如新 (NUS) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Q2 2007 Nu Skin Earnings Conference Call. My name is Mike, and I'll be your operator today. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's call, Scott Pond, Director of Investor Relations. Sir, please proceed.

Thank you. We appreciate you joining us on the call this morning.

With us today are Truman Hunt, President and Chief Executive Officer; Ritch Wood, Chief Financial Officer; Dan Chard; President of Global Sales; and Joe Chang, President of Product Development.

During this Conference Call, comments may be made that include some forward-looking statements. These statements involve risks and uncertainties, and 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 these risks.

In addition, during this call, certain financial numbers may be discussed that differ from comparable numbers contained in our financial statements. We believe that these non-GAAP financial numbers 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 for a reconciliation of these non-GAAP numbers.

With that, I'll now turn the time over to Truman.

Thanks, Scott. Good morning, everyone. And again, we appreciate you joining us today.

As our press release indicates, we had a solid second quarter and are encouraged by the overall progress of our business. As you may recall, we increased our 2007 guidance after reporting strong first quarter results. Our second quarter results fell within this revised guidance, despite the fact that the actual Yen exchange rate for the quarter was 121 to the dollar compared to our projected 119, which cost us about $2 million on the top line.

In addition, when you exclude the $0.03 in losses and restructuring charges associated with closing our offices in Brazil, our earnings per share would have been $0.24 for the quarter. This represents 20% growth over the prior-year period as a result of increased revenue and improving operating efficiencies. So based on the direction of our business, we expect to see continued revenue and earnings growth for the remainder of the year.

We're particularly pleased with our results in the U.S., South Korea, Europe and Southeast Asia, where we posted double-digit revenue increases in the quarter in each of these regions. Our business in each of these markets has grown -- has the potential to be significantly larger in size. And as these markets grow, we're becoming less dependent on any single market, as well as becoming less vulnerable to currency flucutations.

In the United States, we reported 12% revenue growth, fueled primarily by significant gains in our personal care line. The restaging of the Galvanic Spa System II and the impact of the ProDerm Skin Analyzer led to a 36% increase in our personal care business during the quarter.

We also see continued enthusiasm for our nutrition initiatives. Our nutrition business grew about 2% in the United States during the quarter, with good attention on the upcoming launch of our weight management program in the U.S. So consequently, we expect to see double-digit growth continue in the United States in the second half of the year.

South Korea, which is now our third-largest market, generated 17% revenue growth in the quarter. This is against a difficult comparison in Q2 of last year, when we generated significant revenue growth with the launch of our g3 nutrition drink. I would characterize South Korea as perhaps our most stellar market. We anticipate the current rate of growth to continue throughout the second half of the year.

And when we look at the size of our business versus the competition, we also see a lot of upside potential in South Korea in the long term. Our success there has justified additional infrastructure investment. So last week, we opened a new state-of-the-art walk-in center in Seoul, which we're very happy with. And we continue to raise the bar for our expectations in this market.

Europe also continued healthy double-digit growth in the quarter, with a 27% year-over-year increase. Growth is happening in virtually all regions throughout Europe. As you know, operating in numerous European markets has been a costly proposition for us. Over the past 10 years, Central Europe in particular has been very costly, representing between $0.05 and $0.10 per share in losses on an annual basis. With our continued focus on achieving operating efficiencies, and with three consecutive years of growth in the region, we're now on target to be profitable in Central Europe by the fourth quarter of this year.

Reducing losses in unprofitable markets continues to be an area of focus for us. Further evidence of this is the recently completed closure of our offices in Brazil. Although this cost us $0.03 in the second quarter, we expect to see savings of approximately $0.02 per year going forward.

We're also encouraged with the trends in Southeast Asia, which continue to show improvement, with double-digit growth in the second quarter. In addition, Hong Kong and Taiwan also had solid quarters, with 2 and 4% revenue growth there. Growth in Southeast Asia, and in Taiwan in particular, is being driven by effective marketing of our TRA weight management products.

Nutrition is the stronger category for growth right now in Taiwan. And in fact, weight management now represents nearly 20% of Taiwan sales. The weight management initiative in Taiwan is very integrated, with the BioPhotonic Scanner, as the core component of the TRA program is Life Tech, making the TRA marketing effort very complementary with Scanner emphasis over the past three years. As you know, during the quarter we also announced management changes in Japan and China. While the new management teams need some time to formulate and execute their plans, we're confident that these management [teams' management] changes will be positive in the mid and long terms.

In April, we appointed Gary Sumihiro as the new president of our Japan business. Gary's experience and knowledge in the industry will be very valuable, as we work to rekindle growth in Japan. He brings a wealth of experience, having participated in the management and operations of the largest direct-selling company in Japan for more than a decade. Gary has the right skills and the right experience to help us meet our goal of becoming the premier direct-selling company in Japan. So our expectation for Japan at this point is to see trends improve in the second half of 2007.

In June, we also made a substantial change to our Greater China management team by appointing Andrew Fan as president of the region. Andrew is a seasoned business leader and has a great track record of success with Nu Skin Enterprises. He's a Hong Kong native and was a large contributor to our success in Hong Kong. In fact, I believe he was our first hire in Hong Kong, now about 17 years ago. Most recently, he was President of our Southeast Asia Region, where he led a turnaround of markets in this region. He's as passionate a leader as we have anywhere in the world. He knows the business very well and is ideally suited to structuring a business to maximize success in China.

I look forward to introducing both Gary and Andrew to the investment community, for those of you who can participate in our convention in Salt Lake City, which is coming up on September 6th.

Just one final note on China -- those who have followed our history and the evolution of direct selling in China know that we're in a transition phase, where we're working to redesign the business to operate successfully within the framework of the new regulations. I've personally spent quite a bit of time in China recently and feel confident that despite a very fluid market environment, we're as well positioned as anyone to be successful in China. This is truly an amazing market that has enormous potential. We're making good headway with regulatory permits, having recently received preliminary approval for Beijing. And we also understand that the government is implementing procedures to make licensing much more streamlined than has been the case to date.

Converting our business model to conform with the new regulations, and working closely with our sales force to successfully make this transition, is our biggest focus right now. The upside in China continues to be huge. And we continue to believe that our investment there is justified.

Looking to the second half of 2007 -- we'll continue to see growth on the top and bottom lines. We're focused on making sure that our September convention is successful. The most critical initiatives for convention are threefold. First, we'll be unveiling a new brand positioning. That is the result of a comprehensive branding study that we recently completed, that will enable our sales force to effectively communicate how we differentiate ourselves in the marketplace. This positioning is going to be based on the proposition that within the direct-selling community, we'll distinguish ourselves among our competitors through out commitment to demonstrating to consumers and to potential distributors that our products and our opportunities are the most compelling in the marketplace.

Secondly, we'll be focusing the eyes of our global sales force on the products that are working to effectively grow the business at a very healthy rate in many markets. And that is specifically the Galvanic Spa System, which will be reintroduced and will include new and improved features; as well as the introduction of our new weight management system, which augments the focus of growth in Southeast Asia and Taiwan.

And third, we'll launch certain key new products and tools. We're really pleased with the results we're seeing with the new Pharmanex weight management system, which will be branded under the [My Victory] brand. Study participants have lost an average of 22 pounds in only 12 weeks. [My Victory] will be positioned as an aggressive weight management system for markets such as the U.S., where we face a serious obesity epidemic. We'll also introduce an improved version of the Nu Skin ProDerm Skin Analyzer and, as I mentioned, an update to our rapidly emerging Galvanic Spa System II.

Finally, conventions are also a great opportunity for us to communicate with our sales force globally and to renew enthusiasm and direction in the business. It will be a great chance for us to demonstrate to the Japanese leaders in particular how well our ammunition is working in other markets, and that they need to be taking advantage of that ammunition as well.

So with that, let me turn a few minutes over to Ritch to provide a bit more detail on our recent quarter and on our 2007 forecast.

Thank you, Truman. Good morning, everyone.

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

For the North Asia region, second quarter revenue in Japan was JPY13.2 billion, compared to JPY14.0 billion in the second quarter of 2006. And quarterly revenue in South Korea was KRW33.8 billion versus KRW28.9 billion in the prior year.

In Greater China Region, mainland China revenue was RMB131.1 million during the quarter versus RMB142.5 million in the prior year. Quarterly revenue from Taiwan was NT$786 million. That's compared against NT$752 million since last year.

Hey, Ritch?

Yes?

This is Truman. I need to interrupt you, because I need to ask you to speak up a little more; we're not hearing you well on your telephone line.

Okay. Okay, sorry about that.

In Taiwan, revenue was NT$786 million this year versus NT$752 million last year. And Hong Kong revenue was HKD88.4 million, compared to HKD99.0 million during the second quarter of 2006, which included a regional convention held there in Hong Kong during that quarter.

In the Americas, the U.S. posted $40.3 million in revenue, compared to $36.4 million in the prior year. And Latin America reported revenue of $2.3 million this quarter; that's even with the prior year. And finally, in the Europe Region, second quarter revenue was $18.9 million, versus $15.0 million in the same period of 2006.

During the second quarter, the Yen averaged approximately 121 to the dollar, which was somewhat weaker than the 119 rate that we used in our guidance. And had the Yen been at the 119 level we had anticipated in our guidance revenue in EPS for the quarter -- would have been at the top end of our range, which just indicates that our business continues to track at or slightly ahead of our projections. Our gross margin for the quarter was 82.2%, compared to 83.0% for the second quarter last year; but was up on a sequential basis. And the year-over-year reduction is due in part to the continued strength of the U.S. dollar against the Japanese Yen. We would expect gross margin trends to continue to show slight improvements in the coming quarters. And that's primarily given the growth in our personal care business, which has slightly higher margins than nutrition, and assuming that the Yen will continue to strengthen a little bit from where it was in the second quarter.

We expect our gross margin to be in the 82.2% range -- 82.2 to 82.5% range -- for the next quarter and the balance of the year. Our selling expenses as a percent of revenue were 42.9%, compared to 43.3% for the prior-year quarter. And we would anticipate that selling expenses will remain approximately this level for the balance of 2007.

General and administrative expenses as a percent of revenue were 32.0%, which is up 70 basis points over the prior-year period. However, when excluding the restructuring charges and operating losses related to Brazil -- which were approximately $2.8 million -- general and administrative expenses would have been approximately 31.0%, or 30 basis points lower than the prior year. And we continue to seek ways to streamline our overhead expenses and feel like we're continuing to make progress in this area.

Just as a reminder -- as you model out the next couple quarters, we would remind you that in the third quarter, we will host our global convention in Salt Lake City. Approximately 10,000 of our field leaders from around the world will join us in Salt Lake. But we would expect to spend approximately $5 million on this event. And that will impact our third quarter G&A expense level.

And would also remind you, from a top-line revenue standpoint, that we would expect approximately $3.5 million of revenue in purchases from foreign distributors in the U.S. And so it's kind of a shift of revenue from our foreign markets into the U.S. And approximately $2 million will come from Japanese distributors.

We made good progress during the quarter at improving profitability in less profitable markets, as Truman commented. Our restructuring in Brazil will be a benefit to us going forward. We would indicated that our -- we would not expect any additional significant expense out of Brazil in the coming quarters. And Europe is ahead of plan in terms of being profitable by the end of the year.

Our tax rate for the quarter was 37.1% and would expect it to be approximately 36 to 37% for the year. However, due to fluctuations in the timing of uncertain tax positions -- which we book under FIN 48, which is the most recent income tax accounting pronouncement -- we'd expect a shift in our tax rate during the third and fourth quarters. So just as you model, would expect our tax rate to be approximately 30% in the third quarter, and then approximately 42 to 42.5% in the fourth quarter. And again, our tax rate for the year will be approximately 36 to 37%, which is consistent with where it was the first part of the year and where it's been in prior years. Would just note that there will be that fluctuation in the third and fourth quarters.

During the quarter, we paid dividends of $6.8 million. And as we go forward and project out the rest of the year, we leave our Yen expectations level with what we used in prior guidance, which would be approximately 119 Yen to the dollar for the third quarter and the balance of the year. We would expect third quarter revenue to be approximately $285 million to $290, which is growth of approximately 4 to 5% over the prior year; and earnings per share to be approximately $0.22 to $0.24.

And we continue to feel confident with our annual revenue earnings and guidance, which was updated in the first quarter -- at the end of the first quarter. That guidance is $1.145 billion to $1.16 billion in revenue, and EPS of $0.86 to $0.92. Note that that EPS guidance includes the $0.03 charge that was taken for Brazil in the second quarter.

So with that, I'll turn the call back to Truman.

Operator, we're ready to open the call for questions.

(OPERATOR INSTRUCTIONS) Kathleen Reed with Stanford Financial.

Good morning.

First question -- on Japan, can you just talk a little bit about the second quarter results -- if those came in in line with what you were thinking? They were a little bit better in the first quarter. And although on an actual Yen basis, they improved sequentially on a year-over-year growth rate, they were down 6, and they were only down in the 3% range in the first quarter. And if you can -- still just on Japan -- just talk about some new products that they'll be getting in that market, that will help results turn and continue to improve by the end of the year.

Good morning, Kathy, this is Truman. Let me just take a whack at the Q1 versus Q2 sequential movement.

You'll recall that in Q1, we posted slightly better-than-anticipated results for Japan. And I think that that was driven primarily by the fact that we had a very successful March convention, which I think pumped our numbers in Q1 just a little bit. As we graph the sequential and the year-over-year growth trend rate, we still see continued improvement on the long term versus Q4-Q3 of last year, with Q1 being, I think, a little bit stronger than we had anticipated, and Q2 being perhaps a little bit more normalized on our recovery trajectory.

Dan, you want to comment on the products?

Sure.

At convention, we're going to launch several products. But the main initiative that will be affecting Japan is our restage of our Galvanic II. This is an initiative that's driven significant growth, along with some business incentives in the United States. And we anticipate that will also have an impact on Japan.

Will Japan also get the weight loss products in the second half of the year?

Right now, Japan has our TRA weight loss product, which has been the product that's driven a lot of growth in Taiwan. So we don't plan to roll out our new weight loss product in Japan right after convention. Eventually we will be expanding that. But right now, we believe that the weight loss program we have in Asia is appropriate for Asia.

Do you still expect Japan to be flat on a year-over-year basis by 4Q?

That's our goal.

Okay.

And that has been our intention all year. The only reason why I hesitate to commit to that, Kathy, is that as you know, we have a new management team there. And they are thoroughly immersing themselves in the market, and really putting together a plan that will rekindle growth for Japan. And it's probably, frankly, a little bit unfair to expect Gary and his team to turn that market in one or two quarters. So we're confident with them and with the direction.

We do have a goal to be even year-over-year in the fourth quarter. Whether or not we make it is a difficult commitment to make today.

Okay.

On China, can you just give us a little more information on -- you got your initial direct-selling approval in Beijing, and what that means with your comments that you said, that the government was trying to streamline, I think -- does that mean the local license approvals, so maybe you'll gain some faster ones in Beijing? And then, can you just tell us where you stand in Shanghai?

Yes. What I learned on my recent trip to China is that the government has realized that it's become very cumbersome for direct-selling companies -- and for them, frankly -- to execute the licensing process on a city-by-city and province-by-province basis. And so they're in the process of figuring out how to implement a system where these licenses can be issued for multiple provinces and cities simultaneously. So whereas today, we're applying individually -- city-to-city, province-to-province -- hopefully, in the near term, we'll be able to have licenses issued for multiple provinces simultaneously.

So we have received preliminary approval for Beijing, which means that we've cleared the hurdle within some of the regulatory agencies that need to authorize direct-selling activities. And it looks like our path to securing the final licenses is well in place.

But right now, you still have to go through all the local licenses. And then, if the government passes some new regulation, it would be a lot easier?

Yes.

Okay.

In Shanghai, have you gained any new ones since the last quarter that you reported?

No, we're still operating within eight districts of Shanghai municipality. And our focus, frankly, has been on Beijing and Guangdong. Because we're operating as a direct seller in most of Shanghai.

Okay.

And just last question on share repurchase -- can you tell us what you did for that in the quarter, and where you stand on your authorization, and if there's discussion on increasing it?

Yes, we -- this is Ritch, Kathy -- as indicated in the press release -- or not indicated -- we did not purchase any shares in the second quarter. And we still have $14 million remaining on our authorization. And so in terms of go-forward, it would be up to our Board to authorize an increase in that authorization.

Okay. And the next regularly scheduled Board meeting?

Would be August. We have a --

Okay.

-- scheduled Board meeting in August.

Great.

Thank you very much.

Thank you.

Olivia Tong with Merrill Lynch.

Hi, good morning.

Good morning.

Wanted to talk about the operating margin target. I know we talked about this last quarter as well. But you've got this 9% operating margin target out there. First, is that still the goal? And then second, given that G&A -- while it was down, it was only down 30 basis points -- it sort of suggests that you have quite a bit of G&A decline expected in the second half. So I was wondering if you could give a little more color on that.

Yes, Olivia, this is Ritch.

In terms of the G&A target for the year -- I should say the operating margin target of the year, at 9%, we will probably be a little short of that. We'll probably be right around 8.5%, which would exclude the charges related to Brazil.

We were a little bit short, primarily on our gross margin, from where we had anticipated in the first quarter, first part of the year. We see that improving. We do have the convention here in the third quarter. And then, in the fourth quarter, would expect our operating margin to be approximately 11%, which doesn't factor in significant declines in our G&A. But obviously, the fourth quarter would not have a convention. So would see the overall G&A level fall, probably around $4 million to $5 million in the fourth quarter.

So I would expect for the year will be right about 8.5%. Again, we've had the charges in Brazil in the second quarter. We have the convention in the third quarter. By the fourth quarter, I expect it to be approximately 11%. And I'd continue to reiterate that our target is to be at 12% operating margin by 2010. And that's our focus as a management team.

Okay, got it.

And then, also in China -- were those results -- was the decline worse than you had anticipated?

Well, Olivia, we would always -- sure, we would like to have posted better results. We have a situation there where frankly, we're also going through a transition in management teams, as we are in Japan. And what enables me to sleep at night is the fact that we couldn't have a stronger management team in China than the one that we have in place there now. These guys are good. And they are totally 24/7-occupied on getting our business headed the right direction in China.

We would like to do better. We know that the market holds a lot more potential. And we're just doing our best to lay the foundation for what we think can be a very significant business.

But you can provide any color on why China had declined, considering that the comp was pretty -- you had a pretty weak comp?

Well, we are seeing year-over-year improvement in the rate of decline. So we're still making progress in the market. Would like to make it faster. But it's just taking some time for us to transition our sales force away from what had been an expectation of an opportunity to work in an environment where we and they had anticipated that multilevel compensation would be authorized, for example, away from that expectation and into a new business model that still enables them a lot of upside from an income potential, but is appropriate for the regulatory framework.

Okay. But there wasn't anything specific that you had not anticipated in China, in the quarter?

No.

Okay.

There had been nothing in the way of events or anything that we haven't anticipated. I think it's possible -- and I hesitate to use this as an excuse -- because it's a management excuse, and there shouldn't be any management excuses -- but I think it's possible that the change of management teams there might have negatively impacted the market a bit, as the new management team essentially gets its feet on the ground, coming in from outside the region; becomes familiar with the landscape and the situation, and designs plans that will enable growth.

Got it.

And then, just one last thing on China -- you had mentioned in the last call that you were making a major push to [start] getting more distributors on direct selling in May. How did that go?

I didn't quite understand the question. What's the question?

Sure. If I remember correctly, in your Q1 call you had said that in May, you're going to try and get a bigger push of people into -- bigger push of your employees into direct selling. And just wondering what it is that you did to do that.

Yes. We made the change. We're essentially -- with the direct-selling license rolling out, we're integrating our employee model and the direct-selling model together. And we did make those changes in Shanghai to push our new applicants through a direct-selling model, and then bridge them over to our employee model. And so we did make that change. The transition is still happening. And that's what Truman was describing earlier, in terms of transitioning our sales force between our employee model and our direct-selling model. But we do continue to see increasing numbers of direct sellers come into our business.

Got it. Thank you very much.

Timothy Ramey with D.A. Davidson.

Good morning.

Wonder if you could quantify what the loss in Europe is likely to look like this year, so we can kind of think about the deltas for next year; and also maybe what the delta would be in Brazil, if -- I think you might have given us a forecast on that once before -- but just update us there.

Yes. Tim, the loss in Europe will be approximately $3 million this year; again, breakeven by the end of the year and profitable next year -- probably $1 million to $2 million of profit in 2008. As far as Brazil goes, we have lost approximately $2 million per year, or $0.02 per year, for the last four or five years. And so, taking Brazil out of the mix should put approximately $0.02 back to the bottom line as we go forward -- $0.02 per year.

Sounds good.

And I'm hearing you talk a lot more about diet products. Does that -- is there a strategic risk of being too exposed to the diet segment, as opposed to skin care and nutritionals?

We consider diet to really be a category of nutrition. And frankly, it's a huge category, where historically we really haven't had a strong success. The success we've had in Southeast Asia and Taiwan n the course of the last year has really been our biggest success with weight management. We think there's tremendous upside in the weight management segment. And it actually blends very well with the nutrition category.

And really, the way we're positioning our personal care brand, too, and really telling an anti-aging story -- those pieces really fit together very well strategically.

Good.

And Truman, on the -- we've now changed management in Japan two or three times. And what do you really view as the concrete steps to getting that turned around and growing again? Or is this just a country-driven malaise?

Well, we really haven't changed management in Japan two or three times. I mean, our most recent manager there has been there the last four years or so. And prior to that, our general manager had been there since we opened 14 years ago. So we haven't really juggled management teams there.

What's the issue in Japan? As we ask ourselves the same question, and as we see such healthy rates of growth outside Japan, with ammunition that we have available to use within Japan, we conclude that it's not a question of lacking ammunition.

One of the initiatives that we'll put in place at convention for the fourth quarter is a new sales incentive that has been used very effectively with the restaging of the Galvanic System here in the United States, that we'll also be implementing in Japan, to really encourage the alignment of sales leaders and sales efforts behind this product in corporate promotional activities.

So I personally think it's a question of alignment. It's a question of making sure that our sales force is engaged and pushing the same direction we are. And it's a question, really, of convincing our sales leaders there that they have the ammunition to grow the market. And that is what we intend to do at convention when they see the success that we're having elsewhere.

Terrific, thanks.

(OPERATOR INSTRUCTIONS) Mimi Noel.

Hi, good morning.

Morning.

I think most of my questions are for Ritch. And I apologize; I missed the first eight or nine minutes of the call. Did you provide updated revenue guidance on China for the year?

No.

Would you comment on it at all?

We did not provide updated guidance in terms of China and haven't really broke that out specifically. I can tell you that we would expect to see our business in China positive by the fourth quarter. And things continue to kind of move along that path.

Can you verify that at the onset of the year you were looking for double-digit sales growth?

We were looking for --

Okay.

-- double-digit sales growth, but we're not -- obviously those plans have changed.

Okay.

And in your prepared remarks, you gave G&A guidance for the second half. I couldn't tell if you meant that things were going to stay consistent with the second quarter on a dollar basis, or an expense-ratio basis. Would you --

On a dollar basis.

Dollar, okay.

And then the last question pertains to the debt. Can you remind me of what the situation is there -- the prepayment -- or the payment schedule, the coupons, et cetera?

We have approximately $185 million of debt on our balance sheet. About $80 million is denominated in Japanese Yen, and the rest in U.S. dollars. We're paying back approximately $25 million per year. The Japanese Yen-denominated debt has about a 3% coupon, and the U.S. debt about a 4.5% coupon.

Okay, so it's pretty cheap.

Yes.

All right, that's all I have. Thank you.

All right, you bet.

Andy Speller with A.G. Edwards.

Hi, good morning, guys.

Morning.

Was hoping to get a little more color around maybe what -- I know it's early with the new management team in Japan, Truman -- but maybe you could talk a little bit about what they're seeing initially; what kind of plan they're working up, and if you could address that, please?

Well, sure.

In the short term -- and let me say that Dan Chard, who oversees all of our geographic regions, is the person who's really working most intimately and closely with the Japan team, as well as all of our geographic teams -- but in the short term, again, we're really focused on leveraging ammunition that's already in the marketplace and that is working effectively elsewhere.

And in the mid to long term, they're focused on putting together a business plan and a strategic plan that enables us to become the leading direct-selling company in Japan, which Gary Sumihiro, having come from the current largest direct-selling company in Japan, believes that we have a shot at doing. That's essentially why he joined us, is because he thinks we are better positioned than any other company to double our size in Japan and become the leading company in the market.

So in a short-term focus on Galvanic Spa, in the mid term, we will be staging a Japan convention in Q2 of next year, where we will unveil a new skin care product based on a technology that we've been talking about within the investment community now for about a year and a half, and that's a technology called arNOX -- A-R-NOX -- that we think is a very compelling story and will blend well with the restaging of the Galvanic Spa System. So those are really the two product catalysts for growth.

As I indicated, we're also implementing a new sales incentive in Q4 in Japan that is working very effectively in the United States and in a few other markets.

Dan, anything to add to that?

No. I think longer term, we're also looking at initiatives that will allow us to drive a positive image for the Company. And in general, the industry in Japan has been very active in creating a more positive image in the local market.

In terms of, I mean, longer term, in terms of just driving to be the dominant direct-selling company, is it going to be more just enthusiasm focus, more new product focus? What do you think the real driver is going to be to get there?

Our business is driven first by the sponsoring environment that we have, so our current distributors going out and recruiting new distributors. And that's largely influenced by the nature of our product offering. It's influenced by business initiatives, and it's also influenced by confidence in the future.

So all three of those areas we have very positive things to offer to our distributors. So we'll first see the sponsoring environments increasing, so the number of new distributors coming in. We also have identified a need that our Japanese distributors have for additional sponsoring of tools and materials, which we are now focused on. And longer term, it's about leadership development.

And we have a very -- what we believe will be a very effective program that we'll be introducing at our convention, that has to do with -- I think what you're describing as enthusiasm; we'll call it mind set and motivation -- but really creating the base foundation for our people who come in to become effective leaders in our distribution channel.

Okay, thanks.

And then, Ritch, with regard to the tax rate for next year, do you think you're going to see this gyrations quarterly?

Yes, I think we'll typically see a gyration in Q3 and Q4, and would expect that our overall tax rate for the year will kind of remain in the 37% range. But I think what you're seeing this year can be expected, as we go forward -- years going forward.

And, I guess maybe we talk about this off-line -- but in terms of the new accounting pronouncement here -- what's driving the -- in terms of just the gyration from quarter to quarter?

It's effectively booked on almost a quarterly basis, some of the uncertain tax positions you'd take. And as statutes roll off or roll on, you get these gyrations between quarterly numbers. And because we have so much of our business foreign, that's what some of these roll-on and roll-offs are in the Q3s and Q4s of each year. Again, doesn't affect our yearly rate; it's just a little bit of a shift between our third and fourth quarters going forward.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) Kathleen Reed with Stanford Financial.

Oh, hi.

Can you just, Ritch, split out for us interest expense from other income?

Yes, let me just pull that up real quick here. I think it was about $1.5 million was interest expense.

Okay. And the interest income was mainly currency, or was it interest income as well?

It was also interest income. We had about -- let's see; I've got the numbers right here -- $1.6 million of interest expense, about $650,000 interest income, and about -- approximately $1 million -- almost $2 million of foreign currency gain.

Okay. And is that likely to repeat, the foreign currency gains?

Well, it depends on what happens with the Yen. It's primarily surrounding what's going on with the Yen, and what our assets and liabilities are in that market. If the Yen remains fairly constant, then we would not anticipate those sort of gains going forward.

Okay.

And also, can you break out the Photomax revenue in the U.S. revenue number?

Let's see -- Photomax in the U.S. was approximately -- I want to say about $2.5 million -- just under $2.5 million for the quarter.

Okay.

And clarification question -- when you said G&A expense in the fourth quarter would obviously not include the big global convention amount, which was supposed to be about 5 -- but when you said it would be down 3 to 4, or 4 to 5, you meant not year-over-year but from 3Q to 4Q?

Yes, sequentially. That's correct.

On a dollar amount?

That's correct.

Okay.

And then, just lastly, can you just provide us a little more information on the re-branding that you were speaking about, Truman, I think, when you were talking about -- at the convention, the re-branding efforts or repositioning a little --

Yes.

Okay.

Yes, we are really, really excited about this. Because we find, as we survey the field, and as we go from market to market, that frankly, we haven't done a very good job of cleanly and crisply articulating our brand position in a fashion that has been, A, memorable; and B, effective from a competitive perspective, and really enabling our distributors to recruit at a more successful rate.

So we have recently completed what I believe is the most thorough marketing study this company has ever done, that was a multi-market brand-positioning study. Have surveyed the sales force on a segmented basis, with respect to how they're growing the business, what's working best for them, how they would prefer to see the Company and the brands be positioned.

This has been a particular challenge for us, as a result of the fact that we've been doing business under three brands instead of one brand, and have really tried to build brand equity and brand presence under each of those -- our product categories.

And so, we're just -- we're delighted to have this research done and are very excited to unveil the new brand positioning at convention. It is not a huge deviation from where we've been. It's just a clarification and a clean, crisp approach to us being able to articulate more effectively how we want to differentiate ourselves in the marketplace.

Okay, great.

Yes.

Mimi Noel with Sidoti & Company.

Just another quick one, probably best answered by Ritch. The global convention is an every 18-month event, correct?

Yes, we're actually moving that to every two years, at this point in time.

Oh, all right. Well, then that answers my question, I think, anyway. Just in thinking about 2008, there will be an absence of that -- call it $5 million cost?

That is correct. We'll have some regional conventions, which will --

That's what I was going to ask, yes.

-- yes, typically in Q1 and Q2. This year, we've actually had both -- both conventions, regional and global. Next year, we'll just have the regional. So you would anticipate overall G&A in dollars to come down about $5 million as it relates to convention expenses next year.

Okay. So the regional conventions -- you ran them this year -- or ran them with the global. You'll have them next year, but you won't have the global?

That is right.

So it will be a net drop of about 5?

That's correct.

That's great, thank you.

You bet.

Olivia Tong with Merrill Lynch.

Hi, thanks again.

Can you go into further detail about this health incentive, changes in Japan in Q4?

Yes. Dan?

Essentially, what we found -- and this is partly through the survey, and through the internal data analysis -- is that we have much higher success on retention and recruiting when we're able to compensate our early executives more effectively. So our compensation plan incentive is targeted at early executives and early leaders in our company who have tested it now in the United States, and have also -- are looking at it in other markets. But it's been very successful and has been able to move the needle very quickly on sponsoring. So that's what we'll be looking at for Japan -- or be introducing in Japan.

Okay, so better compensation of some of the early executives?

Provides -- yes, early compensation for early leaders.

Okay. Is that going to increase your selling expense overall? Or are you taking it from another subset of distributors?

It's accomplished through basically a -- it's a retail profit program. So it does have an impact on our margins. But from a dollar-profit standpoint, it's equal.

Yes, I think in terms of modeling, it's not a lot. Because it's really on just those new executives that are coming in. So the overall impact is not significant, unless obviously sponsoring goes up dramatically from where it's at today.

Got it.

And then also, the $0.22 to $0.24 EPS outlook for Q3 -- that assumes 30% tax rate, correct?

That's correct.

Great, thanks a lot.

You bet.

Currently, no questions.

Very well, then. Thank you for joining us again today.

I wanted to just let you know that we will be on the East Coast next week. And we would welcome the opportunity to meet with any of you. We also want to make sure that you know you're all invited to attend our September convention. We'd love to have you, and it really is a great opportunity for you to get to see what's really going on in the business globally.

So thanks very much for joining us today.

Ladies and gentlemen, this does conclude the presentation. You may now disconnect. Thank you very much, and have a very good day.