let's open the lines for questions.

[OPERATOR INSTRUCTIONS]

Your first question comes from Kathleen Reed.

Good morning. A quick question on the guidance. I think on your last call, you tightened up your guidance to a range of 75 to 80, and it had been a bigger range before that, and now it seems like you're going to 73 to 75, so definitely the lower end of the range. In addition to the yen, which you said is about a penny, is it also because there's some increased expense due to the build-out in China, or are you spending more on advertising in Japan, or just any other information on that.

Yes, not so much China, Kathy. I think the primary issue, you know, we did adjust the yen, which hit slightly on the earnings per share. And just given the revenue forecast, we feel like we'll be in that range. Our selling expenses were a little bit higher than we had anticipated, and I think the sales reps in Japan adopted the plan a little more quickly than we had anticipated. But otherwise things are pretty much in line with where we had seen in the prior quarter.

Okay. In the China build-out, can you guys just give us some more information what -- if your service centers -- I think you had stated before you were doing a certain amount in each of those cities -- are those all on track? And just what the response -- are you able to recruit, already, reps? Just some more information on the whole process.

Yes, you'll recall, Kathy, that the local regulations require a certain number of service centers in each province and municipality, and we are focused on securing those service center facilities in our most important markets, and, as indicated in our remarks, that's Shanghai, Beijing and Guangzhou, which constitutes 53% of our current business. We are also looking aggressively for service centers in other provinces and municipalities so that by late 2007 we're essentially operating in a direct selling fashion in virtually the entire country.

But we do have to satisfy local service center requirements. We also have to secure local level licenses. And that's just going to take the next several quarters to do that effectively. We do -- we are planning on initiating direct selling in Shanghai in December, but we are not currently recruiting and won't currently be recruiting on our direct selling model until December in Shanghai and then throughout 2007 in the other provinces.

Okay. I think on your June call you had said that you would open or add five service centers in Shanghai by the end of August, ten in Beijing in September and 30 in Guangzhou in October. Did that all happen? I mean, are you on track with all of that?

Yes, we are. That is happening, and we are on track with that.

Okay. Great. And my last question is, just in Japan, I think you stated that trends look like they're improving and people are adapting to the new compensation plan. Can you just talk about the regulations in Japan, if they've improved at all with the S2? Are you able to make any different claims than you were on the S1, or just what the response is? How's the S2 performing, I guess, in relation to the S1 there?

Well, there has been no change in the regulations since we launched the S1 originally, so we're really operating under the same regulatory environment. And, as you recall, in Japan we are not able to produce a number, as we do outside of Japan, to measure antioxidant levels. So that has been a little bit of a handicap for us in Japan, but our sales reps are making the best of that and are still able to use the Scanner effectively. And everyone loves the S2. It's a very significant improvement over the S1, much more portable, much more functional, much more user-friendly, hardly any calibration time, which was a big problem with the S1. So everyone's happy with it.

Okay, great. Thank you.

You bet.

Your next question comes from Olivia Tong.

Hi, good morning, guys. Relative to your estimates for China, results for the quarter, relative to your expectations both for sales and distributors, how do you -- how do they stack up?

For the third quarter?

Yes.

Well --

Like did you expect more of a deceleration, or is a -34 sort of where you would expect it to be?

Well, clearly we would have liked more of a deceleration, but the results that we generated were really pretty much in line with what we expected.

And I think as we look at China going into the fourth quarter, Olivia, as Truman mentioned, I think we'll see that now stabilize. It should be fairly even on a sequential basis. So I think the deceleration will stop here and we'll start to move in the right direction.

Okay. So for Q4 you're expecting it to stay flat sequentially, sort of in that 130 [inaudible] range?

That's right.

Okay.

That is right.

And then how much savings flowed through during this quarter, and how much have you recognized year-to-date from restructuring?

Yes, we had a -- we are down about $4 million year over year in the quarter. We had saved a little bit more than that and then increased our expenses slightly, as we had talked about, in Japan particularly, with our sort of media campaigns and image enhancements. So I think we talked about, earlier in the year, that we were looking for about $15 million savings, and with $4-plus million in this quarter, I think we're right on track with that forecast, earlier forecast.

Okay, and then I think it was $30 million for next year. Right?

Yes, I think $20 million is what we talked about in net savings for next year.

After [investment].

And we'll give -- again, we'll go through, on November 30, and kind of walk you through what that savings will look like for next year, as well as where we anticipate it coming from.

Okay. Something that was interesting, too, is that you had talked about possibly starting doing some media spending in the U.S. Is it going to be newspapers or another form of media? What's your thinking as far as that?

Yes, we'll talk about that on November 30, Olivia, but we anticipate it will be a combination of cable and our new tool that we launched last week in the United States called [inaudible], which we'll demonstrate for you on November 30. It's a very effective Internet-based tool for disseminating really wonderful information. And that will play an important role in the U.S., as well.

Got it. And then just lastly, you had touched on a test in low-cost countries that you were planning to do in September in the last call. I was just wondering if you could give us further details on that test and what you've learned so far.

[Inaudible] the technology is allowing [inaudible].

I'm sorry, could you speak up? I couldn't hear you.

Yes. We did open South Africa using this lowest cost expansion technology, which, and that's happened November 1, actually, so yesterday, and the technology is being used to take orders, to facilitate payments, both for orders as well as pay our commissions. So, so far that's been successful. We'll be evaluating it and determining how else we apply it to other low-cost expansion markets.

Okay. So far South Africa is the one country. Anything as far as Eastern Europe or any other regions?

Well, Eastern Europe, this is an extension of what we've been doing in Eastern Europe, which is -- so we're in Hungary and Romania. We've opened both of those markets in the last two years. And we did that with the low-cost expansion model. The test in South Africa is essentially automating some of those processes and having them be web-based, whereas previously we were required to put more of an infrastructure in place. But, yes, it will apply to Eastern Europe.

What exactly are the components of the low-cost expansion model? I assume it's -- you mentioned that it's web-based. What else is there involved in it?

Well, it's essentially a way to facilitate sign-up, an electronic way, to take orders electronically, to take payment and to make payment. Some of the challenges we have in these countries are being able to work within their banking systems, both to -- because credit cards aren't readily available, and also to be able to pay into an account, because the banking transactions operate differently. So, in the past, building that infrastructure has been fairly sophisticated, and we've created a simplified way of making that happen that doesn't require as much investment for us.

Okay, and then, just lastly, you mentioned potential investment in media in the U.S. Are there any other countries where you might be thinking about that?

You know, our effort to build brand and build awareness really differs from country to country. What you'll see in 2007 globally will be -- will include a packaging overhaul that we're looking at, really, across our product line, and each country will go about brand building in a little bit of a different fashion. For example, in Taiwan, we recently opened a spa and fitness center in Taipei, which is really a showpiece for our sales force to use and is generating a lot of attention and is really serving this same purpose in that market. In China, one of the ways we're building brand there is through billboards. So the mechanism differs country to country, but the objective is the same.

Thank you very much.

Your next question comes from Doug Lane.

Hi, good morning, everybody.

Good morning, Doug.

Ritch, that $20 million of savings that you talk about next year, is that incremental to the $15 million or is that an incremental $5 million in '07 over '06?

Yes, an additional $5 million over where we're at this -- where we kind of end up this year on the run rate that we end up this year.

And these marketing initiatives, the billboards and what have you, are being paid for from this cost savings? Is that how to look at it?

That is correct.

Okay. On the Shanghai opening, is that December opening the same time frame you had thought about it in the summer, or was that pushed back a little bit?

You know, we're probably 30 days later than what we anticipated being three or four months ago, so not much of a pushback.

And any particular reason, one or two single reasons, or just a group of them, or --?

Yes, really just a group of reasons, but mostly wanting to make sure that we've really laid the groundwork with our sales force as we transition to this new model. I mean, the communication in China is really one of the big challenges, because it's just not easy to communicate across the country, and, in fact, Dan's headed to China this weekend to spend next week meeting with the sales leaders. So really mostly communication.

Okay. And can you give me -- refresh my memory on your three growth initiatives, the g3, the Scanner and the Skin Analyzer, where they are currently geographically, and what the plans are going forward?

The Scanner is rolling out globally as we speak. It is essentially available in all of our major markets. ProDerm really has been limited so far to the United States and Europe and we'll continue to roll out primarily in those two geographies through the first half of '07. We're already at work on the next generation ProDerm unit, which we anticipate launching at our September convention, international convention, next year. And there's a possibility, depending on how our markets develop, that we may hold other markets and not introduce ProDerm 1 at all, but just jump right to ProDerm 2 as soon as it's available the second half of next year. G3 is rolling out virtually globally now. Where has g3 not yet launched? I think it's essentially --

It's everywhere.

Essentially everywhere.

And what about the ProDerm Skin Analyzer in Japan? Is that feasible for that market, and you're just waiting for the second generation? Or are there no plans to launch it in Japan?

Yes, we've really wanted to evaluate the impact of ProDerm 1 outside of Japan first, and I think there's really a high likelihood, Doug, we will save Japan for ProDerm 2.

Okay. Thank you.

You bet.

Your next question comes from Scott Van Winkle.

Hi. Thanks for taking the question, a few, actually, here. First, this is probably an impossible question to answer, but I'll ask it anyway. Your four initiatives in Japan that you think are going to drive -- improve year-over-year comparisons, any results you've seen to date, could you rank them, maybe which one you think's having the most impact? Is it the comp plan change? Is it g3? Anything there?

Well, rank them -- you know, really, they're all playing a significant role in the dynamics of the market. But my gut sense, Scott, is that the comp plan changes are probably more core and more critical than anything. And we're really happy with the feedback on the comp plan changes. Typically, comp plan changes draw some positive fire and some negative fire, and in this case it's just positive fire. Our sales leaders have responded very positively to it.

Okay. And in China you mentioned the first quarter being -- covering 52%, I think you said, of your existing revenue in three regions. How much of your existing business is Shanghai today? Is it 25%?

No, 20%.

20%. Okay. And a quick question on ProDerm, thus far, obviously, great results in the U.S., are you seeing the same type of impact on your skin care that you did on the original Scanner, on the supplement side, or any lessons learned this time on a different type of sales tool with a different half of your business?

There is a similar impact. Any time you introduce a new tools like this, it just directs distributor attention to that category. And the launch of ProDerm has redirected significant distributor attention to the Nu Skin category. I think the thing that -- the biggest difference here, Scott, and we've talked quite a bit about this over the last year and half or so, is that in the United States we're trying to modify our approach to this term we use called divisionalization, where we have the three distinct brands and somewhat, to some degree, three distinct sales forces focused on each of the brands.

What we're really trying to do, as we discussed at our last Investor Day last fall, is have the existence of these brands be constructive and not destructive. And so we've made some tremendous headway on this issue, and, in fact, last week at our North American convention what we saw was an awful lot of harmony between the brands, and that's encouraging to me, because we frankly don't care where the sales come from. We just want growth in the market overall, and there's no reason why our sales force shouldn't be taking advantage of all of the good we have to offer. And that really is the most significant change in the way this device is being launched.

Okay, thanks. I'll see you in a month.

You bet. Thanks.

Your next question comes from Mimi Sokolowski.

Hi. I apologize, Ritch, that you probably covered this already, but I dialed in late. In the press release that was just alluded to, you talk about covering more than 50%, and then 90% by year-end next year. How should I interpret that?

Yes, the 50% means that we'll have a direct selling business opportunity in the provinces that account for 50% of today's revenue base. When we talk about 90%, we're just saying that we'll have direct selling made available in provinces which add up to 90% of our revenue base today. And so it's just kind of trying to identify which provinces we're putting priority on, and how --

I understand.

And how you'll see that roll out.

So it's not making -- you really can't draw any implications for how the revenue stream is going to change next year.

Yes, that's [inaudible].

Other than to say you're going to have people on the ground in this -- in these geographies that account for such-and-such percent of revenue.

That is correct.

Okay. And just a couple of housekeeping things that you -- I know you cover, I just missed them. How much was the stock-based compensation expense in the quarter?

Just over $2 million.

And that was pretax?

That is pretax.

Okay. And should I assume a straight line to the fourth quarter?

Correct.

Okay, and is it [inaudible] --

[Inaudible] and going forward, it should hold right at about that level.

Okay. That's what I was going to ask you. I was afraid it was too early for '07, but that's helpful. Thank you very much.

You bet.

[OPERATOR INSTRUCTIONS]

Your next question comes from Kathleen Reed.

Oh, hi, just a couple other quick follow-ups. The distributor count in North Asia, the executive number declined, I believe, 8%, in this third quarter, and it was only down 4% in the second quarter and the first quarter. Is there anything in particular that -- it seems like if the sales are slightly better and people are adapting more to the comp changes, that that doesn't -- that there's some disconnect there.

I think really what you're seeing there, Kathy, is the fact that our executive count is going to trend more or less in line with our revenue line. And we have perhaps fended off some erosion of our executive numbers in the last couple of quarters, so that's just catching up with us a bit as those executives fall out. And so I don't think it's terribly surprising that that -- that we'd see a little more executive erosion, but I would expect that to improve going forward.

And I'll just mention that you'll remember that our executive process is actually a three to four-month process for somebody to become an executive, so it will lag sometimes slightly behind some of the other numbers.

Okay. The North American convention, or the U.S. convention that you just had, where did you hold that, and how much did you spend on that?

We held it in Salt Lake City, and it was about a million dollar spend. We had about 3,500 people in attendance, I believe, and it was a very successful event.

And next year are there any quarters -- I think you mentioned you're having your international convention. What quarter are you having that, and --?

Right. That's in September, so third quarter.

And that's a much larger convention, correct?

Yes.

Also in the North America revenue, how much was Photomax on the revenue line?

I think it was just over $2 million.

Okay. And did you tell us how many ProDerms you have in the U.S. and how many S2s that you have in the U.S.? I think you gave them for Japan, or I know you gave the S2, the ProDerm, I'm sorry, in Japan for just --

In the U.S. we have about 500 ProDerms in the market, so still a fairly small number. And S2s, Ritch? About 500 S2s as well.

About 500.

And what is your goal for each of those for the U.S. for '06?

The U.S. is very bullish on ProDerm, and they've actually ordered 4,000 units through 2007. So they anticipate putting a lot of units. That actually covers Europe as well, so about 4,000 units in the U.S. and Europe.

Wow. Okay, and my last question is just, other income looks like it was really -- spiked up this quarter, or are interest expenses really low? Is there something in there?

Yes. Well, interest expense stayed the same. We just pushed off a gain in our other income line because of exchange rate fluctuation. We [were] a long liability from Japan, and as the yen moved we kicked off a gain.

Okay. So that probably shouldn't repeat in the fourth quarter?

That's right. I'd expect, you know, we always kind of just budget that we're going to be fairly close to even on the exchange rate fluctuation and have somewhere around a million dollars, a little bit more than that, of interest expense.

So you mean -- was the same -- so interest expense was the same with Q2, which was 1.4?

That's right.

Okay, and so then the difference was your gain. Okay. That's all for me. Thank you.

Your next question comes from Tim Ramey.

Good morning. I was confused on the commentary on the selling expense going up 200 basis points, and then I think your release said it was primarily due to the compensation transition plan in Japan. But I think you also said that was only 30 basis points. Did I miss something there?

Yes, maybe I can give you a little bit more color on the numbers. If you go back into the 2004 year, we were really tracking right around the 43%. In 2005, you'll notice that in the second quarter, particularly, we dropped about 100 basis points. And that was due to the change we made in Japan the first quarter of 2005.

As we changed the plan again in Q2 of 2006, we restored, effectively, our payout in Japan to where it was pre-2005, and, in addition to that, during the transition period of time, we had an additional 30 basis points, which will not continue going forward. So in the fourth quarter, I would expect our selling expenses to be more in the 43.3% range and kind of holding in that range as we go forward.

Okay. So it's more than just the single line item there.

That's exactly right.

The health center idea in Taiwan sounds interesting. Have you ever tried that anywhere else in the world, and is this viewed as a Taiwan-specific initiative or potentially something that could be broader based?

We have not tried it anywhere else in the world, and so far we're very pleased with the impact of this center. But it's kind of a unique geography, as well. I mean, Taipei, obviously, heavy concentration of people and affordable real estate. And typically throughout Asia that combination is hard to find. So I don't know that this is going to be a model for us outside of Taiwan, but we like what it's doing for us there.

Okay. And, Truman, on the cost savings, it looks like at a $4 million run rate for the quarter, it is coming through as expected. But how would you address concerns that it may have impacted revenue growth rates as well?

You know, our sense is that the restructuring that we've done here really hasn't impacted the top line negatively. The primary goal of our restructuring was, in fact, to drive the top line positively by making sure we're in alignment and really enjoying some organizational clarity and initiative clarity. And so I really think that -- I think that our transformation is going to positively impact the top line and not negatively impact it.

Terrific. Thanks.

Yes. And let me, with that, just make a quick concluding remark and thank you all for joining the call. As indicated in our release, and, as we've discussed this morning, we are aggressive buyers of our own stock. And there are a lot of reasons for that. We like the S2. We like the ProDerm. We like g3. We're very comfortable with other products that we have in the pipeline that you'll be hearing about as things unfold over the next year.

We have tremendous upside in China. We have a lot of geographic upside in other geographies, including the U.S. and South Korea and Eastern Europe. We're very focused on converting unprofitable markets to profitable markets or to significantly lower losses, lower levels of investment, in 2007. And we're using our balance sheet to promote shareholder value.

So we're buyers of our own stock, and we appreciate your continued support. We're focused on becoming the world's leading direct selling company, and we feel that we're on track to do so. We look forward to seeing you all on November 30, and, if you have any questions in the meantime, you know where to find us. Thanks a lot.

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