如新 (NUS) 2006 Q4 法說會逐字稿

Good morning. My name is Lynn and I will be your conference operator today. At this time, I would like to welcome everyone to the Nu Skin Enterprises fourth 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). Mr. Allen, you may begin your conference.

Thank you and good morning. We appreciate all of those joining us today on this conference call and listening over the Internet. With us on the call today are Truman Hunt, President and Chief Executive Officer; Ritch Wood, Chief Financial Officer and Dan Chard, Head of Global Sales. 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 a complete discussion of risks associated with the forward-looking statements and our business. I will now turn the time over to Truman.

Thanks, Charlie, and good morning everyone. As you have seen from our earnings release, we posted solid results in the fourth quarter. We are pleased to have exceeded guidance for the quarter and to have concluded a year of restructuring on a positive note. And, we see the positive momentum generated in the fourth quarter carrying forward in the beginning of this year which bodes well for a solid 2007.

During the quarter, we were pleased with strong results in South Korea, the United States and Europe in particular. These markets are becoming increasingly important contributors to our revenue profile. Additionally, as we continue to take steps to become more profitable, our efforts to streamline our business and control costs are beginning to pay dividends. In the fourth quarter we, also repurchased approximately 3% of our outstanding shares as part of our ongoing share repurchase program. All of these figures factors considered, we are headed in the right direction.

I want take a minute talk about a few of our markets specifically. In Japan, our largest market, we saw a year-over-year revenue trend improvement in both the third and fourth quarters. We anticipate this trend will continue as we see positive impacts from our turnaround plan that includes promoting g3 nutrition drink, emphasizing our differentiating tools, like the S2 scanner, as well as a renewed focus on our Nu Skin brand with the launch of a new anti-aging skin care treatment in the first quarter of 2007.

As you know, our Skin Care business has slowed a bit in Japan over the past three years as a result of attention diverted to Pharmanex and the scanner program. Consequently, our turnaround plan for Japan requires that we build the Personal Care category. The plan also calls for us to focus more of our resources on product development specifically for Japan. These objectives are reflected in the first-quarter launch of an advanced skin care product called Beauty Essence Duo. The launch will refocus attention on the Nu Skin category and help us stabilize Skin Care in the face of what has been so much attention on Pharmanex.

Turning to the United States, we very much like what we're seeing in this market. All three of our brands are growing at a healthy clip. The scanner, g3 and LifePak Nano continue to drive Pharmanex, while the launch of the ProDerm Skin Analyzer drove Nu Skin revenue up 28% in the fourth quarter. And our Photomax initiative is also generating a lot of distributor activity and will become more relevant to our U.S. business as the year progresses.

As for China, we've been encouraged by steady month-over-month increases in revenue since we received our direct selling license last summer. The license enabled us to start training the sales force for the initiation of direct selling and we've been able to hold large meetings in Shanghai which previously had been difficult, so we're now able to promote our business and communicate with our constituencies much more clearly and effectively. And of course, just a couple weeks ago, we started to accept direct selling applications in Shanghai.

Now that we're entering a phase where we are running both a government approved direct selling model in parallel with the employed sales model we've built over the past few years, I am sure that there will be some attention focused on our results in both of these categories. We're carefully structuring and integrating our direct selling business model to make it complementary to our existing business model. It is important to remember that the best indicator of our success in China will be our overall revenue results, rather than just results for one segment of our business. So public reports that focus only on the number of direct sellers, for example, will not be indicative of our overall results as we anticipate that a majority of our activity in revenue will continue to come from our employed sales force for sometime because our employed sales representative business model will continue to offer a higher magnitude earnings opportunity and because we are direct selling in only one city currently.

In addition, reports on a number of direct sellers will not reflect productivity within the employed sales force base or activity among what we call our preferred customers. And of course we are also in the very early days of direct selling in China, so we have a lot to learn and a lot to do as we test, refine and expand throughout the country. We remain one of just a handful of companies that have received a license from the central government to direct sell, and as we understand it, we are also one of just to companies that have even been licensed in any of the provinces who actually commence direct selling activities, so we maintain a competitive advantage in that regard.

On the other hand, our expansion into other cities and provinces requires city-to-city and province-to-province licensing processes, which is frankly taking longer than previously anticipated and it is done without a lot of a visibility as to the time line from local government agencies. But, we remain optimistic about the market, about what we're seeing in our business and about what we're seeing in our competitors' businesses. We believe we are on target to meet our previously discussed financial projections and continue to believe that China justifies patient investment.

South Korea has been quietly posting exceptional results now for several years. The fourth quarter was the twelfth consecutive period of significant year-over-year growth in this large market and we anticipate continued strength there. Over the past three years, the European region has steadily grown and is becoming much more relevant to our revenue mix which is evident in Europe's 48% increase in the fourth quarter. This turnaround in our business there was implemented by Dan Chard, which is why I'm happy him focusing on the rest of the world now as well. Some of the growth in the region is due to the addition of new markets, such as Russia and Israel, but it's also the result of very healthy growth in central Europe and in Germany, France, and the Netherlands, in particular. Europe is a large market and one in which we have plenty of room to grow, so we see some upside in Europe as well in 2007.

While we focus primarily on growing revenue globally, we continue to devote attention on business transformation and G&A reductions to reach our operating profit targets in 2007 and in the longer term as well. The business transformation efforts we initiated in 2006 will save the Company in excess of $20 million annually and we continue to look for better ways to do the business. In the fourth quarter, we incurred about $2 million of severance charges relating to ongoing streamlining. In 2007, we will continue to focus our energy on reducing costs, and in particular we expect to make significant strides in reducing losses in unprofitable markets. Europe, for example, required about $5 million of investment in 2006 and with the revenue growth we're seeing there as well as a result of our G&A control, we will be operating at breakeven there by the end of 2007. We're seeing similar progress in other markets that are currently and have historically been unprofitable.

Additionally, we remain committed to using our strong cash flow to benefit shareholders. We took on another $40 million of debt in the fourth quarter to continue our share repurchase program. At year end, we had about $60 million relating on our authorization and we anticipate we will continue to be active in the market in upcoming months.

Looking to 2007, we're gearing up for a solid year and are committed to increasing earnings per share in excess of 20%. Our geographic priorities remain the same with an emphasis on the Japan turnaround and expansion in China, but we're also excited about what we see happening in the U.S., South Korea and Europe. We have good growth drivers on the product side, which include g3 and the scanner for Pharmanex, but we also look forward to the launch of a weight management system this fall in the U.S. This is a category where we are not yet relevant and we need to be. Our markets are calling for a compelling offering in this category and we like how our product line is shaping up.

For Nu Skin, the rollout of ProDerm, the reformulated Nu Skin 180 system and Japan's Beauty Essence Duo will refocus attention on the Skin Care category for us. In addition, a skin treatment device called the Galvanic Spa, which we launched about four years ago, has been the recent impetus for growth in Nu Skin in Europe and South Korea as well. And Photomax, as I indicated, is also generating good distributor activity in the U.S.

So we have good ammunition and we're committed to making sure we use it effectively. I will now turn the time over to Ritch to go over the numbers.

Thank you, Truman, good morning everyone. I will quickly provide the local currency revenue figures for our major markets and again remind you that these numbers and other numbers as well can be found on the investor section of our nuskinenterprises.com web site.

In North Asia, fourth quarter revenue in Japan was 14.1 billion yen, as compared to 15.5 billion yen in the fourth quarter of 2005. Quarterly revenue in South Korea was 30.2 billion won versus 25.1 billion won in the prior year. In mainland China, revenue was 132 million renminbi during the quarter versus 183 million renminbi in the prior year, and quarterly revenue from Taiwan was $780 million NT versus $748 million NT last year.

Hong Kong revenue was $83.6 million Hong Kong compared to $81.1 million Hong Kong during the fourth quarter of 2005, and in North America, the U.S. $39.3 million in revenue. That is compared to $36 million in the prior year after excluding $4 million in global convention revenue to non-U.S. distributors, which happened in the fourth quarter of 2005. Fourth-quarter revenue in Europe was $17.7 million versus $11.6 million in the same quarter of 2005, and finally revenue in Latin America was $2.3 million for the quarter versus $2.1 million in the prior year.

Europe is becoming a more and more significant part of our business, and therefore to provide more transparency, we'll adjust our presentation of the markets slightly in 2007. Rather than including Europe in other markets along with Latin America, we will place Europe as a separate region and combine Latin America with our other market, and that will begin in the first quarter of 2007.

Our gross margin for the quarter was 82.2% compared to 82.4% for the fourth quarter last year. Selling expenses as a percent of revenue were 43% compared to 42.4% for the prior-year quarter. This increase is attributed to the contributed plan changes that we made in Japan in April of 2006. Sequentially, you will notice that selling expenses declined from 43.7% in the third quarter to 43.0% in the fourth quarter.

General and administrative expenses as a percent of revenue were 30.5%. That is essentially level with last year's results. In dollar terms, we continue to make progress in our efforts to streamline our processes. And as Truman noted, we had about $2 million of severance-related expenses that we took in the fourth quarter as we continue to seek efficiencies in our operations. We also had about $2 million of stock option expenses this year not included in the prior-year number. I would also mention that as we proceed into 2007, we've focused a lot of attention on our less profit markets. Primarily, these include China, Europe and Latin America, markets that we believe will be important to our growth in future years, but they have put a strain on our operating margin over the past few years, and particularly in 2006. We see improvement in these markets and the direction that we see happening right now would expect to make good progress in moving these markets toward a profitable position in 2007. We should make good progress in this area.

We paid dividends of $6.8 million during the quarter and repurchased $37.9 million worth of stock, or 2.1 million shares during the quarter. And as of January 1, as Truman mentioned, we have $60 million remaining in our authorized stock repurchase plan.

As we look forward, we anticipate our gross margins will be in the 82.0% to 82.5% range, and we estimate selling expenses to hold in the 42.7% to 43.2% range. Based on the current exchange rate for the yen, we'd forecast the yen to be approximately 1.20 to the dollar here in the first quarter, and in local currency terms, we would anticipate a year-over-year trend improvement to continue in Japan with local currency revenue being down approximately 5% to 6% in the first quarter. Overall, we estimate revenue to be $260 million to $265 million in the first quarter, which would put our earnings per share approximately $0.14 to $0.16.

We reiterate our 2007 revenue projections, that is $1.13 billion to $1.15 billion, as well as our earnings-per-share guidance previously given of $0.88 to $0.94.

So with that direction, we will go ahead and open up the call for questions.

(OPERATOR INSTRUCTIONS). Kathleen Reed, Stanford Financial.

First question, just on your outlook for '07, with the yen I guess moving slightly in the wrong direction, you've revised your currency expectations. EPS is the same and the top line is the same. Can you just tell us what area is doing better do you think to offset just the currency weakness, if it's the U.S. or if you're just seeing better results in local currency growth in Japan, maybe from benefiting from your new product introduction, or if you think Japan could turn positive sooner, or I think it was expected to be flat by the fourth quarter?

We really have not changed anything in our guidance for Japan, Kathy. I think the strength to offset some of the weakness in the yen would come from the markets that Truman highlighted -- Europe, South Korea and the United States. And really, I think we are just really in line. Things continue to operate according to our plan that we laid out at our investor day and continue to move in the right direction. We do have I think a little upside in the U.S., Europe and South Korea to offset any weakness (indiscernible) the other way.

Okay. Then just next in China, can you just about why you think it's taking longer than you had thought in getting the local licenses? Is that a service center issue, is it another type of issue that we are unaware of, and if that changes any of your expectations to have covered 50% of your market I think by the first quarter and 90% by the end of the year?

I think -- I'm concerned a bit that the message we are sending about China today might be a little bit misread, so I want to try to clarify it. You will recall that in November at our investor day presentation, we indicated that we would be launching our direct selling business model in the first quarter in Beijing and Guangdong, in addition to Shanghai. And today, as of today, we think it is more likely that this will push into the second quarter because we simply lack visibility on when the local regulatory approvals will be secured. And this is really just more of a function of the process than anything else. And the fact that we are a bit frustrated here in terms of disability has us a little bit hesitant to necessarily put a stake in the ground again today and say, well, this is for sure going to happen by Q2, and by Q3 we'll be able to open up these additional provinces. So we just don't have great visibility right now on all of the approval processes that are having to be done at the local level. But, we are also really quite encouraged by the stability and the sequential growth that we've seen over the last several months, and so we don't want to send to negative a message here. All we're saying is that implementation of direct selling is going to be spread out perhaps a little bit more than we anticipated in November.

Can you just talk a little bit about what is the licensing difference between the local and the national license? Is it any additional things you have to meet, or is it just you have to once again go through all the paperwork and submit to the local officials?

What we're finding is that at the central level, there is a high level of education and information that has already been disseminated within the central government, so they're just more up to speed on what direct selling is and what the regulations are. And then as you work down into the provinces and then further work down into the cities and even into the district within the cities, there is less and less familiarity with the regulations and with the process. And so, there are hundreds and even thousands of local regulators to educate and get up to speed and make sure that they're comfortable with the degree to which we're satisfying the regulatory requirements. And it's really just that. It's just dissemination and implementation of the regulations at the local level. In Shanghai, for example, there are 12 districts within a city and we have to be licensed essentially within each of those districts separately. So there are just so many layers of government here in this environment that it's just a lot of regulatory hoops to jump through.

Okay. With your comment that you made that you were still one of only two companies that were even allowed to operate as a direct seller, so Avon got their national license and posted some good growth in China yesterday, but the other companies that got a license, I guess the U.S. companies, Amway and Mary Kay, you're still ahead of them I guess in terms of going through this approval licensing process?

That's our understanding, yes. We may not be familiar with the details of all of those companies, but what we're being told is that we're one of two companies that is licensed to actually be engaged in direct selling activities anywhere in China right now.

My last question, just on gross margin in the quarter, Ritch, I think it was a low bit lower than what we had thought, and I think what you had mentioned on your last quarter call that we were expecting 82.5% and it was actually increased year-over-year in the third quarter, can you just talk about gross margin in your fourth quarter?

Yes. I would just mention one or two things. We are starting to feel a little bit of pressure from the exchange rate as the yen weakens, and secondly we had some airfreight expenses as we tried to avoid some stockouts in some of our foreign markets that hit us in the fourth quarter that caused us to be just a little bit lower. That's a temporary, it should be gone away. I think I was a little more conservative in my guidance primarily due to what is happening with the yen being a little bit weaker.

And the guidance that you gave for gross margin was for the quarter, not the whole year, right, the 82 to 82.5?

Yes, it should be standard for the year as well, though.

Thank you very much.

Doug Lane, Avondale Partners.

Ritch, can you straighten me out on the P&L items, the '06 versus '07, three in particular? One, you mentioned you have $20 million in annual savings beginning in '07 from your restructuring over the last year or so. How much of that did you realize in '06?

We realized about $15 million or so. As you look at our financial statements, it's hard to factor it all out, because we ended up adding approximately $10 million of stock option expense during the year, and then we reinvested some back into Japan, particularly with some advertising initiatives. So overall, about $15 million of the $20 million in annual savings was realized in 2006. Again, some was reinvested, some was offset by stock option expense in the year.

Will that reinvestment in Japan recur in '07, or are you looking at that as a onetime thing?

No, I would anticipate to continue to spend at about the same level in Japan this year as we did last year.

Okay. And then Europe is getting bigger. This was a separate issue of just through scaling your infrastructure going from a $5 million loss to a breakeven. Is that correct?

That is right.

And then the third one, you mentioned a $2 million restructuring charge in the fourth quarter?

I would probably say it this way. We had about $2 million in expenses related to severance, primarily activities as we seek to try and continue to find efficiencies. So that really related to some people that we let go here again here at corporate. We'll continue to try and find efficiencies as we go forward. We're not going to catch those as onetime expenses. We committed to really doing the onetime expense last year in the first quarter. We just highlight that to show that we continue to make progress in terms of reducing our G&A going forward.

So, there's $2 million more of G&A that is included in that $0.23 number that you reported in the fourth quarter that should not be repeated in next year's fourth quarter. Is that the way to look at it?

That is correct.

Okay, thank you.

You bet.

Olivia Tong, Merrill Lynch.

Regarding China, are you guys on plan with your service center buildout outside of Shanghai?

Yes, we are. We have been able -- that has not been the holdup for us. We've been able to fulfill the requirements, and that is on track.

So it's more of just not understanding how long of a timeline would be necessary in the buildout, rather than anything on you guys' side?

Yes, it's not the infrastructure buildout, it's the regulatory requirements, the government sign-offs. A lot of, as Truman described, need to go to the city and local level government to get the final approval.

What gives you confidence that by Q2, this will start turning around?

Well, every city and every district that we work with, I mean they are getting better at the process. They're getting a greater understanding and we're getting a better feel for how long it takes them to go through the process. We have a large and capable group of government affairs employees who are working with them, and as they get more comfortable with the expansion, they seem to move at a more predictable rate.

Got it. And just looking for some color on the quarterly flow of earnings in '07. I was wondering if there's anything that's particularly hitting Q1 or it's just greater visibility on the near-term, because Q1 looks like the easiest comp of the year, and if you just do the midpoints, it looks like you're expecting a pretty decent sized plus-20% year-over-year in Q2 or Q4. So I was just wondering if you could give some granularity on quarterly flow of earnings from this year.

The first quarter is always our lowest quarter in terms of revenue for the year, and then it builds from there. So we still anticipate -- I think we are $0.14 last year in the first quarter, anticipate being $0.14 to $0.16, and we would probably guess at the higher end of the range would be where we would anticipate landing. Throughout the year then, our revenue jump second and third quarter. We do have a convention in the third quarter which adds a little bit of the expense, so we would anticipate our earnings being fairly similar in Q2 and Q3, possibly a penny or so lower in Q3, and then Q4 is always our largest quarter, I would expect our earnings to jump higher in Q4. And so, is that enough clarity in terms of what you're looking for?

Well, I was just thinking more on a year-over-year basis, rather than sequentially through the year, because it looks like you have a $0.14 comp on Q1, looking at $0.14 to $0.16. If you just back out what you are expecting Q2 through Q4, it looks like you're using midpoints, that you're expecting 23% year-over-year growth in Q2 through Q4. I'm just wondering what you're seeing in Q2 through Q4, other than the convention that leads you to believe that 20%-plus EPS growth is the right number for the remainder for this three quarters, the three later quarters of '07.

I actually feel confident with those numbers too. Our revenue will be very close in Q1 '07 to where it was last year. As we go out into further quarters out, we will start to show more revenue growth year-over-year is the way we are modeled out, and therefore, you will see the pickup in the earnings comparisons as well.

Got it, thanks. On Japan, are you expecting to still be negative year-over-year by Q4?

No, I would anticipate that we'd be about even by Q4. I think we kind of out what our plan would be at our investor day, which would be kind of down 5% or so on in the first quarter, cutting a little bit in the second quarter, getting more close to even third, and then being even or slightly ahead in the fourth quarter. We continue to believe we are on track for that as we move throughout 2007.

Got it. One last housekeeping question. What else is in the other line to lead to income this quarter, or during Q4?

There's primarily two things that hit in our other one line. There's interest expense and interest income, and then there is foreign currency translation gains and losses. And those two sum to the number. So we have about a $200,000 gain. That was primarily from foreign currency benefits, translation benefits.

Got it. Thank you very much.

Scott Van Winkle, Canaccord Adams.

A few questions. First, Ritch, on the $2 million you talked about in the fourth quarter and severance, and I don't want to belabor the point, but it sounds like you are saying that it's going to be more of an ongoing type of models to keep streamlining. Do you expect -- obviously not the same level in '07 you saw in '06, but is that just going to continue going forward indefinitely?

We hope that as we continue to refine it, we get closer and closer to where we need to be. So I think our objective is that we continue to improve our processes. We continue to leverage our IT infrastructure. We do everything we can to be more and more efficient as we go forward. And some of those sort of process improvements take some time. So, yes, I believe we can continue to get more efficient as we move forward. I'm not sure that we will have a lot of charges like we did in the fourth quarter, but we do believe that we can continue to find efficiencies in our organization.

And on top of that $2 million in the fourth quarter, was there any amount spent that was already accrued for in the previous charge earlier last year?

No. (MULTIPLE SPEAKERS).

And you mentioned in the third quarter, just to help with modeling, you had the small U.S.-focused one in the third quarter of '06, I believe, and you're going back to the global convention in the third quarter of '07?

Yes. In the fourth quarter of this year, we also had a UF convention that was about $1.7 million. We have those smaller conventions going on regularly. For example, in the first quarter this year, we will have smaller conventions held in Korea and Taiwan and Japan. So those are kind of ongoing constantly. We don't really highlight those because they don't cause our G&A to shift like the global convention does. The global convention is closer to a $5 million to $6 million spend, that's the reason I highlighted that in the third quarter of this year. Truman was going to make a comment.

Scott, just back on the $2 million severance issue. Really, the only reason why we highlighted that was to point out that, had we not taken the service charge in the fourth quarter, you would have seen our transformation efforts yield even more benefit to the bottom line in the fourth quarter, so that is really why we highlighted it.

Truman, on your comments about China not -- it sounded like you were saying not focus too much on distributors, is there something inherent in the switch that is causing not just a big jump in the number of distributors, but more effectiveness than just the distributors you currently have? I'm trying to get exactly where you're going with that.

The point is that we were running parallel business models there, and it's really not going to be a fair comparison to look at whatever public reports might be published on Chinese web sites about numbers of direct sellers signing up in our business versus Avon's, for example. We're operating in eight districts in Shanghai, they're operating throughout the country. And the reality is that the higher-octane income opportunity continues to be in our employed sales model. So most people are going to continue to opt into that program. There will be some who opt into the direct selling program. The benefit of the direct selling program really for us is that it settles the dust on the issue of who is approved to be doing business there and who isn't, and it also gives us the opportunity to engage part-timers instead of having to engage full-timers. But it's not going to be a correct read on what is going on in our business there for some time.

So to clarify, your distributor totals in Greater China includes distributors in China that are part-time, but not the employed salespeople?

No, I think the number that we publish as active distributors will include salespeople too; it does. But the numbers that are published on government sites in China will not include employed salespeople, or preferred customers.

Okay, thanks. And I think I missed the number, did you say it was like 24% growth of the Skin Care business in the fourth quarter in the U.S. -- was that the right number?

28.

28. What was the comparison for the supplement side?

I think it was up 7 or 8% -- 7%.

And that is after you exclude the $4 million in the fourth quarter, sales are non-U.S. So if it was up 8% and you had 7 in Supplements and 28 in Skin Care, where is the balance out there? I think something has to be down.

Yes, it's primarily -- we had some old services that were in our Big Planet division that have kind of gone away, and the reason for the offset there.

Great, thank you very much.

Andy Speller, A.G. Edwards.

I just wanted to follow up on the distributor count within China. For the year, you were down about, I guess fairly significant, and we had thought that that was going to grow pretty significantly in '07. I'm just wondering with your new comments here today, do you still expect significant growth in that distributor, in the active distributor count number, or is it going to be more tempered?

Again, the most important measure of our success in China is going to be revenue, and what we are saying today is that we're concerned that as numbers are published, that highlights the number of direct sellers coming into the business. It's just going to be confusing if people assume that that's really a fair measure of revenue in China because it's not going to be. So, overall, we do expect that our active distributor count in China will continue to compress through 2007, but that revenue will continue to grow at the rate we have projected.

And the reason for the compression in '07 is just lack of visibility in terms of --?

No, the reason for the compression is that there's just going to be a lot of fallout, kind of continued fallout, among our employed sales force who are just frankly washing through the business. There was a fairly high level of speculation going on in the whole direct selling industry previously that led to frankly some inflated numbers on our active distributor count, and a lot of those weak -- or the weak people who came into speculate or whatever are just washing through the business. But that -- as the dust settles and as our core business grows, we will continue to grow our revenue.

I would just mention, Andy, that as we put our numbers, our actives are going to represent the entire business and they should trend in line with our revenue. So those numbers that we actually disclosed publicly, actives and executives, will continue, we would anticipate, to trend in line with revenue just like they do in other markets.

And, Rich, if I could just get in that other line, can you give me what interest expense was as part of that line?

I think it was about $1.4 million.

Would you expect to continue to borrow to finance the other $60 million of the share repurchase, or do you think cash flows can take care of it?

We took on another $40 million of debt in January. That will help -- that will cover basically the $60 million that -- to get us up to the $60 million remaining.

So that was not for the repurchases you did in the fourth-quarter, so that is not reflected in the balance sheet?

That is correct.

So that's the first quarter?

That is right. We took $40 million in October, and then we took another $40 million in January that's not reflected in the balance sheet as of 12/31.

Okay, thank you.

Linda Bolton Weiser, Oppenheimer.

I was just curious, back on China again, if you could describe to us how Amway, for example, is operating there. So if they have the license but they haven't fulfilled other requirements, how are they operating? Because they had a lot of sales, I think about $2 billion of sales. And secondly, is it true then that you and Avon are the only ones actively recruiting reps at this point in China? Thanks.

Well, our understanding is that Amway is essentially transitioning its business model as many other companies are, and that they are essentially in a transition period that the government is cooperating with. They understand that Amway and others need to modify their business models in accordance with the new regulations, and that's what they're in the process of doing. Our understanding is that, as of today, Avon and Nu Skin are the only companies who are currently recruiting direct sellers anywhere in China, and in our case, just in Shanghai, obviously.

So in Amway's case, like the Amway stores that they have, they're still open and operating and serving customers?

Oh, yes.

Okay, thanks very much.

Kathleen Reed, Stanford Financial.

Can you give us a little more information on your new Skin Care launch that you're going to have in the first quarter of '07, specifically for Japan, what it is, what kind of a price point, why it's different than some of your basics Skin Care products?

Yes, I'm happy to, and in fact, I'm going to ask Joe Chang to describe this product for you.

The whole point of launching this new product in the first quarter for Japan is this so-called Beauty Essence Duo. What we have found from our R&D is the fact that there are many great ingredients. Unfortunately, many of these ingredients cannot be mixed together in one formulation for a variety of reasons, the most important being that some are sort of water-soluble and the others are fat-soluble. So when you include both in the same formulation, they tend to separate out. So these new technologies that we are employing in Japan uses two compartments whereby we keep the water-soluble active ingredient in one compartment, and then the fat-soluble ingredient in the other. And at a time of use, when you squirt it out from the bottle, it has two nozzles, they mix directly on the skin so that the actives really remain 100% potent.

So that was the idea and notion behind this particular product. We're selling it at a wholesale price of about 5000 yen, and the amounts will last for about roughly a month, based on the recommended usage. And it's almost an all in one, ranging all the way to addressing the signs of aging, from wrinkles to dryness of the skin and so on, and we have formulated this product particularly for Japan. Culturally, there are differences in terms of skin products. In Japan, they tend to like and prefer a lighter formulation whereby there's less cream or oil associated with the product. So this product, this is the first of its kind that we're launching in Japan where we used this two-compartment technology, and we think it's going to be received very well. I will be in fact going over in March to promote this product when they launch it.

Okay, terrific. And then also, for your U.S., your new weight loss line, what quarter is that going to launch?

We anticipate it, and right now, we're projecting that will be our major focus at our September convention at Salt Lake City where all of our global distributors come in, and we intend to have a good program. It's almost a three-pronged approach. I think I described at the investors meeting last year, whereby we are going to combine meal replacements, some of our more innovative, in fact new dietary ingredients, in the supplement, and then attach it to a behavior modification tool. So that will be our project. We think it's going to be a fairly effective weight management program. So simply put, I think this is one program that will not kill you while you're losing weight.

Okay, great. Finally, can you tell us how many S2s and ProDerm scanners you have in the U.S. market now, and how much Photomax added to U.S. sales in the quarter?

Let me just pull up that schedule. In the U.S., let me just tell you, S2s globally are approximately 3000, and the U.S. number is about 700. That was as of the end of the year. ProDerms, we have right close to 1200, 1150, as of the end of the year. And Photomax was approximately $2.5 million for the quarter.

Thank you very much.

At this time, there are not further questions.

Thank you very much for joining us, everyone, and as always, we look forward to a answering any other questions you have individually. Have a great day.

Thank you. This concludes the Nu Skin Enterprises fourth quarter earnings conference call. You may now disconnect.