如新 (NUS) 2007 Q1 法說會逐字稿

Good morning. My name is Tiara 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. (OPERATOR INSTRUCTIONS) Thank you. Mr. Pond, you may begin your conference.

Great. Thank you. Good morning, everyone. We appreciate all those joining us today and joining us on the call today are Truman Hunt, President and Chief Executive Officer, Ritch Wood, Chief Financial Officer, Dan Chard, Head of our Global Sales, and Dr. Joe Chang, our Chief Scientific Officer.

As a reminder, during this conference call, comments may be made that include some forward-looking statements. These statements involve risks and uncertainties. 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. In addition, during this call certain financial performance measures may be discussed that differ from comparable measures contained in our financial statements. 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 our investor portion of the Company's website at nuskinenterprises.com to find our first quarter press release containing the reconciliation of these measures.

I will now turn the time over to Truman.

Thanks, Scott, good morning everyone. We appreciate you joining us today.

We're pleased to report good progress in the first quarter. As indicated in our release, we were able to exceed our revenue guidance and come in at the top end of our earnings range. And starting the year off on the right foot sets the tone for a solid 2007 and it also keeps us on track to achieve the objectives we introduced at last November's investor day and leads to a modest increase in our 2007 forecast.

The business transformation process we initiated in late 2005 is bearing fruit, both on the top and the bottom lines. Our financial objectives, as we initiated our business transformation, were first to get back to at least 10% top line growth and 20% bottom line growth. And second, to gain efficiencies we seek through a more efficient internal structure, better alignment with our sales force, allocation of resources on the most critical growth drivers, as well as by refining our core business processes.

Our sequential business trends over the past year reflect the progress we're making on both the top and bottom lines. Let me first address our top line results for the first quarter.

Our 3.0% top line improvement can be attributed to improving trends in Japan and China, as well as to healthy gains in South Korea, Europe, Southeast Asia and the United States. Japan posted a better than expected 3.0% year-over-year decrease.

A Japan distributor convention in March positively impacted results for the quarter. We introduced an anti-aging product call Beauty Essence Duo that was specifically designed for Japan. The response to the product has been very positive. In fact, we sold about $1.5 million of this new product in the first quarter.

This effort was designed to bring some attention back to the personal care side of the business, which has waned a bit over the past few years due to sales leader focus on Pharmanex. We also continue to benefit from continued strong demand for g3 nutrition drink and the ongoing rollout of additional S2 Scanners in that market.

We were also pleased to announce recently the hiring of Gary Sumihiro as the new president of our Japan business. Gary brings a wealth of experience to us, having managed the operations of Japan's largest direct selling company for several years. I'm confident that Gary's hiring will be helpful, as we continue to capitalize on the improving trends in Japan. So, all things considered, we're pleased to see continued improvement in our Japan business.

The United States also had a solid quarter, with sales up 6.0% year-over-year. We're seeing growth in all three of our brands, which is encouraging. The ProDerm Skin Analyzer is driving personal care, which was up 19% in the U.S. in the quarter, and we're also starting to see a lot of distributor attention on our Galvanic Spa Skin Treatment product.

The S2 Scanner, LifePak, and g3 continue to be the focus of our Pharmanex brand and Photomax is proving to be an effective tool to attract new distributors and customers.

In China, we generated continued sequential improvement during the quarter. As we mentioned in our last earnings call, the timeline for rolling out direct selling is taking longer than we would like, but we remain positive about our prospects in the mid- and long-term. Since being licensed last fall, we've posted steady revenue increases, which is a reflection of the market stabilizing as the status of direct selling becomes more clear.

We're seeing a steady rate in the number of people joining the business as well, as both independent representatives in Shanghai where we're licensed to direct sell, as well as those joining our employed sales force model elsewhere in the country. We continue to work on securing direct selling regulatory approvals for other provinces and understand that the process is progressing favorably.

In other markets, South Korea continues its strong growth rate, with quarterly results up 26%. South Korea has become a star market for us and continues to hold great upside potential, as it's a market where we still have a lot of room to grow to catch our larger competitors.

Europe also had another exceptional quarter, posting a 48% revenue gain. We're seeing strong results throughout Central and Eastern Europe in particular. Now, as you know, one of our commitments in 2007 is to trim our losses in unprofitable markets and Europe is a reflection of that focus, based on the current growth rate, we expect to be profitable in Europe at the end of 2007. This is significant, because Europe has been a major investment for us in the past several years. A profitable Europe will have a $0.04 to $0.06 positive impact to the bottom line in 2008 compared to past years.

Another example of this commitment to trim our losses in unprofitable markets is Brazil. Recently we elected to restructure our operations in this market, which has also been a significant investment for us over the past several years. We'll continue to provide products and distributor support to our Brazilian distributors, but to reduce costs we anticipate closing our office in San Paulo, we'll narrow our product offering, outsource fulfillment and move our call center operations to our U.S. headquarters.

So, although this will precipitate a restructuring charge in the second quarter of about $0.03 per share, the restructuring will save us about $0.2 per year going forward. And since Brazil only generates about $2.0 million per year in revenue, any negative impact from the restructuring will not be material to our overall results.

Okay, turning to the bottom line, our efforts to operate more efficiently are becoming more apparent. We made good progress in Q1 despite significant convention expenses around the world, as we push towards our goal of a 12% operating margin within the next three-year timeframe.

As a component of our business transformation, we also remain focused on improving shareholder value. As part of this effort, we used $46 million to repurchase about 2.7 million shares of common stock in the quarter and over the past year, we've repurchased more than $110 million of our shares outstanding, which is another reflection of our belief in our future.

Looking at the remainder of the year, we feel comfortable with our 2007 objectives. Our geographic priorities remain Japan, the United States and China, but with South Korea's growth we now add that market to our key market priorities. We're also pleased to be back on track in Southeast Asia and look to this region in Europe to play an increasingly important role in our global revenue mix.

We're also ramping up for our global distributor convention this September. The major growth initiatives for this event include a second generation ProDerm unit. And we also plan to introduce a comprehensive weight management system, which is a compelling category we've not yet penetrated to any great degree, and we'll also introduce other proprietary products in nutrition as well as personal care.

You should also expect to hear us talking more about the Nu Skin Galvanic Spa system, which has become a catalyst for growth in Europe and is now catching on in other parts of the world. This is a treatment device that emits a very low-level electrical current into the skin that when used with the proper topical gels can show a dramatic reduction in lines and wrinkles. Although this system has been in our portfolio for a few years, our sales force has recently managed to use it as a very effective sponsoring and customer acquisition tool.

So overall, we're confident with the direction of our business and we're optimistic about 2007. So, with that, let me turn the microphone over to Ritch.

Good morning, everyone. I'll first provide the local currency revenue figures for our major markets and remind you that these are found also under the investor section of our corporate website.

For the North Asia region, first quarter revenue in Japan was JPY12.7 billion, compared against JPY13.2 billion in the first quarter of 2006. Quarterly revenue in South Korea was KRW31.2 billion versus KRW24.8 billion in the prior year

In the Greater China region, Mainland China revenue was CNY136 million during the quarter versus CNY159 million in the prior year. Quarterly revenue from Taiwan was TWD689 million versus TWD713 million last year. And Hong Kong revenue was HKD81.8 million compared against HKD78.7 million during the first quarter of 2006.

In the Americas, the U.S. posted $37.7 million in revenue and that compared against $35.7 million in the prior year and Latin America reported revenue of $2.2 million this year versus $2.0 million in the prior year. And finally, in the Europe region, first quarter revenue was $18.5 million versus $12.5 million in the same period of 2006.

Our gross margin for the quarter was 81.5%, as compared to 82.3% for the first quarter last year and slightly lower than we had anticipated. This reduction is due, in part, to the continuing strength of the U.S. dollar against the Japanese Yen, but also impacted in the quarter negatively by additional freight costs, primarily air freight costs in the first part of the first quarter. We do not anticipate these air freight costs to continue into the second quarter at the same level.

And also during the quarter we had higher than expected sales of low margin sales aids at our distributor convention, which also negatively impacted our margin in the first quarter.

Our selling expenses as a percent of revenue were 42.6%, compared to 42.3% for the prior year quarter, but on a sequential basis these selling expenses improved from 43% in the fourth quarter of 2006. Selling expenses were slightly lower than we had anticipated, due primarily to higher than projected sales of non-commissionable sales aids at these same distributor conventions.

G&A expenses as a percent of revenue were 32.5%. That's down from 33.9% or a 140-BP improvement over the prior year and we're making steady progress in reducing our overhead costs and then taking some of those costs and refocusing spending on initiatives that will drive the business growth forward. Truman discussed our efforts in Brazil, which tie directly to our focus on improving profitability in our Company.

We're establishing internal plans to improve our operating margin to 12% over the next three years. A key step to our success will be our ability to reduce losses in unprofitable markets and these are markets where we feel we have great future growth opportunities. So we've determined to make investments in such markets and they include markets like China, Europe, Eastern Europe and Latin America.

We discussed our intent to become more profitable in these regions at our investor meeting in November and we're seeing nice growth and feel like we're on track with our plans in all of these markets, with the exception of Brazil. And here, our pathway to profitability seems just a little too far on the horizon and for that reason we've decided to redesign our operations there. Overall, this is the right long-term decision for the health and overall profitability of our business.

During the quarter, we paid dividends of $6.9 million and repurchased $46 million worth of stock and that equals approximately 2.7 million shares. And as we look forward, we anticipate our second quarter gross margin will improve and be in the 81.8 to 82.2% range.

We estimate selling expenses to be in the 42.6 to 43% range and anticipate expenses, again associated with Brazil, to be approximately $3.0 million or about $0.03 per share and relate primarily to severance costs, lease termination fees, fixed asset write-offs, tax payments and other associated costs. And we would anticipate that these expenses will be primarily confined to the second quarter.

We expect this restructuring effort will benefit the last half of 2007 by $0.01 per share and then future years by approximately $0.02 per year.

We've modeled the Yen at 119 to the dollar for the second quarter and anticipate it to be in the $285 to $290 million range for revenue. Excluding expenses in Brazil, we would expect second quarter EPS to be $0.23 to $0.25 or including those expenses related to Brazil, $0.20 to $0.22.

I'm very pleased with the progress against our 2007 objectives. We laid these out to our shareholders in November and expect to be accountable for our progress against these commitments. Again, these objectives can be found on the investor section of our website.

But given the slightly stronger than expected revenue in the first quarter, we're increasing our annual revenue estimates to a range of $1.145 billion to $1.16 billion for the year. And we project annual EPS to be in the $0.89 to $0.95 range, when excluding the charges for Brazil, or $0.86 to $0.92 when including these anticipated charges.

So, just to try and reconcile our guidance, we were previously at $0.88 to $0.94. We reduced the guidance $0.03 for the restructuring expenses in Brazil and then added $0.01 for the last half of the year benefit that we'll also get from the restructuring in Brazil and that's the way our guidance falls out at this point in time.

With that, we'll open the call up for questions.

(OPERATOR INSTRUCTIONS) Kathleen Reed, Stanford Group.

First a question on China. Can you just talk a little bit about if you're still on track for 20 to 25% growth in China and just give a little more color on where you stand in terms of local licenses? I think on your previous quarter call you had made some good progress in certain provinces and if you could just give us a little more information on that?

Right. Thanks, Kathy. We are satisfied with the overall direction of our business in China and have been pleased, as we indicated, that since last fall we've seen a real stabilization in our business and even sequential improvement. So we are on track with China. We continue to believe in the upside of China and continue to feel that it's just a matter of time until we really have an opportunity to run there,

We're also confident with the overall 2007 objectives we articulated in November. The question of whether China will be 20 to 25% growth in 2007 is, frankly, hard to predict. That could happen, if we get our regulatory permits in place. But even if it doesn't, we're still confident with our 2007 numbers, because we're seeing higher than expected growth in South Korea and Europe and elsewhere.

So we do have some visibility on the licensing process in other provinces, but, frankly, we don't have total visibility and the process is largely out of our ability to control. So rather than establish fixed expectations on when the additional licenses will come in place, we prefer to just remain silent on that for the time being and then we'll notify our shareholder base when those approvals are received. But there is no reason for us to believe that we are off track with respect to securing additional approvals.

Just, I guess, from your fourth quarter, which you talked about in February, to now, can you just, I guess you don't have to go through specific numbers, but can you just talk about additional provinces that you may have started to gain local licenses?

Well, the two provinces that we're focused on next are Beijing and Quangdong Provinces and I'm not sure that I understood your question there, exactly, but those are the two we expect to be licensed in next. And once we're licensed in those two areas, we will have covered 50% of our existing revenue base with direct selling licenses. So those are our priorities and we're on a favorable track to be licensed in those two provinces.

Okay. What I meant was, on your fourth quarter call you said that you had 8 out of the 12 in Shanghai. So I was just wondering if you were -- you had them all in Shanghai and now you're starting these other ones.

We are in the same situation in Shanghai we were on the last call.

Okay, great, and then just on gross margin, Ritch. If you can just talk a little bit about the freight charges also were a negative in your fourth quarter and I think you had mentioned at that time that we didn't expect any additional air freight charges in 2007. Can you just talk a little bit about that, like if it was for out-of-stocks or is it fuel expense or what the issue is or it's just because your sales were so high in South Korea and some of the other areas?

Part of it was sales adjustments and a mis-forecast. The other part was just some supply issues and because of that, we needed to air freight some products so that we wouldn't stock out. It's not so much associated with fuel costs and those costs really seemed to be over for the most part by the end of February. So we don't anticipate them going forward into the second quarter.

Okay and lastly, can you just break out how much Photomax was in North America?

Photomax accounted for about 10% of our U.S. sales, so right around $3.5 million.

Okay, thank you.

Olivia Tong, Merrill Lynch.

Hi, good morning, just want to talk a little bit about operating margins. You guys had said 9.5% operating margin for the year, I believe, at your analyst meeting and now you're saying 12% over the next three year time horizon.

First, is that 9.5% target still a right way to look at it and then, if that is, with Q1 only being up 20 BP and you've got savings from restructuring coming through, how are you pacing towards that 9.5% target?

And then also, with the benefit from savings this year you've got a little bit of push for this year. After that, you're still looking for 250 BP over the next two years. Wondering what's going to drive that increase. Thanks.

Yes, you bet, Olivia. Hi. This year makes it a little tougher, because we started out a little slow in the first quarter, again hit primarily by our gross margins being a little bit lower than we had anticipated. So we've got ground to catch up as we got throughout the year.

We look at things really in two pieces. We look at our contribution margin, which is sales less cost of sales and distributor incentives. That came in at about 39% in the first quarter. We need to push that to 40%, so we've got to get a little more benefit in the gross margin line, have our distributor incentives come down just a little bit.

And our goal, in order to get to the 12%, is to reduce our operating costs, our G&A costs to 28% and we have specific plans that we're putting in place that involve all of our markets. It involves all of our support functions here at our corporate headquarters and we're committed to pushing towards that. It requires us to be more effective, use technology more efficiently, tighten down supply chain procedures.

And I think we're really on good track. I think we've got good commitment. We have good alignment in terms of our management and we're focused on moving to that direction.

Okay, but are you seeing anything in Q2 through Q4 different, as far as the cost structure versus your previous expectations?

We will continue to receive some benefit on the G&A line, particularly. The first quarter, we actually spent quite a bit on distributor conventions. Some of that goes away in the second quarter and will not be repeated then, but will have the Brazil expenses.

So, I think, as we go throughout the year, you'll continue to see us, number one our gross margin should improve a little bit from where it was here in the first quarter and then secondly, we should be able to continue to gain benefit on our G&A line. And so you'll see our operating margin improve throughout the year.

All right, thanks, and then on gross margin. Can you sort of quantify those three drivers, the freight, the lower margin mix? And also it looks to me like mix was the biggest. First, is that right and if that's the case I assume that'll be the case also in Q3 when you have your U.S. convention?

Yes. Typically, the U.S. we kind of -- we've done that enough times that we can kind of factor in where that's going to be and give guidance that's a little closer. In the first quarter, it's about 25 BP reduction in our gross margin for the sales of sales aid items and just over 20 BP for the air freight.

Great. Thanks a lot.

Tim Ramey, D. A. Davidson & Co.

Good morning. I'm impressed with the consistency in the rate of share repurchase, Truman. Have you talked about or would you care to comment on the leverage that you'd be comfortable putting on the balance sheet to continue your share repurchase?

Well, as you know, Tim, we historically have been a fairly conservative company in that regard. But we have become convinced and our board has become convinced, over the course of the last 18 months, that buying our shares back is a good use of cash and have been willing to incur some debt in that regard.

We really are just beginning our board discussions with respect to where we go from here and so it would probably be inappropriate for me the characterize how our board will feel about this going forward. But we're very satisfied with the shares that we repurchased to date and as a management team would endorse further share repurchase programs.

Okay and then just a question on currency impact. It was perhaps a little bit less than I thought it would be. Were there hedges in place that gave back some of that impact or could you care to comment on the currency impact for the next couple?

Yes. I can just comment briefly, Tim. In the first quarter we didn't see a lot of impact, even though we were impacted by the Yen. The Yen last year was in the 116 for the average and this year 119, so we lost about 2.5% or so from the Yen, but we had some strengthening up in some other currencies such as the Chinese Yuan and the South Korean Won to Euro. So together they kind of netted out.

As we go throughout the year, you know last year the average Yen was 116.3 and I've modeled for this year about a 119 Yen. We initially talked about 118. The Yen is a little weaker than what we had anticipated at the beginning of the year, but it's hard to say. Most of the banks continue to reflect a forecast somewhere in the 115 to 118 range. We've kind of modeled 119 for the second quarter, somewhere in the 118 to 119 for the last two quarters of the year.

So I don't think we'll see a big currency fluctuation or impact one way or the other, for positive or negative. We don't have a lot of hedges in place at this point in time and so we're not expecting a real benefit or a negative impact from those either.

Terrific and can you give us any more color on your new management in Japan? What's -- any specific initiatives that are underway there other than further deployment of the Scanner and so on?

Well, Gary is just getting his feet on the ground. He's been with us now for about three weeks, the first week of which we spent as a management team with our team distributor leaders from around the world on our annual sales incentive trip.

I can tell that the good news is that our sales leaders have had a very positive initial reception to Gary, which is very encouraging and as he goes about planning the remainder of the year for Japan, really planning 2008, he's just getting started in that process. But this is a very capable guy who we're very fortunate to secure.

Great to hear. Thank you.

Scott Van Winkle, Canaccord Adams.

Hi, a couple of questions, first following up on the earlier question about reaching the 12% margin in three years. Is there anything else incremental you have to do from here on the restructuring side or are you -- to kind of set yourself up with this most recent move?

The big components, Scott, are getting profitable in China, which is a big investment for us this year and was in 2007. Trimming our losses in other unprofitable markets in Europe is the biggest, has historically been our biggest, most unprofitable market over the course of the last 10 years. So getting profitable there is very positive and those are really the big factors, don't you think, Ritch?

Yes. I totally agree. I think here at corporate, we feel like there's a lot of efficiency that we can gain through streamlining our functions, particularly using technology better and continuing to be more effective and efficient as we grow our top line. And so I think those are the key factors that we'll be focusing on around the world.

Every one of our markets have specific goals that they're working towards, in terms of profitability in their business, particularly managing their cost structure. And so we've just got a real good alignment, I think, in these areas. So I think we've made the big -- the big whack was made last year and now it's refining and improving.

And I would just add to that, that the thing that makes this realistic is the fact that we've been at a 12% operating margin in the past, so there's no reason why we can't get back there.

Got you and then moving over to China and the questions about expanding into other provinces in the future and I understand you have limited visibility and it's certainly out of your control. But is there anything you can let us -- give us a glimpse as to what the monitoring process is? I would assume that this is a test for a lot of companies and they'll be monitored and then a determination will be made as to where the expansion occurs. So is there anything you're aware of or you can talk about where monitoring is happening of new companies with new licenses?

Well, I would just say, Scott, that the thing that probably caught us by surprise a little bit in the last few months is the notion that additional province licenses would be issued over a period of time, rather than in a relatively rapid sequence.

For us, that was a little bit of a surprise. But I think that the government is being fairly consistent with us and with other direct selling companies in this regard in making sure that they're comfortable with how companies are operating, once licensed and where licensed, and then expanding their rights from there.

And do you have any idea or thought as to -- I'm sure you have an idea, but can you share your thoughts on how being limited in one province or one geographic region, and in any country for that matter, limits your ability to expand in direct selling? I would assume those in Shanghai may have their core relationships in Beijing. And is that the most difficult thing when you open up in one province of a very large country, is you're really limiting that friends and family network of the direct sellers?

Yes and I would characterize the biggest issue as simply (inaudible) sales force. It's really hard for them to know how to present (technical difficulty). They do it in (technical difficulty) a totally different fashion. (technical difficulty) So, as soon as we're able to really have a consistent sales pitch (technical difficulty).

Operator, next question?

Doug Lane, Avondale Partners.

Sorry, good morning, everybody.

Good morning.

Just a couple questions on some of the smaller markets, one on Europe, which you're breaking out separately now, showing really strong growth. Can you put more color on your strategy there and any kind of metrics you could give us on how big you think that market could be, near-term, in a year or two years, something like that? And how you're going after that growth and then, on the other side, with the write-off from Brazil, does that really change your strategy about pursuing Latin America very aggressively?

Doug, I'm going to have Dan Chard address that.

On the question on Europe, Europe has generated the growth that you're seeing through two things. One is largely alignment of the continent behind some specific sales strategies and we've been able to unify our sales force. We anticipate that we'll continue to see strong growth. We have a lot of competitors who do extremely well there and we anticipate that we will continue to grow our share of Europe.

We've also achieved some of that growth through expansion. We've identified some ways to expand in a very low-cost manner in Eastern Europe with Hungary and Romania being the two most recent openings and we'll continue to expand in Eastern Europe and where we find that our model works very well. And we're establishing more leaders.

In terms of Latin America, we anticipate that we'll continue to identify ways to grow those markets, despite some setbacks in Brazil.

So it's not signaling any kind of retrenchment there or refocus of resources out of the continent?

When you look at Brazil, Doug, Brazil is a very interesting market, because its one of the top five direct selling markets in the world. But it's also the only major market in the where our form of direct selling, which, as you know, is fairly high octane in terms of income potential, has never really caught on. And elsewhere in Latin America, Mexico specifically and elsewhere throughout the region, multilevel marketing companies have been very successful in many environments, but for whatever reason, Brazil has been tough for virtually all multilevel marketers.

So we decided to take a step back here for a moment and reduce our losses and get creative on what we're going to do from a business model standpoint in Brazil to really have that market make a difference for us in the future.

Okay and then in Europe, is most of the growth there Eastern Europe, former Soviet Union, sort of an Oriflame strategy or how would you differentiate maybe yourselves from what Oriflame is going to market.

No, we have a very strong growth. We separate -- we look at North Europe, which is our Scandinavian markets, where we still have been posting very strong growth. Central Europe we're still posting very strong growth, with Germany leading the way. Germany is now our biggest market in Europe and we've now expanded also into Switzerland. France is doing very well. So the largest portion of our growth is actually coming from markets where we already are doing business.

I see. Okay, thank you.

Kathleen Reed, Stanford Group.

Oh, thanks, just two little quick ones. First, can you just give us the breakout between interest expense and interest or other income in the quarter?

Yes. I think interest expense was about $1.8 million for the quarter and interest income about $700,000, so the net impact was pretty much interest expense in the other income line.

Okay and how much money do you have left on your share repurchase program?

$15 million.

Okay, so in the current environment - and I know you said you're still in preliminary discussions with your board - but is share repurchase still considered a productive use of cash and we could expect, I guess, to see another share repurchase program announced?

I think Truman hit it on the head saying that that's a discussion item that we need to have with our board. At this point in time, $15 million isn't a lot remaining, so we really need to determine our strategy going forward at this point in time.

Okay, great. Thanks.

Olivia Tong, Merrill Lynch.

Hi, thanks again. What drove the upside in Japan? Was it broad-based or was there one particular initiative or a couple of specific things that drove it?

No, it's really a couple of things. Number one, our g3 product has been very well received there and our sales forecasts have really been exceeded after the launch of that product.

But secondly, as we indicated in our initial remarks, the Beauty Essence Duo product that was developed specifically for Japan has helped turn attention back to the personal care category. And it's the personal care category, you'll recall, Olivia, that has really suffered over the last couple of years, as the attention shifted Pharmanex's direction.

So, as that erosion has stopped, it's just -- and the March convention that we had generated a lot of enthusiasm. Those are the big factors.

Okay. Thanks and then in Shanghai, did you say the distributor growth in Shanghai was similar to the rest of China, with the year-over-year change in distributors was similar in Shanghai versus the rest of China?

We didn't really talk about the specifics in our distributor growth. What's happening in Shanghai right now is a transition to our direct sales model. So we have -- with each sequential month, the amount of direct sellers under the new direct selling program and their share of volume is increasing.

Okay.

And let me just comment a little bit of Shanghai specifically, because since we were licensed in Shanghai and initiated direct selling in January, we have enabled people to come into the business in either the direct selling format or the employed sales force format.

And because we have enabled both models in that market, there's been some confusion, A, but going forward and beginning in the month of May, we're really going to be pushing initially into the direct selling model so they'll virtually no longer have that choice, as of May 1st. And we'll be funneling people into the direct sales model, which we think will help kind of clarify some ambiguity and channel people down a certain path.

But the fact that we've been running both models has been a little bit confusing in Shanghai in the first quarter.

Okay. How are you going to go about sort of pushing people into the direct selling model? I guess through marketing promotions?

Well, I mean, it's not necessarily pushing people into it. We have our sales employee model, which we'll continue on and that essentially is the long-term opportunity for people who come into our business in China. But they have the benefit of been able to join our Company as a part-time opportunity versus full-time, with the direct selling model and we are using marketing efforts.

We're using Shanghai as, really, our test case and we've been advertising in Shanghai and very successful driving people with our more open meetings, so business meetings. We had our biggest meeting ever in China in the month of March and we continue to find ways to drive the business forward with the benefits of the new regulations with the direct selling and being licensed in Shanghai.

So we anticipate that those benefits will be able to carry through the rest of the country, as we receive approval, then, to expand that model.

Okay and then just lastly. Sorry, I missed it, but Ritch could you give me the gross margin target for FY '07 again, please?

Yes. I just gave, actually, for the second quarter, which was 81.8 to 82.2. Let me just tell you kind of what I'm looking at for the year real quick. Yes. It should be right around the high 81% range for the year between 81.8%, 82% for the year.

Got it. Thanks very much.

You bet.

Thank you, Olivia. And let's conclude the call and thank you again for joining us today. We want to just reiterate that we're pleased with the direction of our business and we'll continue to pursue the strategies and execute the tactics we articulated last November, which we're confident will result in a very positive 2007.

Thanks for joining us, everyone. Have a great day.

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