如新 (NUS) 2007 Q3 法說會逐字稿

Ladies and gentlemen, we welcome you this morning. We appreciate you taking a few minutes with us today, and I would like to make a couple introductions, just brief introductions. We have Steve Lund. Steve, can you maybe just wave, stand? Steve is our Vice Chairman, member of our Board of Directors, one of the founders of our company. And Desmond Wong, sitting over here on the side, also a member of our Board of Directors, appreciate him being here as well.

We look forward to a good day today. We're going to kind of update you on our third quarter earnings release, which went out this morning. We will give you a preview of kind of our 2008 guidance and walk you through how we're modeling next year. We'll talk about our plans, what our operating plans are.

We have with us Gary Sumihiro from Japan. We have as well Andrew Fan from China, so they'll be available for questions in our Q&A as well, and be able to give some background on what they're doing in these critical markets for us.

In the back, we have a product gift bag for everyone, so feel free to grab that. It's got a couple of the key products that we'll talk about today. We also have our Scanner and the ProDerm, so if you're interested in taking the vitamin lie detector test, you can go take the Scanner, do a Scanner test.

So, feel free to get up and walk around. We don't really have planned breaks in the morning. This'll go until right around noon. If you need to use the facilities or whatever, just feel free to stand up. There's food out in the hall right outside. We'll go ahead and begin.

Let me just give you a quick overview of what we'll be doing today. Truman will give us a Q3 update. We'll talk -- he'll then talk about our 2008 plans. We'll turn the time over to Dan Chard at that point in time, and then our market managers, Gary and Andrew, will talk. Joe Chang will give you a product vision of what's happening with our product development.

Then, I'll kind of wrap up with the 2008 modeling. And then, we'll open it up for Q&A. And we have plenty of time here, so we're probably limited more by your time than ours. Just to remind you, we will give today some forward-looking statements, which may differ from the actual results. We give that heads up.

Well with that, we'll go ahead and turn the time over to Truman.

Thanks, Ritch, and good morning, everyone. I want to also introduce a couple who are truly VIPs in our world. And that's John and Giselle Sexsmith, who are seated here in the audience next to Steve Lund. Raise your hands there, guys. There they are. John and Giselle are -- represent one of the 25 Nu Skin Enterprises distributorships that has generated north of $20 million in distributor commissions over the years. So, they're very, very successful, and if you're interested in talking to real live distributors, there they are.

As Ritch indicated, I want to talk this morning about our Q3 results quickly, but spend most of our time talking about our '08 plan. In the third quarter, we generated 5.2% top line growth at $291 million, slightly ahead of our guidance. As our release indicates, we also showed healthy levels of growth in four of our five regions in the world.

Let me just talk about our top line regional results quickly. As you can see from this slide, North Asia finished down 4% as a result of a decline in Japan. Let me just mention that that 7% decline in Japan is a little bit misleading. It -- we think it's more of a 5% decline because of the money spent by Japanese distributors in the United States in September at our Global Distributor Convention. So, we'll call it a 5% down, which is a slight sequential improvement over the second quarter, but still not where we want it to be.

All of the other regions in the world really performed very well. In Greater China, Hong Kong and Taiwan had a very solid quarter. China continued down in the quarter, but we expect to see improving trends there and in the region generally.

The Americas, a very strong quarter, this 30% up is really a 17% up when you exclude sales to foreign distributors attending the convention in the U.S., but still it's 17% up. The U.S. had a very solid quarter, and we're seeing some accelerating growth here. Southeast Asia performed very well in the quarter, and Europe continues to perform very well for us. So, we're really happy about the top line direction almost everywhere in the world.

The third quarter results put us on track to finish the year at about $1.15 billion, which again is within the guidance that we provided to you a year ago and puts us back on a growth track for -- on a year-over-year basis. You can see on this slide that we're also announcing this morning some 2008 guidance. We'll guide to $1.2 billion in 2008, [in the] $1.2 billion range. And as this slide also indicates, this will be the seventh of the last eight years where we'll post growth on the top line.

Our earnings for the quarter came in at $0.21 versus $0.19 last year. It's nice to grow year-over-year, but this is definitely not where we expected to be or where we need to be, and I want to talk about what's impacting our profitability here in a moment and also highlight that this is our priority in our 2008 plan.

We also had, as I indicated, during the quarter a very successful Distributor Convention in September. These are big events for us and wanted to just give you a little bit of a flavor for the convention since most of you didn't have an opportunity to attend.

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These conventions are a lot of fun, and it brings a smile to my face just thinking back on it a month ago. This one was particularly enjoyable for a number of reasons. We had good attendance with really distributor leaders from all over the globe. About 2,100 of our attendees were first-timers. We generated a record level of sales at this year's convention, which was a good sign.

And anecdotally, it's just nice to hear feedback from the field and from third parties who -- many of whom shared with me that they had never been to an event in our industry where they felt the lever of -- the level of energy and enthusiasm that we had at this year's convention.

We unveiled a new brand positioning at our convention this year, and are really happy with the work that's gone on here. Dan Chard is going to talk more about this, but the brand positioning reflects how we want to present our business and the theme to which we will tie our messaging going forward, the difference demonstrated.

This is the result of the most comprehensive marketing work we've ever done, frankly. And it's designed to enable us to integrate our brands in a fashion that enable us and enable our sales force to really articulate the ways that we are different.

In the direct-selling world, there is so much hype, I suppose, that we heard loudly and clearly from our sales force that we want to be the company that distinguishes itself in the field by being willing to demonstrate the ways that we're different. And we do that though our people, both internally as well as our sales force, through our product lines, through the opportunity that we provide to people around the world and through our culture.

And Dan Chard will spend a little more time on this, but we've very happy with this positioning. We think it's going to go a long ways towards enabling us to message clearly and to message in a very globally integrated fashion. And we'll be rolling out this positioning globally in 2008.

New products, we're very happy with the ammunition that we have today from a product perspective to continue to drive the business forward. You're going to hear a lot today about the device that's featured on this slide, the Nu Skin Galvanic Spa System.

This is a device that we introduced a few years ago, but has recently really caught a gear and has been incredibly successful for us over the last 18 months. And in fact, I want to give credit to John and Giselle Sexsmith, who were really the distributor leaders in our world who grabbed this device and ran with it within their organization and started to grow so rapidly in Europe originally that the success of this device is now spreading around the world.

Joe will talk about this device a little bit more specifically, but I just wanted to highlight in the United States, for example, the impact that this is having on sales. The -- it's literally a hockey stick story for us right now where Galvanic sales are growing so rapidly that we're, frankly, having a hard time keeping them in stock and working hard to keep up with demand.

This has been the case in Europe now. South Korea has been very successful with Galvanic. The United States has now taken off, and we expect Japan to follow the same trend that we're seeing elsewhere in the world with this machine.

Other new products included the launch of our My Victory weight management plan, and Joe Chang will talk about weight management as a category. It's becoming increasingly important for us globally. We all know that there is a huge and rapidly growing market in weight management products.

We have seen our weight management business grow very rapidly, in particular, in Southeast Asia of all places, where our TRA weight management system in Taiwan, for example, now represents 20% of sales. And so, we're seeing terrific -- a terrific response to this category among our sales force and among consumers. We're very pleased with this program, and Joe Chang will be talking more about it.

Similarly, ProDerm has recently been launched in the United States and is tying very well to our theme. ProDerm is to skin care what the BioPhotonic Scanner has been to nutrition for us. It enables our sales force to assess a consumer's skin texture, lines and wrinkles, pores, discoloration, and put them on a regiment of our skin care products and watch improvement. It's a very demonstrable, very experiential device and a wonderful calling card for our sales force.

Tru Face Essence Ultra is a product that again, you'll hear more from Joe on this morning, a very successful product that is receiving a very warm response from the consumer world, and it is also very effective.

The BioPhotonic Scanner has also undergone some improvements, and this is what we're calling the Everest Edition of the BioPhotonic Scanner. Much more user friendly again in this iteration than it's been in the past, more portable, easier to calibrate, and again, just provides our distributors with a very convenient way to demonstrate the difference in our products by measuring antioxidant levels in consumer tissue.

Now, let me just talk about our 2007 results and obviously, 2007 is not complete yet. But last year when we were here, we represented that we would generate 2% to 4% revenue growth in the year. We will come within the high end of that range at about 3.4%, assuming the fourth quarter comes in where we anticipate it coming in.

The revenue declines in Japan and China have been offset by very strong growth elsewhere in the world. And so, we're pleased to be able to come within the range we articulated last year. However, we also projected 17% to 25% earnings growth in 2007, and we're going to come in at about 15% to 18% revenue growth, so the low end of that range. We're not happy about that, and that's why this is going to be the focus of our 2008 operating plan.

I want to talk about what's impacting our bottom line in 2007 and why we're hitting our revenue targets, but missing a little bit on the bottom line. One of the factors has been a compression in our gross margin.

As sales have declined a little bit more in Japan than we anticipated, we're seeing those higher margin dollars replaced elsewhere in the world with slightly lower margin dollars coming out of the United States and out of Europe. So, this shift in geographic revenue is compressing our gross margin and showing up on our bottom line. Foreign currency has also impacted our gross margin in 2007.

We're also seeing our selling expenses be a little bit above where we would like them to be. This is an important line. When you look at our income statement, it's our -- the largest income statement line on our income statement. So, distributor incentives and selling expenses are very important. We try to manage them carefully with -- because of incentives that we've been running in the last two quarters, our selling expenses are slightly ahead of where we want them to be, and this will be an area of focus in 2008 as well that will impact positively our bottom line.

Our general and administrative costs have also hurt us this year and in particular, in China. With the revenue decline that we've experienced there, [where they] exposed the level of G&A in China that has adversely impacted us, I want to just show a slide to show you that the -- quantitatively what we're talking about here.

You'll recall that in the fall of 2006, we really wanted to bring our investment in unprofitable markets from $22 million down about $10 million. We've made some very good progress on this front in Europe. We've made some progress on this front in Latin America, although the bump that you see here in 2007 is really reflective of Brazil, which I'll talk about in a moment.

But, you can see that our China investment has really hurt us on the bottom line. And our investment there has become a little bit disproportionate with our revenue level. And so, we haven't made the progress that we anticipated making a year ago. But again, this will be an area of focus for us in 2008. And as you hear in particular our operating plan for China, you'll see how we intend to address this issue.

I wanted to just mention that from a key development perspective, the appointments of Gary Sumihiro as President of Nu Skin Japan and Andrew Fan as President of Greater China and now relocated to China, are very material changes for us in 2007.

We worked long and hard to secure Gary Sumihiro in Japan and wish we would have had him earlier. But, we're happy to get him. There is, in fact, no other manager on the face of the planet who's more capable of running our business in Japan than Gary Sumihiro is. He comes to us with a world of experience, not only in the direct-selling industry, but in Japan specifically. So, we're very happy to have him.

Similarly, I can tell you that I'm sleeping a lot better now that Andrew Fan is in China. There is no other manager in the world who's more capable to run our China business than Andrew Fan is, and you will sense that when you hear from him.

We also took a -- what was, for us, a fairly traumatic step. It's not easy for us to close markets. We open them and when we do, thousands of people put their faith and trust in us to do what we have to do to enable them to be successful. Closing Brazil was a painful decision for us, because although it's the right decision financially, we still had a lot of people there who were counting on us in building their own businesses.

Unfortunately, given the tax structure there and the duties and tariffs that are imposed on inbound shipments into the country, and given the fact that we don't have enough scale to manufacture locally in Brazil, we simply saw no way to really build a pathway to profitability in that market. So we decided to retreat, and we'll look at the market again in the future.

Now when you hear us talk, you're going to hear us talk a lot about product, opportunity and culture. Those are really the three pillars of our business. One of the diagnoses that we have reached in our own business, and in particular in Japan, is the fact that we have spent, we think, a disproportionate amount of time and energy and resources shining the spotlight on product and on consumption specifically, at the cost of shining the spotlight on sponsoring, which is the most potent fuel we have to drive our business forward.

You're going to be seeing today more data and more analytics than we have shown you in the past, and in particular with respect to the Japanese market. As we have run analytics there and really parsed the data, we believe that we have diagnosed the problems, and we need to shine the spotlight back again on sponsoring. And that will be an area of focus for us in 2008.

We've also learned that early compensation is important to our distributor force. We believe that people come to the Nu Skin Enterprises opportunity because of the prospect of long-term material income, sizable income potential.

But, we've also learned that when the early earnings opportunity is inadequate, we simply can't hold enough people for a long enough period of time to get them in the pipeline and get them building a successful business, so we're applying more and more attention and more resources to early compensation. And you'll hear about some mechanisms that we've applied recently from Dan and from Gary that are working very effectively.

And finally, I want you to know that we believe that our business transformation initiated about two years ago has been very positive. Organizationally, we are more aligned than we've ever been, and we are also identifying ways, because of transformed processes, that we can continue to reduce G&A and really improve our profitability levels. And that's really what I want to talk about in our '08 plan.

Our strategic imperatives in 2008 are number one, to align behind our brand proposition, both internally and externally, and do an effective job of rolling this brand proposition out globally.

Number two, we're focused on strengthening our partnership with our sales force. And really, these first two bullet points are almost everything. If we don't have an effective partnership with our sales leaders, we go nowhere. And so, aligning with them and strengthening our partnership with them is an important priority for us, and you'll hear about how we intend to do that in 2008 from Dan.

Third, as I indicated, we're going to shine the spotlight on sponsoring, and we're going to allocate distributor incentives to promote sponsoring and really focus on bringing in people into our business. Fourth, we know that we have to address Japan and China. They're different issues, but we're very confident that we are headed down the right path in these markets. And finally, we're out to improve profitability.

I assume most of you saw in our release this morning how we're guiding the bottom line in 2008. We really believe that we can grow the bottom line at a faster rate than we ever have in our past as a public company. We believe that the number that we set out, which represents 35% to 40% earnings growth after restructuring charges is doable, and in fact, does not reflect the impact of the stock repurchase that we also announced this morning.

So, let me just set the context for Japan, specifically, because I know this is on everyone's mind. Again, we're very happy with our new management team here, and it's not just Gary, by the way. We're also parachuting in a -- one of our key expats into the market. And Gary is also in the process of hiring some additional talent that we're bringing in from the outside.

We feel very good about the analytics that we're running in the market, and we're going to be showing you a lot of that this morning. We think we have diagnosed the problems, and the turnaround plan is already underway just in the last couple of months. The effort, by the way in the month of October, resulted in increased sponsoring in Japan in excess of 60% year-over-year, so we're very happy about what's going on there.

What about China? Okay. Similarly, we have a new management team in this market, which we're very comfortable with. We continue to believe in the potential of China and really for a couple of reasons. Number one is that our competitors are doing well. Avon's number last week, I believe was 23%, up year-over-year.

We have heard from internal sources that our largest competitor, the Amway organization is again growing in China and is generating revenue north of $2 billion a year. This gives us a great deal of comfort because where they do well, we do well. And in fact, our 2008 strategy is really to align, frankly, our business model a little bit closer to theirs, and we'll talk a little bit more about that.

The regulatory environment, I want to characterize as an ongoing work in progress. The issue from a regulatory perspective in China now has gone from not having direct-selling regulations, to now having disparate enforcement of direct-selling regulations.

And so in one environment, we may be under a higher level of scrutiny, based on our current business model than we are in another environment. And it's particularly frustrating when in that other environment, the direct-selling regulators will even tell us that we're a model for the industry and that they encourage companies to be like us.

So, this is really playing into our 2008 strategy in one important way, and that is to focus our efforts and focus our investment in the environments where the regulatory attitude is a little bit more progressive and a little bit more sophisticated and developed, and that would be specifically, Shanghai, Guangzhou, Guangdong Province and Beijing.

Finally, as indicated on the slide that I showed, our cost structure needs to be addressed, and we're going to take a real whack at that $13 million loss in 2007. And we'll be talking a little bit more about that.

So, our objective for 2008 from a revenue perspective is 4% revenue growth, and the strategy grid that you all have at your place reflects the five key strategies towards making that happen. Number one is to align our communication behind our global positioning. Number two is, strengthen partnership and alignment with sales leaders. Number three, improve the impact and effectiveness of marketing and promotion.

This really -- this bullet point really speaks to the issue of making sure that we're applying incentives to drive the behavior that we want to drive, and that is specifically sponsoring and recruiting new distributors. And number four, focus recruiting and development efforts on key distributor segments.

You will see from the data that Dan will present that we know which group of distributors is the most productive, and where we really need to be applying effort and incentives to maximize their productivity and move people along a pipeline that makes them more productive. And finally, we're out to strengthen and refine our product portfolio.

Now, we believe that on the strengthening topic here, we really have a lot of product ammunition. And we have some new innovation that will be introduced in 2008 in the skin care category in particular that you'll hear Joe talk about.

But, we continue to believe that our consumers tend to be a little bit overwhelmed by our product offering and have a hard time really pulling out of our catalog what they should use. So, refining our product portfolio is part of making sure that our product mix is appropriate and our SKU count is appropriate, given market size.

For Japan specifically, our strategies are focused on aligning our sales leadership behind a -- behind core growth strategies and consistent growth strategies. This is again, this alignment issue that is so critical in our business. We want to focus our sales force on sponsoring, and Gary Sumihiro is also in the process of undertaking a significant management and organizational restructuring here in the fourth quarter.

In China, we'll be restaging our business model by aligning our business model to facilitate leadership progression. This really speaks to the point of aligning our direct-selling opportunity with our employee sales force model in a much more integrated and consistent fashion and again, paralleling to a great degree what the country's largest and most successful direct seller is doing in that market.

We have a new store strategy that we'll be executing that Andrew will talk about. We've come to believe that China is not about maximizing the number of retail presence. We want to make sure that we have a good flagship presence in our key markets, and the retail stores that we currently have in place are a good way for us to address some of the G&A issues in the market, and so we'll be attacking that. And finally, we'll be managing our investment level down a bit in 2008 in China.

Our target on the operating margin line is 10.5%, and we think that this is very doable by simply applying some focus to gross margin where we expect to see some improvement, make sure that our distributor incentives are a little bit more in line with where they've been historically. And again, there's a lot of money on that line, so even small improvements make a big difference on the bottom line.

And we're out to reduce G&A by $15 million to the $350 million level. This reduction in G&A will be available through a fourth quarter restructuring that we're just undertaking, and we feel that this G&A reduction is very manageable, very doable, without really risking any of our top line momentum.

Finally, we're out to improve shareholder value. We want to take EPS from $1.15 to $1.22 per share, which excluding 2007 restructuring charges is about 35% to 40% growth. This is not -- and as you run your models and as you hear Ritch go through our model, this is not an overly aggressive target. We think that this is very doable. And in fact, this $100 million stock repurchase that we announced this morning is not built into this projection.

So, 2008 should be a better year for us than 2007 was. We've built a solid foundation over the course of the last few years. We anticipate continued revenue growth in all of the markets that are growing. We expect significant changes to improve our bottom line. We believe that we're more aligned and more integrated from a messaging perspective than we've ever been, and we have very solid product drivers in place to continue to drive the business forward.

Our Board is really putting their faith and trust in the management team by an expression of $100 million of capital committed to repurchase shares. This really reflects virtually a commitment to apply virtually all of our free cash flow to benefit shareholders in the upcoming year or so.

Let me introduce for our next presentation, Dan Chard, who's our Executive Vice President of Distributor Success.

Good morning. It's good to be here with you today. 18 months ago, we created an organization called Distributor Success. The reason for doing that was to bring together all of the functions and support mechanisms we had throughout the Company, throughout the world, to focus on that one thing, partnering, aligning and supporting our distributors to ensure that we provided them with all that they needed to run their businesses effectively.

There are three objectives with the organization. First was to develop stronger insights into our business and what makes our distributor successful and how we can better participate and support that effort. The second was to be able to take best practices that are being created around the world and share those more quickly and more effectively with our other markets.

We have over 45 markets throughout the world, and we have some great things that happen in many of those markets, and being able to translate those into opportunities for all of our markets is an important piece. The last piece is to develop a stronger analytic system, which is really tied to generating stronger strategies and developing stronger, faster growth and more predictable growth in the future.

As Truman mentioned, I'm going to share more analytics in my presentation today than is typical. But, I'm going to start with talking to you about our distributor and the critical roles they play. They are central to our business. We have just under 900,000 distributors over [there] and throughout the world, and they are the heart of our business. But, they play some very unique and specific roles.

First of all, they are our sales leaders; now not in the same traditional sense that you'd think of a sales leader in a typical corporation, because our sales leaders have literally built these organizations from scratch. They've recruited. They've trained. They've motivated and built these distribution networks themselves, and they represent really the heart of our organization.

They're also our reseller in much the same way you would think of P&G's relationship with Wal-Mart or K-Mart or a large grocery chain. We depend on this role of our distributor to sell in our ideas, to partner with them to align our programs and to make our product launches as effective as possible.

They also play the role of a traditional consumer, because as they promote and build the sales organization, they also become advocates of our products and consumers of our products. So, we need to please them with our product quality at the same time as we work with them as our sales leaders.

And lastly, and probably one of the most significant roles they play is that they are our communication medium. When we talk about the advertising spend in our business, it's really the $0.5 billion that we spend in our commissions that is effectively a word-of-mouth campaign throughout the world to talk about our business, to talk about our opportunity and to talk about our products.

So, what I'd like to do with you is talk to you a little bit about the progression that our distributors go through as they come into our business and tie it back to some of the trends that we see in our revenue in a way that we haven't talked about before.

If you look at our overall revenue globally, you can talk about the first portion as roughly this 50% that's made up of preferred customers and wholesale buyers. This group essentially represents the 50% of our revenue that is tied to individuals who we have a pure product relationship with.

In other words, they haven't received a commission from us, nor have they recruited anyone. In the case of preferred customers, they've decided that they love our products and want to use our products. And at some other point in time, they may choose to become involved in our business, but initially, they're purely involved in our product.

Another 24% of our sales is what I would deem as our sales force. These are individuals who have recruited a distributor, at least one distributor in their down line, but they have not yet taken the step of becoming an executive in our business. So, they may receive a commission check, but they're on their way to developing to become a sales leader.

The final piece of our business is someone who has submitted a letter of intent or has become an executive -- or, an executive in our business, and they represent 26% of our revenue base. And these are those who have -- at least, they're recruiting other distributors in their organization, other executives in the organization and are leveraging our compensation plan at different levels in their genealogy.

So, if you look at this a little bit more specifically, you can see this -- preferred customers, you can see how these different segments relate to the purchasing power, and they're not all equal. Preferred customers, which make up roughly 15% of our volume, purchase on average 95 PSV. Now, PSV is a measure that we use internally. It's roughly equal to dollars. It's an equivalized measure. It stands for personal sales volume. So on a monthly basis, they purchase 95 PSV.

Wholesale purchasers, almost double that, 152 PSV, sponsors, slightly more than that. And you can see as our distributors become more involved in the business, they get more involved in the retailing outside as well, so, their personal sales volume increases. Our executives, close to $500 -- 500 PSV a month and our leaders, about 350 PSV per month.

Now, you -- as we look at our volume over the last year, and Truman went over some of this, I want to illustrate what's happening across our geographies and then help you see what's happening in these different segments. The way this graph is laid out, this represents two periods, one -- two one-year periods ending on June 30th of 2007 over here, and June 30th of 2006 over here.

We did roughly, and this is again stated in total order volume PSV, we did approximately $1.030 billion and across the world as you -- or, across the world as you look at this, from 2006 to 2007, the United States increased by $30 million. The -- Japan decreased by $42 million, and you can see how this works across.

We had strong growth in Korea, $20 million. Europe's up $7 million. China, you can see the decline there. And as you look across the world, we roughly for the six-month period ended flat, which is reflective of the back half of our 2006 year being slightly down, and the first half of 2000 being up.

Now, what I want to show you is how this volume change is reflected in the different markets across our geography -- or, across our segments. So, we talked earlier about these groups right down here, these distributor segments.

And you can see from 2006 to 2007, our preferred customer segment grew by $11 million, which is the largest segment growth across the different categories. Wholesale purchasers, sponsors and executives declined, and we had some good growth in our leader segment.

Now, why this is important is that as you look at this same preferred customer segment across our different geographies, you can see as Truman was pointing out earlier, that Japan actually had strong growth, in fact, led the globe in the increase of our preferred customer segment. The United States also did the same thing, and most of our other markets, with the exception of China, increased in this important category.

Now, what we find is that the markets that are most successful in growing overall are able to grow this preferred customer segment, but at the same time, they're able to grow our wholesale buyer segment, which is the first stage of somebody who's becoming a sales leader.

And here, you can see the United States, which grew about $4 million. This segment represents 36% of our global revenue. And Japan, it's -- the increases in the preferred customer segment was more than offset by declines here. Our other geographies performed very strongly and well in this critical segment.

The other piece that's important is what's happening with our top leaders. I showed you earlier the slide that showed that this segment was up roughly 11%, and this is a reflection of the strength of our top sales leader group. It represents the pin levels that are what we call Ruby through Blue Diamond and Team Elite. And you can see across all of our leadership base, including Japan, with the exception of China, which is down slightly, we grew in this very important segment.

So, what does that mean? We're taking these analytics and using them to drive the four strategies that Truman talked to you about earlier, aligning our communication, strengthening our partnership, improving the impact and effectiveness of our spend and making sure that we target our business effectively.

What I'd like to do is talk to you about some of the key initiatives that we're focused on and give you some specific examples of how we're taking that second objective that I talked to you about earlier. Second and third objective for the Distributor Success organizations, which were to identify best practices and expand those quickly around the world and to use analytics as a way to measure our spend effectively.

But, the first piece has to do with our positioning. As I mentioned, our biggest spend by far is the $0.5 billion we spend a year in commissions for our distributor force. Just like a typical brand company, the message that we communicate is critical. If our message is off target or if our message is not as effective as it should be, that message is not as effectively -- is not as effective in communicating.

So mid last year, we engaged in a significant project, which was to identify a global brand positioning for the Company that would be effective in driving -- making this message more effective. We started out by interviewing in focus groups, qualitative research, our executives and sales leaders from across the world.

We then did a rigorous analysis of our internal database to make sure that as we went into the final phase of our quantitative research, we would be able to clearly segment the different key segments of our distributor force and understand how this positioning played out with them.

As Truman mentioned, the positioning that we came up with is described as Nu Skin Enterprising -- Nu Skin Enterprises being the Company that can demonstrate its difference across a number of category. The tag line, short tag line, is the difference demonstrated.

The focus is on four areas. We can demonstrate our difference in our people, which is largely our distributors but also includes our employee group. We can demonstrate the difference in our products, which is an area that Joe Chang will talk about. Our culture is -- has a demonstrated difference, has to do with our philanthropic effort.

But also, we know that the reason distributors stay with our company and stay with Nu Skin Enterprises is largely because of the culture. There are two things. They stay because they want the opportunity to help other people, and they stay because they feel like they can improve themselves through the culture.

And the last, which is really the foundation of this positioning is our opportunity. It's the benefit that we provide to help our distributors or those who come in be as effective as possible in realizing their ambitions with our company.

So, the measures of a great positioning, we're competitive, and we verified that with our distributors in this research. The positioning is simple, easy to explain. It's engaging, and this will act as a strategic filter for us as we move forward, and ensures that everything that we do meets this criteria of being demonstratively different. Doesn't -- if it doesn't demonstrate how we're different and by extension, better, then we simply won't do it.

Related to -- again to the message, as I pointed out earlier, you can see that several of our markets, in fact, most of our markets have been able to grow this preferred customer group, and at the same time, grow our wholesale buyer group, and at the same time, grow the sponsoring group and our other groups.

What we've found is that these -- there are markets that are -- that do that are far more effective at managing these various customer relationships or distributorship relationships that we have. So -- and they have forms of customer relationship program.

In 2008, one of the things we're going to be doing is managing and institutionalizing some of these processes. We get a lot of comments from our distributors who say, hey, when I go to the United States versus Japan versus Korea, sometimes I have a different experience. I'm treated differently, and it's confusing for me, because I expect you to be the same kind of company.

We literally have tens of thousands of interactions with our distributors every day, so taking those interactions and making sure that we represent our company to our distributors in a consistent way is what CRM is all about. We think that it's going to allow us to better serve each of those critical segments that we talked about earlier, our preferred customers, wholesale buyers, sponsoring distributors and sales leaders.

We also think it's going to have a real business impact on our ability to -- and supporting our distributors and their ability to acquire, retain and grow [this] profitable customer relationship. Second strategy has to do with strengthening the partnership with our leadership, and Truman mentioned that this is -- this one is critical and fundamental to what we do.

It's easy to say, and it's often a very challenging thing to do when you have a dispersed organization, but it's something that we're committed to, and we've seen a lot of success in many of our markets and always an area that we can improve in. But it has to do with aligning our corporate management, with our market management, with our distributor leaders, and making sure that across the board, that relationship is consistent and effective as we launch products, as we introduce -- and as we introduce new programs.

The second piece of this is goal setting. Most of you are probably familiar with a traditional sales force that meets together. They set quotas, and they're all motivated and incented to meet those quotas. Our relationship with our distributors is very different because they are, in fact, not our employees. They are our partners. They are -- we are engaged in this business together, but they essentially own, manage and operate or have that specific relationship with their down line.

Several years ago, under the leadership of one of our markets, Hong Kong, we -- they created a goal-setting program that took place on an annual basis. Last year, as we saw the strong results from Hong Kong, we decided we would roll this out into other geographies. And the one I'm referencing here is Korea. And Korea instituted this in 2007 across their executive demographic.

And see here, they had roughly 40% of their executives who engaged in this goal-setting process, 43% [of them executives] and the rest were Gold and Lapis and above. The objective of this goal setting is to help our distributors achieve success in different areas, primarily in their ability to increase in the organization.

And so, if you look at the non-goal-setter group versus the goal-setter group, you can that the most important measure we look at is what percentage of those were able to increase their titles. And so in the non-goal setters, roughly 10% were able to increase. In the goal-setters, 21% of that group was able to increase their titles.

The decrease in titles was far lower, and maintenance slightly lower in the goal-setter group, largely because we had more of them increasing. So, this is a program that we're instituting that has a real bottom line impact across our other geographies and perfecting year-over-year.

The third strategy is to improve the impact of our marketing spend. One of the things that we recognized and got feedback on our global survey on was that our distributors see us as extremely competitive in the area of creating a full-time employment opportunity, though we're somewhat weaker when it comes to creating early income for our distributors.

So with that in mind, we tested this year. And we talked about this on the last -- on the earnings release last quarter, a program in the United States that we're now expanding called Gross Retail Profits Program, which has to do with providing a retail profit in kit sales.

The objective of the program was to increase the early -- the income opportunity for early distributors, for early executives. The results of the program are very compelling. If you look at the three key constituents, our distributor group, our qualifying executives and our executives, these bars here represent the percent increase over the average distributor income.

So, distributors who participated in this program using the GRP kits made, on average, over 80% more in income than those who did not, qualifying executives, over 100% more, and executives about 65% more than the average distributor.

So, this is a program that has -- we're repackaging. And Gary will be talking about it as it applies to Japan, but we believe that this is one of the fundamental pieces to the -- to resolving the perceived weakness with our distributors in being able to provide early income to our executives.

Another piece is our product launch process. This has to do with our partnership again. I'm not going to go into a lot of detail on this, but every time Joe and his R&D group create a new product, it represents an opportunity for us. We've found that there is a very clear process that works in many of our markets that can make our product launch opportunities far greater and far more impactful in the market. And so, we're taking this product launch process and rolling out this as a best practice across our various geographies.

Lastly, is focusing on recruiting our highest potential targets. We talked about preferred customers and their important consumption as a core piece of our business, and retailing our products is an important part of our business. But we also realize that our highest return comes when we -- the more engaged those people who come into our business are. We get higher monthly purchases from them, and we get a higher retention rate, the more involved they are in our business.

With that in mind, this past summer, we tested a program in the United States, which essentially was designed to tie our business promotion, or the GRP program, to a product promotion. And by putting those together, the intention was to create the synergies between them.

We did it in the summer months, which are typically the time when our sales plateau. And across all the key member -- the key measures, we were able to have significant increases in the summer months on those participating on the number -- on the sponsoring rates for our distributors. And this is one of the programs that made our U.S. revenue very strong in the last quarter.

The last area is leadership development. We know from talking to our sales leaders that it's not an easy process to go from a distributor to a sales leader. They're incredibly talented individuals who, as they go through the process, they have to essentially build from scratch, motivate, train and keep an organization going throughout the process of advancing and help other people advance.

We know in talking to our sales leaders that every one of them realized that goal setting was an important part of this, that personal motivation was a part of it and that along the way, their mindset and their motivation, the ability to motivate other people, had a huge amount to do with their success.

So with that in mind, this last year at this last convention, we rolled out a program called The Success Formula. The program was not designed to replace anything that our current leaders already do. In fact, it's designed to enhance it.

It has a -- basically a 12-week program that's focused on some very key areas that are important to the founders of the Company, and to our most significant leaders. So, you can see some of the names of these different segments. There's -- this is really mindset and motivation, the power of clarity, the power of fundamentals, the power of thought, the power of potential, and it goes on. And it's designed to help our early-stage distributors and our executives be more successful.

These aren't principles that we designed or that we pulled out of the air. These are principles that represent the foundation of our company, success principles from our founders, Blake Roney, Steve Lund and Sandy Tillotson. And the program is -- was put together in concert and [we taught] with our top sales leaders who also participate in the video training, talking about how they have applied these success principles in their own Nu Skin career and developing the strength behind it.

So, we believe that this is going to be an important part going forward for us. We're still very early in the process. But again, along the lines of measuring what we see, is across these three important segments, distributors, qualifying executives and executives is that those who participate in the successful (inaudible) training are earning higher commissions. Now there are a lot of factors that go into this, but the control group versus the test group, across all three of these areas, show a greater income earning opportunity.

So in summary, we have a clear competitive positioning that we believe is going to allow us to use that $0.5 billion in commission to better communicate a more effective messaging. We have improved alignment with our leaders that will result in more effective promotions and more effective product launches.

And we have a number of test and improvement programs that we're going to be able to roll out more quickly than we traditionally have. And as we roll them out, we'll continue to learn, measure and improve on those programs.

With that, I'd like to go to the next level of detail, which is to introduce you to two of our key market managers. Gary Sumihiro will speak to you first and talk to you a little bit about Japan. And then Andrew Fan, who's the President of Greater China, will speak to you. Gary Sumihiro came to us roughly seven months ago and, as Truman mentioned, we feel very fortunate to have him join our management team.

He's a veteran of the industry having spent 17 years in the direct-selling industry. He's also spent the last 13 years specifically in Japan, most recently as the -- as a Vice President and Chief Operating Officer and Representative Director for Amway Japan. And he's already made a -- an enormous difference in our organization, and he has some exciting plans that he'll be sharing with you.

Andrew Fan is one of our most seasoned managers. He's -- was our first employee in Hong Kong in 1991, and has since then been instrumental in opening virtually every one of our Asian markets. He's a native of Hong Kong, most recently -- prior to his assignment in Greater China was the President of our Southeast Asia region, and has had an enormous amount of success in partnering with our leaders in helping design, modify and build successful organizations and working with our leaders to grow our markets.

So with that, I'll turn the time over to Gary Sumihiro.

Good morning (Japanese language). That picture was taken when I was (technical difficulty). It was about five minutes before they told me I was going to get on a plane and come out and speak with all of you. I'm pleased to be in New York. I live in Tokyo, so it's nice to come to a smaller city like New York.

I want you to know that this Sunday is my anniversary. I'll be seven months in the business. Now, I don't want you to get anxieties that the guy with the shortest tenure is running the largest market in the Nu Skin world because, as Dan mentioned, I have over 17 years of experience in direct selling and 13 of them living in Asia.

I came from a far larger company to come work for Nu Skin Japan, and that's because I like the process of creation. I like the process of turning companies around, and I know we can do it in Japan. I'm also one of the talking heads that often goes to trade conferences and international associations, and if any of you are in Hong Kong on Monday, I'll be speaking to the World Federation of Direct Selling Associations on how to do business in Japan.

Now, I want you to have confidence in my experience, but more importantly, I want you to have confidence in the upside of doing business in Japan. Japan is a $22 billion direct-selling market, and that's in a $1 trillion retail environment. Just in nutritional supplements, which is our Pharmanex brand, that's $11 billion. In our personal care line of Nu Skin, that's a $19 billion market. So, that's huge potential in Japan.

Now, even if there was a theoretical market penetration cap, we're nowhere near penetration. Now, I've see companies decline and I've seen companies rebound and as well as new companies enter that market in my time in Asia, and I can tell you there's significant upside with doing business in Japan.

Now, there are some key issues for Japan. One is, there is insufficient alignment with our sales leadership. And secondly, there is a disproportionate focus on preferred customers. And thirdly, is that the sales promotional tactics that were done in the [past] were often misaligned with the growth strategies.

Well let me tell you, when you don't articulate a clear and consistent and coordinated strategy what often happens is that there is attention deficit disorder or a lack of alignment with the distributor field. So, this business is all about getting new distributors into the business and their subsequent sponsoring and leadership of their down line.

Now in the past, the Company has sent out multiple messages. Sell more products. Acquire preferred customers. Get into high technology. But going forward, the strategy is that we will integrate everything we are doing around acquiring new distributors, in getting preferred distributors less and more distributors at the front end. We need to grow that leadership pipeline among the distributors as well.

Now I want you all to remember that I just came in, in the second quarter, but it was very clear that we needed to do something going into Q3 and Q4. So number one, the first thing we did is we went out on the road and met as many of the field leaders as possible, and that's part of the alignment of the Company with the distributors.

The second thing we did is we went out and gave them a roadmap to the future, and I'm going to refer to the six buckets later on in my presentation, but over layered with what we are doing as a company is the overriding messages that we need to sponsor more.

And a third strategy was to create business incentives, to increase sponsoring, and really that's what the first three promotions are all about. Those are distributor compensation incentives to help incent the distributor field to acquire and bring new distributors into this business. Now the fourth thing we did is we launched strategic product promotions, and to create energy and excitement, and frankly, to satisfy the demand as to what was going on out in the field.

And the last two, the trial-size package and the free shipping campaign are to create that energy and excitement. And I'm real happy to say that the trial size package which we launched was very, very successful. The upside is that we sold out, which indicated that there was substantial demand. The downside is that we sold out. But now we have inventory back in and there continues to be a high demand for the trial size package. But you tie those product promotions back into sponsoring. Those trial size packages are to use to help the distributors sponsor.

Let me take you into some of the Q4 events into which we are doing now. Sendai is part of our strategy to create greater awareness about Nu Skin. Now it's not a hard figure, but I believe that only about 35% of the population is aware about Nu Skin or what we do in Japan. Now, that's out of a population of 127 million. We have never surveyed the market for awareness in the past, but we're going to be doing that in '08.

The second thing is that we had a Woman to Woman event which we kicked off this past Friday. And I will tell you that we thought that we would get 2,000 people, well over 8,000 signed up for the event. Now the reason we chose Woman to Woman is because approximately 42% of our population of distributors is female, but in the direct selling industry over 80% are involved in direct selling.

And that means that that spread between what our current distribute base is of females and what the direct selling environment is, is an opportunity for us. Now we've never done a Woman to Woman event like this in the past. This involves a sponsoring opportunity to bring new people into the business so they can look, touch and feel the product. It also is an opportunity to provide executive leadership training, and thirdly it's to create awareness.

Now, I'll show you what this is. Let's see if I can get this going. There's no sound on this, but (inaudible) but what this will do is show you what we have been doing in terms of creating that excitement and energy in the field to bring distributors into the business. Again, I'm a big believe that if people don't know who you are or what you sell, you're never going to get them into the business. So we need to create these types of events.

Before we opened the door there were over 1,000 people lined up just to get inside. Now we're running this event in Osaka soon and we'll be running in Fukuoka as well. We also have the One-Day Walk in Centers, and as you know, we have walk-in centers in some locations in Japan, but strategically it's to penetrate the outlying areas and support the majority of distributors who live outside of Tokyo and Osaka.

Only about 23% of the distributors are based in Tokyo and Osaka and what we need to do is to support the other 77%. Well our learnings to date, we had good early initiative responses and the distributors like themed multi-level programs versus singular promotions which we have done in the past. As Truman alluded to earlier, our sponsoring and the number of LOIs has dramatically increased month on month. And clearly there is more energy in the field, the distributors that I'm talking to have called this the new Nu Skin.

Now there are some success imperatives for us. Revenue growth, we're going to grow this market for the first time since 2002. Secondly, we're going to create awareness about Nu Skin and what we do as a business. Again, you have to go back to that fundamental proposition that people won't buy the product and they won't join the business if they don't know who we are. So creating an, awareness, is very, very important for us.

The third is to increase the number of distributor sign ups. Again, this business is about bringing more distributors into the business and there is a lot more opportunity in Japan. And lastly, and typically we wouldn't put this inside an IR presentation, but we need to increase employee satisfaction. It is my belief that the employees are the foundation of the Company, and to grow that business long term we have to invest in the employees and make sure that they understand the strategy and direction of the Company.

Now we have some key strategies. We're going to align sales leadership behind the core growth strategies, we're going to focus the salesforce on sponsoring initiatives and we're going to align the organizational structure with business strategies. And let me talk about each of these in turn. One of the first things is to recognize that the distributors are our customers but they are also our partners.

They, between the Company and the distributors, make the success that we have in Japan. So we are going to formalize a Leadership Advisory Council with some of our top leaders. Now that means not just on their sales and productivity, but on their leadership capability in the market.

The second thing we're going to do is focus on the salesforce sponsoring initiatives and we have front runner programs. And I'm not going to go into detail on all these Special Product Promotion Products and Welcome Back Programs, but the belief behind all of these incentives is to create an opportunity for distributors to sponsor. Again the message for the Company is sponsoring, that's the number priority for all of the distributors and these are the tools for them to succeed.

And the third is to align the organizational structure with the business strategies, and as Dan mentioned, we have an organization restructuring going on. I believe that we need to restructure that organization to make it bigger, better and faster. We're also going to expand the goal-setting program so that we partner with the distributors on the strategies and objectives and where we're taking this company.

And lastly, we have something called the six buckets, and I had the luxury of only being in the business about one month when they told me to go on the road and get everybody aligned as to where we're going to use our resource and take the Company. So this is what we did in the first month. I set the team to a task to come up with tactics to grow the business in '08, but those are all disconnected.

So what we wanted to do was to create an easy to sell simple story of where we're going to move this company. We're going to focus all of our resources on creating reputation. That means increasing awareness and favorability. We're also going to provide tools to succeed not only to the employees, but to the distributor.

And this requires more education and training and product information, so that they become the best sales people out there in the market. The third is better communication. Dan talked about CRM, that's part of the communication strategy. But we need to provide the right information at the right time in the right media, and that means reanalyzing whether it's print, paper or digital.

Working with Joe Chang's team we're also going to focus on innovative products. And frankly, we have too many products. We need to focus on those that are innovative, those that have the difference demonstrated. And working with Joe's team again, we're going to focus on creating that ideation and development so that it has a front end on Japan. The Japanese are probably the most demanding consumers around the world and that market deserves the best of the products that Nu Skin can offer.

The next is operational efficiency, we can always be better and that means relooking our KPIs, whether it's call center analysis, distribution strategies or human resources. Every single part of the Company will be reanalyzed to be better. And lastly, is market research. In the past we have launched products, but what we need to do is get better feedback from our customers as well as the market environment.

I'm proud to announce that we have already created the Market Research Department and the first hire will come in as of November 22nd. So we're a little bit ahead of schedule here. Now I'm not saying that it's going to be easy, but I am saying that we have the passion and energy to succeed, and now we have the strategy to succeed. This isn't a short-term event that we're doing, this is long-term consistent that we're going to use to grow this market.

So in closing, we're going to increase sponsoring, that is the focus of this company. We're going to get people successful earlier on by implementing more distributor incentives to help our customers. And we're going to continue to partner with our key leaders to engage them in dialog to help grow this business, and we're going to continue to increase the operational efficiency of Nu Skin Japan.

So thank you very much. (Speaking Japanese)

Hi, good morning. My name is Andrew, let me introduce myself a little bit to you. I'm from Hong Kong originally and therefore I'm [not] Chinese. How should I start? Everyone here is listening to all the corporate executives and speaking in a very corporate way. I'm a little bit weird guy because I [study] in a different way because 22 years ago when I was still in college I was a distributor, unlike all these guys here talking about a lot of things about corporate. They are very rational because you are very rational as well.

I'm not a very quantity guy, I'm more a quality guy because 22 years ago when I was in college I was a distributor, and I did sponsor about 500 people in six short months, maybe not as good as John and Giselle here. They're very great people, they've made 20 million from the Company already, I didn't make anything from the Company, [but] I used to be a distributor. I [failed] and therefore I know how to fail.

And in the last 16 years I've been with Nu Skin since 1991, September, I was the first employee for Nu Skin starting out in 1991 in Hong Kong. In 1992 I helped the Company to open in Taiwan, '93 in Japan, '95 in Macau, '96 in Korea, '97 in Thailand -- actually '96 in Korea, '97 in Thailand, '98 in the Philippines and year 2000 in Singapore and 2001 in Malaysia, in 2003 in China, 2004 in Brunei, in 2005 in Indonesia, I've been going through all these 10, 12 markets in Asia for Nu Skin. And one thing I did learn about this business is we need to work with distributors. We need to learn how they [sell] and therefore we need to learn how they can be successful.

This business is a very interesting business. It's not only about how we put together all these strategies that mean work together with the distributors, but we need to listen to the distributors in how to put things together. When Dan first talked to me about going to China I'd been working for Southeast Asia for the last six years already and I should be having a pretty life in Southeast Asia. As you may notice in the numbers, if you really look at the numbers, Southeast Asia has been growing in the last six months or in the last 12 months, the numbers keep going up.

And I've been wondering and I have been hesitating, why should I go to China? There is no reason for me to go into China. Things are going well in Southeast Asia, because we have been working on a very solid foundation in Southeast Asia already. You know going into China is kind of, in the last four or five years, it seems like we have very good up trend in China. If I go into China its huge country, it's a big country, it's a big market, there are so many things that I can do.

But if I go into China then I have to give up all my sleep and I have to give up all my life. I can have a pretty good life, I don't know how many of you have been traveling to Singapore, I have been living in Singapore in a very relaxed way, I've been working with the leaders and I've been talking with the leaders every day and things are going well. So, why should I go into China? And I've been wondering why.

But when I look at the numbers, this company that I was the distributor, I don't want to name the competitor and you all know this competitor and it's probably (inaudible). And then I have been thinking about this company in China, they are doing US$1.5 billion, which is bigger than what Nu Skin is today overall worldwide, and they are doing just that 1.5 billion in China.

And I look at all the other companies like MK, a 40 or 50 year old company starting out from the U.S. and they are in China, they're doing US$300 million, US$400 million in China. And all these local companies that I don't even know what their product is about and they're doing US$200 million, US$300 million or even USD$500 million just in China.

And I look at Nu Skin. We are only doing what, US$70 million, US$80 million in China after five years. But in all the markets that I've been working for, Nu Skin in Asia, in every market, we are in the top five companies. We are in the top five companies. We are in no way that far behind some of these so-called top companies in China in the other markets.

We actually, in some of our markets, we are doing much better than do. How come we are doing only US$80 million, US$70 million in China, while the other companies are doing multi hundred million or even exceeding billion? There is no way that we can do so much far behind in China than all the companies. We have [far] better products, we really have a great leadership compensation model and we have a great culture.

Well I actually tease with Dan, he cheated me because I was thinking that's simple. Therefore I decided about five months ago, actually five months and ten days, 166 days, I was counting every day. 166 days ago I said yes to Dan, even though he has been talking to me for more than 200, 300 days to ask me to go into China. I really think that in China that could be my last assignment at Nu Skin, because I believe that in China we have huge potential. So I'm trying to cut short here about this slide.

There is no way that we can not do much better than we do. Even if we can do only half of what the other companies, the top five or even the top ten companies are doing now in China, we will be at the least several times what we can achieve today in China.

And in the last 16 years, you saw the other slide from Truman showing all these successful leaders, you may notice one thing if you have your handout there. The slide shows that the 25 people -- the top 25 leaders that have made more than US$20 million commission, like John and Giselle here, 20 of them are Asian or they are actually making their success from Asia.

Our businesses is really great in Asia and they are already going to China. And when they talk to me I tell them hold on for now, let me fix the thing first, let me put [out] a fundamental, a great fundamental, a good foundation for them to spring ahead. And if they all come into China, let me tell you I'm very confident we can double in a couple of years.

But we do not want to double that fast. The [key] thing is we are looking for long-term success. We are looking for growth, not just in a year or two years, but we are looking for a growth, a stable and solid and long-term growth in the next ten years. Maybe bit by bit, but in this business what I [went through] in Thailand, if you go back and look at our numbers in Thailand, we opened in 1997 in Thailand.

We had a great huge opening and then, because of the economic prices in 1997, we dropped so much. We were only 10% from the opening, we dropped 90%, but we grew it back. And this business is not only that -- in the first two years of building it back it could be stable, but when it really accumulated enough energy, we had several years of 90% growth, 80% growth, 90% growth and then we will bring it back. And in China we believe that it will be like that, it will be just like that if we can do things right.

The key issues in China, there are many, many key issues, but in a snapshot they key thing is we have this new direct selling model, direct selling license in China. In the last few years we haven't figured out how to integrate the direct sales model together with our legacy employment model.

The second thing is, because of the employment model that we have put in place, there are social benefit issues that is actually, the people who are our sales people, they are not really getting all the money into their own pocket, because a lot of their income is going into the social benefit system in the country. And then we have the new labor law that will be coming into effect in the next year in 2008 that will be affecting also their real income.

And all these things coming together, one thing that I [share with] the leaders is how can we keep all the complications in China into the key of success into this very, very unique industry which is very different from the traditional industry, which is the four things. How can we keep things very simple? How can we keep things very focused? And, how can we keep all these things integrated? And also, we execute in a very consistent way so that we can leap into the short-term success that we talked about.

There is a Chinese saying, some of you might have saw the Chinese movie, the Crouching Tiger, and what we say here in China is, before we can really spring ahead and spring far enough, we need to crouch to accumulate energy so that we can really spring far ahead. So what we will be doing in the next year is how can we consolidate and accumulate our energy, so that we can really, really have the solid energy to spring far ahead.

You know we are going to manage our investment into China. Some of you [who are] looking at the numbers, we are not making money in China for now, we are only investing but we are not profitable in China. And this is something that we have to fix and we will fix it. And we will fix it in a way that actually is preparing to get our business in a very good shape.

We are going to put in place an infrastructure good enough to attract new people to come into the business. You know in this business, if we are not attracting new people, we will not have long-term success. To make sure have long-term success we need to make sure that everybody looking at our company, they feel proud and they will be very confident to come into our business.

And because of the unique employment model that we have in China, which is very different from our model in the other markets, how can we make sure that people still can be coming into our business without any barriers as much as possible. In the past, the Company in China was organizing in a very diverse way into seven regions before I came into China.

So the first thing that we have to do is we are actually reorganizing our market management into four regions, so that it can be simplified and aligned in a very focused way and in a more simpler way than how we run our business in China to date.

So we are reorganizing the whole country management in a way that our message and our communication and our efforts and or programs will be very effectively communicated to our field leaders and our field builders in the country. As a matter of fact, when I looked into our operations in China, we are very confident that with 700 employees we can manage our business today better than the number of people and the number of stores that we have in China today.

So actually in this month we are reorganizing, we are having a wholesale reorganization of China to make sure that we really have a very, very effective number of employees, effective staff as well as a more effective infrastructure to put in place to run our operations in China.

And this reorganization is trying to actually -- the key thing is what we are trying to do is make sure that our employees at the front will still be very more focusing in providing the service that our customers as well as our distributors would need. And also, in particular in China, to make sure that the local government relations will be handled in a more effective way than today.

And we are actually relocating, therefore, from the resources from this reorganization to launch what we call the Nu Skin Plaza. And this is not something that we do newer than what we used to do in the other markets. In the other markets what you see here is not just image but it's a picture of what we have in Bangkok, this is what we call the Nu Skin Plaza.

It's not just a store, but it's something like an 8,000 or 10,000 square foot facility that, when our distributors bring in new people, they can tell in a very standardized way, in a very simple way and in a very focused way the story of the Company and walk them through what the Company is about, what our product is about and what our culture is about. And this is what we have in Hong Kong.

And the main purpose of creating this Nu Skin Plaza, this is what we call the Nu Skin Plaza and we're going to five Nu Skin Plazas in Beijing, in Shanghai, in Guangzhou, in Shenzhen and in Xian. They are five key cities in the Northwest, Southeast, the four big regions of China, and the focal point is to focus our growth in these important cities in China. And this is where we believe this is actually a proven fact in the other markets in Southeast Asia, or in Hong Kong or in Taiwan, that we have been building these facilities is really helping us to build people and to bring new people into our business.

And in the remaining 48 stores that we have we are going to upgrade into an Image Store to better represent the story of the Company so that, again, when the new people come in and look at our company they will really have good faith and good confidence in our company. So what we are talking about here is really a platform so that the new people come in, there will be a facility that can enhance more new people to come into our business to become either our consumer customer or our business builder.

And you may notice we have less distribution points than before. So to supplement that, actually the distribution point that we will have in the future or for the forthcoming is not only for distribution but it's more for an environment to bring in more new people. And in terms of distribution, to supplement that we are launching a more enhanced phone ordering and payment and delivery system.

You know for you guys in the U.S., you may not understand exactly how important it is in China because in China a lot of times people do not have credit cards or you cannot place orders in the U.S. as conveniently as in China. But we are having a very new facility in China that can make it more convenient for people to call in or to place orders over the website and do the payment and have the delivery of the products as conveniently as in the U.S. You know until today it is still very tough in China to make a facility like in the U.S., but we're going to make it.

The key thing is we are also remodeling our whole employment system in China. In the past people can come into our business only as a full time employee and as a full time employee they have to sign a full time employee contract, which they have to submit almost 20 different documents to become a full time employee. And it is a very big barrier because Nu Skin has been successful in many, many other markets because of the fact that we are attracting very high profile, highly educated and professional people into our business, providing the leadership to our salesforce.

So in China for those people it will be difficult for them to come into our model to be a full time employee because of the regulatory situation in China. But we are resolving this issue by providing, and with also the new law going to be enforced in China, we are remodeling our whole system so that people can come in as part time people, signing a service agreement other than going straight to the full time employee.

What does this mean? If you can see that for people starting up as our sales people signing in through a service agreement, the green column, they only need to provide five documents instead of in the past when they have to come in, to become sales people, they have to submit more than 20 agreements.

So what we are trying to do is we have a model that people can come in, in a very, very convenient way to become a very entry level employee by giving the least required documents as possible until they really migrate into a leadership position. Until they have an income level that will support that they will not be facing all these barriers to come into a business.

And we are also integrating our compensation model so that our model in China would not be different from the leading companies in China. So we are trying to integrate our compensation model so that it will become more integrated than before, which is a little bit separate. And the whole thing that we are trying to do is we are building a whole cycle model to drive our business in China. You can notice the top line in the last quarter of every year, as Dan and Gary have talked about goal setting. We are having a goal setting initiative that we are going to help our sales people to really set up a goal.

And then from then on every quarter we'll have a product expo, just like the video that Gary showed, to provide an environment on a quarterly basis to attract more people to come into our events, which is exciting, and attracting people. At the same time we are building the Nu Skin Plaza which is serving on a day-to-day basis an environment for people to come into the business.

So Q2, the second quarter, we're having what we call a Success Seminar, the Success Seminar is an environment to recognize people for their special achievements. This is a whole cycle we'll go through to put together to drive the people around the activities.

And then every first quarter after the people achieving their targets, we're going to bring them to an annual incentive trip to recognize what they have achieved with the goals that they set in the last quarter of the year. And achieving, this is not something very special, as a matter of fact all the things that we have been doing in the Southeast Asia market in the last few years.

And we can see the effects are really coming out, these are the fundamentals. In terms of this business, achieving is about this business, as I mentioned in the past, its how much effort we can put into place to keep it simple, to keep it focused, to keep it integrated and to execute it in a very consistent manner.

With all the efforts that we are trying to put through, we say in the next year we will see that we will see a very good improvement on the bottom line in the year of 2008. And the top-line results will be resolving by the end of the year and going into 2009. And this is what we are trying to achieve and to focus on building in a very consistent fashion. And we believe that when we can accomplish all these things we are ready to spring ahead and spring far and spring strong. And this is what we are trying to focus on.

Thank you.

I'll just introduce Joe Chang real quick. Joe is our Chief Scientific Officer. We actually acquired him through Pharmanex when we bought Pharmanex back in 1998, really a key member of our management team. Last year in our restructuring one of the key things we did was bring our brands together, now all reporting through Joe Chang, so he's responsible for both our Personal Care and our Nutrition business. I'll turn it over to Joe.

Thanks, Ritch. You know we have name for Andrew in our company, he's known as Andrew Fan the Nu Skin Man. I think you can appreciate he has a passion for the Company and in fact he is our Hidden Dragon, if you will, for China. Let me go on to the next slide.

You've seen the strategy grid from Truman and on the product side what we're focusing on is obviously leveraging our differentiation tools. You've heard about the BioPhotonic Scanner which we launched back in 2003, we have taken it through several generations now and I'll show you the latest Everest Edition, which I think is a very material improvement to that particular tool.

We also just launched ProDerm at our September convention and again that was a second generation. We launched ProDerm I last year and we brought this out ProDerm II at the convention. And again I think you'll appreciate that we have done significant technical improvement to that particular tool. On the Nu Skin side, our key tactics are really focusing on leveraging Galvanic.

We have since learned that a combination of several products in the Nu Skin product line really matches really well with the use of the Galvanic. And again, I'll take you through that. And then Tru Face Essence which is a $25 million global revenue product for us, we have also done a technical enhancement of that product.

Finally, I'd like to introduce a new, what we call, an enabling technology or a platform technology for the Nu Skin brand. And this is focusing on a protein that we have just discovered that's called arNox. We believe strongly that this particular protein, which is an enzyme, plays a pivotal role in the acceleration of skin aging and I'll show you some data on that.

On the Pharmanex side you can imagine where Truman has alluded to the success of the PRH, which is an acronym for the right approach to weight loss, has been a success for our Southeast Asian and Taiwan market. And in the United States we just launched the My victory Weight Management Program at the September convention. So again, I will give you more information on that particular system.

We are also developing for the Pharmanex a new concept focusing on a scientific principal that's called glycation. For all intents and purposes, glycation just means adding sugar to a protein in your body and it's that reaction happens that leads to a lot of significant aging and (inaudible) symptoms in all the tissues and organs in the body. And again, I'll explain that and describe that in a bit more detail.

Importantly, when we brought the two Nu Skin and Pharmanex brands together, what we wanted to do is to simplify the story. I think you've heard from many of the presenters and from our corporate managers that the story got a little bit out of hand in terms of complexity.

We really wanted to make sure that when we do it for both products, since we have so many products in both brands, we want to simply and converge it to a focal point that our distributors can actually look back and be able to duplicate the story in the field. So again I'll be talking about the anti-aging concept that we are going to do, and finally, leveraging, all the tools that we have made in Pharmanex and Nu Skin.

So simply put, Dan has mentioned to you and described the different demonstrated branding/messaging positioning. We're using that as an umbrella to guide our product development and really what we want to make are anti-aging products that you can immediately rebut and say well every company is trying to make anti-aging products.

Our differentiation is to make sure that our anti-aging product comes with a significant difference, whether it's through a clinical study, whether with being able to demonstrate it through our proprietary tools, those are the difference demonstrators we want to associate with our anti-aging products. And that would be our strategy going forward.

And obviously the whole portfolio is focused on providing all our distributors the ability to tell a great Pharmanex or a Nu Skin story so they can sponsor more customers and more people into their organization. And when they come into the organization, they fall within the products so they will start consuming. So that's really what the product lines, both on from Nu Skin and Pharmanex, they are supposed to do and build the business.

Now you've heard on the Pharmanex side particularly, the FDA has sort announced what they call GMP guidelines, which would be Goods Manufacturing Practice Guidelines. We as a company would have to adhere to those GMP guidelines by June of 2008, roughly about seven to eight months from now. I just want to show you that, since Pharmanex, we have always been doing GMP guidelines or GMP-like processes in our company in how we develop our Pharmanex supplements. We already have the 6S Process.

Not to belabor the point, for all intents and purposes, we have satisfied most of the GMP guidelines, now all we have to do is to document it in the way the FDA would like to see it. I think, again, this will be a differentiating point whereby companies, especially in the supplement world, who cannot and will not follow GMP guidelines, they will inevitably fall by the wayside and I think it's good that we can really have such principals in the Company and we call that the 6S Process.

Now the differentiation tool you have already seen, we've already sort of described the BioPhotonic Scanner to you over the last several analyst meetings. And this is our latest generation, this is called the s2, it is faster, lighter than the original version. I think it continues to be a unique tool even though we -- when did we launch this?

Back in the middle of 2003, we have yet to see a scientifically sound tool that can really compete with the BioPhotonic scanner insofar as measuring antioxidant levels noninvasively in situ or in the body. You know we have all kinds of other tests available, but they are invasive, they require a body fluid and so on. Up to this point there is not a competitive tool on the market yet so we're still rather excited about its unique position.

We have since coupled the ProDerm skin analyzer, the ProDerm II, to our Nu Skin line. And again I think that you will find that this portable visualization tool is going to be important for our Nu Skin brand. You know up to this point when you go and visit, whether it's Sacs Fifth Avenue or somewhere in a cosmetic counter, for all intents and purposes you see this great big machine called a Visia where you have to stick your face in and they take a snapshot of your face.

And it's not very portable, in fact it's not that high resolution either. We believe that we have created and developed in ProDerm a significant advantage over the Visia system where by it is portable and the resolution that is associated with ProDerm 2.0 is far, in order of magnitude, better than what the Visia can do.

Now briefly on the s2 Everest Edition, the reason why we call it Everest is interesting, because there were two [surfers] living in Utah and they were world-class climbers. For all intents and purposes, I think one of them holds the world record for ascending the Mount Everest in about 14 hours.

And he wanted to see how that his body oxidated stress is affected by high altitude and he wanted something simple that he can take along. He came to us and we thought well, okay, maybe the BioPhotonic Scanner is worthwhile for him to take along. And instead of using electricity to run the s2, we coupled it to a solar panel for him to use and it worked out well.

We learned a lot from that exposure at high altitude. Now the Everest Edition, within five minutes when you flip on the switch you can start using the scanner to do your antioxidant reading or scanning. No more using fancy, we had some Silly Putty calibration material in the previous version, we don't need that anymore. There's less score variation from people to people from day to day and, most importantly, you can now upload using broadband, which cuts down the uploading of the data from our distributors from roughly about two hours down to about less than ten minutes.

So the capability and the performance of the s2 Everest is far and above over even the previous edition. So it's proving to be quite useful for our distributors to have this kind of user friendliness, because obviously when they go to a hotel room, they have a distributor meeting, they like to set up the scanner easily and I think they can do it far easier now. So it's a good thing.

Impact today on the scanner, as I mentioned we launched it back in July 2003. The Pharmanex revenue has increased about $150 million over the last three years. We have done close to, since this slide was made, we have close to 7 million scans to date, 7 million scanned globally. The s1 which was launched in 2003, second generation s2 in 2005 and the total, you can see there, the total of s1 and s2 we have in the field is roughly 12,400 scanners distributed among our global distributors.

And our data, the analytics that Dan has done with his team, shows that a scanned distributor tends to be far more productive relative to a non-scanned distributor. In other words, the use of the scanner is very effective in building that organization or building your business. So it's a very useful and effective tool.

It remains a key differentiator for the Pharmanex product. Really this is the only tool that any company has up to this point that can really answer the question how do you know your supplements work. That's really the simply that we have taught our distributors to ask, that when you go and talk to a prospective customer or consumer, you essentially ask the question how do you really know that your supplement works. And the BioPhotonic Scanner helps you address that issue. And obviously it's unique in the industry.

Just to show the global scanning activity, the Y axis on the left shows the monthly scans that we have. It continues to grow over the years and also the cumulative, I've shown you the number, its now approaching 7 million people scanned in all our markets. So it continues to be very active and used very productively by our distributors.

Okay a little bit about the ProDerm II, the Skin Analyzer, as I mentioned, we launched it at a convention. The important thing about this particular portable unit is the fact that it can measure wrinkles, it can measure texture, it can measure lines and it can measure pore size. These are the four attributes that one looks for when you look at skin health. The key think about this particular ProDerm II is the fact that, unlike Pharmanex, the Nu Skin product tends to have to be a bit more what we call experiential. It's a warm and fuzzy thing that one has to associate our products with.

Pharmanex is health, great, it helps you to be healthier, it's wellness and so on, it's okay. But on the skin side, when you compete with the mirror, the tool has to be a little bit more experiential. And I think, if I show you some of these pictures that you can immediately take with the ProDerm 2.0, you would agree. For example, it highlights the lines and wrinkles, it's pretty gross. And then it looks at your pore size and you look at those dark black spots.

This is normal skin, this is actually on the mirror, you can't see any of these so-called blemishes, but when you highlight it on the ProDerm 2.0, it gives you that experience. I think it motivates the distributor or the customer to ask more questions about our Nu Skin product.

And that again would be the texture on the third picture, we can show, and finally the dark area here, that's a blemish, that's a discoloration that we can take a picture of in little areas of your face. So this is what we mean when we talk about the ProDerm being an experiential unit or tool.

And just to show you the relationship of the launch of ProDerm and the impact on a particular product, this is one of our flagship products, it's called 180, the Skin Treatment System. And when we launched ProDerm 1.0 back in roughly September '06 and then step up with the September here, thereabouts, with ProDerm 2.0, you can see there's a significant up tick in the sales of 180.

So I think we have pretty good data to suggest that when you use the ProDerm, the sale of a 180 becomes easier and for our distributors to be able to make an impact or be able to influence a customer getting interested in our Nu Skin products. So, pretty good data overall with the use of ProDerm.

Our tactics on the Nu Skin side, as I mentioned, one of them would be arNox [bar] and I will talk about that a little bit more. And then also we launched a new product at convention which we call the Tru Face Essence Ultra. The Tru Face Essence Original, the sales of that globally is around $25 million and with the addition of this new SKU, we think that we can enhance and have incremental sales with this particular line. And then I will address arNox in a minute.

So let me show you a movie on the Galvanic.

(VIDEO PLAYS AND RESUMPTION OF SESSION)

Okay just a tip, because you are going to get one of these units on the way out after this presentation or this session. This is a disposable head, you're going to have four of them in your kit. So when you put it on, there's a button at the back and you have to press a little bit harder first time ever for your kit so that you can easily take it off. And after a couple of times it's coming a bit easier for you to take the disposable head off.

And this black one is what we call our Executive Limited Edition. In fact in Europe, it's interesting, this is sold at a higher price than the white version and there's quite a few off-label uses with this particular unit which I cannot disclose publicly. But it's interesting, The Galvanic unit's found a lot of off-label use, particularly along the bottom of your arm in older women.

Okay. Just to tell you a little bit about the Galvanic current, these are two tattoos that I put together. Step 1, we have a pretreatment gel in your kit, it's a gel literally and it's called a pretreatment gel. You put it on your face and then what happens is the Galvanic unit is then switched on to a negative current. Now this is not going to electrocute you, okay? We do not believe in capital punishment in Nu Skin. So this is direct current, very low and it's negative, and the pretreatment gel is also negative.

What happens is, when it goes into your pores, it then encapsulates or gathers or [aggravates] all the dirt, the microscopic dirt if you will, inside the pore. It covers it and then when you apply and rub the Galvanic negative current over your face, it draws the negative particles out of it because like/like attracts. It's basically the electrical principal. So it cleanses the pore and opens it up.

After you've done that, in Step 2 what happens is then you switch, there's a switch on the Galvanic unit, you switch the current to a positive current. So what happens then, you then put the treatment gel, this represents the treatment gel, the treatment gel has a positive charge to it.

So when you apply that on, and you switch on your Galvanic unit, which is a positive current, when you apply it, it continues to pull out. It attracts the negative now, the negative pretreatment gel, whatever is remaining, out of the pores, continues to pull more of the dirt out while driving the positively charged treatment gel into the skin. That's really, for all intents and purposes, that's how the Galvanic current works.

On the video you notice that if you go to a spa, that particular treatment on the Galvanic unit or Galvanic treatment that they apply to your face usually tends to cost no less than $500 per treatment, up to $1,000. So it's pretty impressive for us to be able to provide, that's why we call it the Galvanic spa at home because it's a portfolio unit, provides for all intents and purposes the same principal as they do in a salon.

Okay. So that's what we did at the convention, we launched the new Executive Edition, which is the black version. But importantly, we also had coupled this particular spa treatment head. We call it, together with another Nu Skin product, the so-called Tru Face Line Corrector. Because what we felt is that when you want to treat a blemish, discoloration, usually discoloration occurs locally.

So what you want to do, rather than having a whole current and weakening, diluting the color out, we focus the current onto a particular spot on the head so that when it applies to the blemish in the local region it applies a greater, higher degree of potency. So it can drive and use the pretreatment gel even better and then putting the Tru Face Line Corrector, which is now the treatment gel version or equivalent, and it works better that way.

And we also have the Galvanic Spa is a driver. You heard from Truman how he has become a very effective growth driver in Europe, the United States and Korea. We have just restaged in Japan so Gary and his team will be launching it in a program that we call the GRP or the retail product promotion or something, where there's a more, front-line money associated with that program. We are putting Galvanic together with that and also in Southeast Asia we are promoting and globalizing this particular Galvanic Spa as a growth driver.

Several factors, importantly, the Galvanic is priced right, it's not a price barrier, and we have not had any significant feedback regarding the price, it's really where it is. There's a lot of perception it provides very good value for that price. The leadership has created and developed very effective duplication model behind the Galvanic Spa.

As I mentioned, it's demonstrable. In fact many of our distributors will do what we call a half-face demo where they do half of the face and leave the other half untouched with the Galvanic and essentially they look like a stroke patient because it looks far better than the other side. But it's very visual and it's very effective during a meeting when you can show that kind of benefit with a Nu Skin product. And obviously it's exclusive to us, so far we have total exclusivity with the Galvanic Spa, and it is indeed a global sponsoring tool.

And as you use, and as other distributors learn more and more on how to create a compelling story on Nu Skin products with Galvanic, they start to introduce our other flagship products. I already mentioned the 180 System, we also have the Tru Face Line Corrector and some of the essentials and, very importantly, I think it's a great door opener when you talk about Nu Skin products with the Galvanic.

True Face Essence Ultra. As I mentioned, this is a $25 million product for us. We have created a new formulation. We've added more things to it. This is a firming product. For all intents and purposes, it lifts up your face when you apply it on and we thought that, while it can restore the elastin fibers in your skin, hence the reason why it has the ability to do it, we also want to make sure that that resilient elastin is not continuously degraded by an enzyme called Elastase.

So we have included some Elastase inhibitors in the second generation Tru Face Essence Ultra. It comes in little pellets, I believe you will get it in your kit as well, you break open, it would make the pellet 25% larger so that more surface area can be applied by using one pellet. And together with the Elastase inhibitors -- and one of Pharmanex's antioxidants called Tegreen, those two ingredients that we have added to Tru Face Essence we think is going to make this product even more compelling and demonstrable.

Okay quickly a little bit about arNox because this is our future and this is a platform technology. It's quite exciting and a bit complicated at times, but I hope maybe I'll leave you with a message that you can take home. For all intents and purposes, when you look at skin and all the things that are being done in skin technology, when you look at all the different systems, the technology is more than 25 years old.

You know if you're looking at sagging, you want to treat it with elasticity. If you want to look at wrinkles you either do acids, peels, firmness, you go Botox the face and so on. It's very old technology. So for all intents and purposes, if you can go out and take all the so-called new products and put it in a room, you can actually distill them down to this kind of technology, very little difference, very little material breakthrough in technology.

Now we think we have come out with a new way that we can actually address skin aging. It is a new technology, it is about this enzyme, it's an acronym called arNox. This is an enzyme that we find, it's actually directly related, in other words the enzyme activity increases as your skin ages. We can find this enzyme then. And we think that the discovery, which is patented by the way, by using the discovery of these enzymes to develop enzyme inhibitors, we can come out with a brand new Nu Skin line of products.

So schematically, what happens is that in a healthy skin it looks like that, it's in the skin, its okay, it's got water, those little round circles represent water droplets, it looks fine. Very healthy, hence when you look at a baby, that's what happens, they have healthy skin cells. However, as you age, what happens is these enzymes, as represented by these red triangles, start to appear on the surface of your skin. And unfortunately when this enzyme appears on skin cells, it tends to catalyze a reaction to produce a lot of free radicals. And those free radicals damage the cell membrane.

So what happens is that when the arNox catalyze reactions happen on the skin cells, water starts to permeate or starts to diffuse out of skin cells. And that's how skin aging starts, you get wrinkles. So when a healthy skin cell loses water from its intracellular state, it becomes an aging skin cell. And what happens is that that's how this whole thing, the whole skin aging process starts. It's all related, we think, and we have the data that suggests the pivotal point, the catalytic point where -- when this happens is actually controlled by this enzyme called arNox.

So what we want to do, if for all intents and purposes, we have discovered some arNox protection factors, these come from natural sources and natural ingredients and we think that by incorporating these arNox protection factors into a new Nu Skin product line, we can come with a set of products that can pause the aging escalator.

So that it's a prevention -- its prevention approach and then we can sort of somehow couple our treatment, like Galvanic Spa, our 180, now to a brand new paradigm that is focusing on prevention, thereby making all the rest of our products work even better. So that's why we are excited about the arNox protection factor approach.

On the Pharmanex side, our key tactic surrounds, obviously, as Truman and [Dan] alluded to, to our weight management system. This is the armband that we have. This is unique, or at least right now we have it in our part and parcel of our weight management system and then I'll talk a little bit about another platform technology we have in Pharmanex.

So My Victory, simply put, we have three components to the system. First we have shakes and meal replacements and these are protein shakes that are very sort -- it's interesting. It's different from other protein shakes that you can buy at GNC or wherever.

These shakes contain active ingredients or active botanical ingredients that can suppress and can help you to achieve a sense of satiety. You don't feel so hungry after you take this protein shake. Hence the reason why we call it an active shake. It's not just another protein shake. It contains ingredients that can suppress your appetite.

We also have a weight loss supplement, a component to it. The biggest difference here is the fact that it has fewer pills. You don't have to take -- it's right now our recommendation is only three capsules in the morning and three in the evening and that's all you need to take together with the protein shake and importantly is the fact that if you look at weight loss systems, the most important element is the -- is our ability to modify your behavior.

And we think with the GoWear armband, we have an effective tool that can help you to modify your behavior so that your weight loss can be sustained. It's not just a flash in the pan and then six months later, you regain all your weight. So I think here's a piece of a video that we've made to promote our (inaudible).

(VIDEO PLAYS AND RESUMPTION OF SESSION)

Okay. The last two frames are particularly important for you to sort of remember and notice because remember the first thing is what the deficit (inaudible) showed. That is key, for people to be able to know whether they're going to hit that caloric or calorie deficit every day. And the second frame that you saw the lady taking a piece of candy or chocolate, that is also key for this system. Because we feel that many of the diet systems that we have in the industry tend to make people go into a very depressed state.

And unfortunately, depression leads to them not staying on that system. We think that with this particular, My Victory system it's a day daily victory every day. Rather than making you go through a boot camp and making you all depressed, we weak really want you to make sure that you go through this diet system and with our protein shakes, with our supplements, with the goal that it is a happy experience and not a depressive experience.

So what's our difference? Importantly, also that the active ingredients that I had alluded to and I mentioned it to you, the active ingredients, every company has it, but not every company is willing to put the true dose or the clinically effective dose in their products. Statisticians, the first time, where we have actually put all the ingredients, blended all the ingredients together at the dose that will help people to lose weight. That to me is what we mean by controlling the true dose guarantee. We want to make sure we don't just fairy dust our ingredients. If you fairy dust, it doesn't work, it just becomes hype.

And then the other thing that's important, I mention to you, many people, when they look and say how much did I actually burn today? They have no clue. We think with the GoWear armband, we are helping people to really see when they download the information, that they wear the GoWear the whole day and then they come home in the evening, download the data onto their laptops.

They know exactly where their deficit is. That is also a key thing. We find that if you tell people how many calories they burn after the first or second -- first week and into the second week, they're beginning to get it that they have to burn the calories. That is really an important thing for them to remember.

And also we have introduced or we have incorporated in this system, and it's easy for our distributors to tell the field, if you follow our instructions, if you wear the GoWear armband, if you measure your deficit every day, right? And if you don't lose weight, we're going to give you your money back.

That's how confident we were -- we are that this system is going to work because we stand behind the product that we launch on My Victory. It's the fact that if you follow our system we believe and we know that you're going to lose the weight, hence the reason for the money back guarantee.

The armband, highly motivating as I mentioned, it monitors your caloric burn any time, anywhere and it displays the information on a laptop in a very easy to read format and the field testing that we have done with this armband, you tend to lose more or you're more effective in losing weight when you use the armband.

Here's some data on the 12-week study. Average loss per person is around 22 pounds. Average loss per person per week was roughly about two pounds a week. And we have individuals losing about over 50 pounds on this particular system and some of the subjective comments we got (inaudible), we got it to go away, it's highly motivating and importantly there's no loss of energy with our My Victory weight management system.

And you don't lose weight, you don't feel tired, you don't feel I don't want to do anything because I don't have enough calories in me, I'm dying, I have to lose weight. You can actually carry on an average life with our My Victory weight management system. And the system works with many of our folks who have tried other weight management diets and fail on those systems.

So that's our My Victory. We are really doing a formal launch in January in the United States because that's when the dieting systems start. Right we are -- we have it available to our distributors, but a full promotional campaign will not start until about roughly after the holidays and we think we'll be able to be much more effective during that time of the year.

Quickly, on glycation, which is a new technology on the Pharmanex side this time, this is all about something called AGE. It's an acronym for Advanced Glycation End-products. Glycation is very simple. When you go for dinner tonight and your dessert is going to be creme brulee, you're seeing glycation. That sugar, the maitre d' or the chef has burned with a torch on the top of it and it turns brown and crystallizes, that's a glycating reaction. It's simply that's chemistry at work when you burn sugar.

(inaudible) that's bonding of the sugar to cellular proteins. Unfortunately, when that happens inside your body, some of the things that happen are really rather bad. In the eyes, you get cataracts. In your blood vessels, you start to have increase of aneurysm. In joints, you get stiffness. Brain is really bad because you will tend to develop senile dementia when there's a high degree of glycation happening inside the body.

That's why many scientists are very interested in seeing how we can regulate this process. So exogenous foods, eating fried foods, hamburgers, because of the cooking, the frying all that will introduce a lot of glycation products into the body and endogenous, obviously I would mention to you, is in the previous slide and all these things, when they start to accumulate, that's what happens. You start to age.

A classic example of aging, an extreme example of aging is Type II diabetes, adult onset diabetes. That is the ultimate manifestation of aging. When you look at an advanced diabetic patient, you see all the signs of aging. You see high glycation, hence the reason why doctors, when they measure diabetic patients, they use a glycated protein that's called hemoglobin, glycated hemoglobin, HA1C, so to see how advanced the diabetes or how well your blood sugar is being controlled.

So we have found some AGE inhibitors. Once again, these are natural product ingredients and we find it from foods and from natural sources. It's a perfect complement. As you see, our product strategy develop over the last three or four years, what we're trying to do is drive people from anti-oxidant state by using the BioPhotonic scanner, helping them to lose weight.

Because that will also help them to improve the wellness sort of stature or index and now we are adding on the glycation, so ultimately all these three pieces are three-legs to our anti-aging story. And this will form our next generation of Pharmanex anti-aging products. It's pretty exciting for us.

So briefly, in summary, I think our product story and pipeline has never been stronger, up to this point. We have all the tools. It's simpler. We can actually visualize our story or our distributors, most importantly, can visualize the story in the field, two brands, one anti-aging story, our tools to drive the product sales and sponsoring and each brand is now supported by a proprietary enabling technology. So that's the story from the product development side.

Let me hand the time back to Ritch Wood who will do the numbers I believe. Thank you.

Okay. Well just before I go through some modeling, let me address a couple of third quarter issues. As you noticed today, in our quarterly release, we actually were at the top end of our range in terms of revenue, but we were slightly below our range in terms of operating income and earnings per share, really two or three things that were not expected in our guidance.

First of all, our gross margin was about D30 basis points lower than we had anticipated, really two issues there. First of all, several purchases at our convention related to the ProDerm, which doesn't really have much margin at all. Also, related to some of the other sales aids that were sold there at the convention hurt us. Also, our Galvanic unit actually has a slightly lower margin than the other Nu Skin products and so the actual unit is a little bit lower.

The gels and products that are sold with it have higher margins on average, but our Galvanic sales actually increased from about $10 million in the second quarter to $16 million in the third quarter and continue to be strong, but pulled a little bit of margin down. So those things cost us about a penny in our gross margin. We also lost about a penny to two pennies on our operating expenses, our overhead.

We had legal expenses, legal and professional fees that were very high for the quarter, a little over $1 million higher than our average and then we also had a little bit of an overspend on our convention. And some expenses in China that also cost us during the quarter. So we showed up at 21%, which we're disappointed with, and believe we have things in place to kind of retrofit that and make sure that going forward we're strong.

Okay. Let me run through our modeling and this is really our modeling for 2008 and then we can answer some questions when we get finished. But to start out with, here's a little bit more detail. Now the pieces are always going to move around a little bit, but we wanted to show you, kind of be transparent in terms of how we would model out a 4% revenue growth. I can tell you that internally, we would be disappointed if we can't do at least 4% on the revenue growth line. I'll kind of walk you through where we're at today and what we would expect to happen.

You can see today, we're modeling for 2008, Japan to be approximately 3% down. That's certainly not what the budget is for Gary, neither would we be excited about those results, but we're modeling Japan to be down 3% and Korea to actually be up 10%. This year, Korea is tracking at about 15% growth, so we don't necessarily see that declining next year, but as we build out our model, a conservative view would be that a 10% growth rate would be very doable.

In the Americas, we have the convention right here that pushed this up about 3% and actually shows us down about 3%. So the U.S., we've actually modeled to be up 11% next year, which is approximately where it's at right now. We reported 17% growth in the U.S. in the third quarter and again I believe that's the conservative view to look at the Americas. Greater China, we have China flat next year, with Hong Kong and Taiwan up around 4% to 5%.

In Southeast Asia, we're currently seeing very strong growth, again, driven, as Joe said, by our weight management products. We just introduced the Galvanic Spa units and we would expect at least 7% growth out of Southeast Asia. We're also getting quite a bit of benefit in currency in Southeast Asia right now. We probably expect that to continue a little bit into next year.

In Europe, we launched a few new markets this year, Slovakia, really have some good growth happening in Eastern Europe, including Romania, Hungary. But we would expect at least 13% growth next year, again, that's probably quite a conservative view of where Europe should come in next year.

And then overall, that generates about $1.2 billion. We've estimated the yen to be somewhere around 115 to the dollar. I think the areas of risk there would be Japan and China. You know what happens in those two markets. Hopefully we've built in a little bit of safety in some of the other markets, but we do believe that 4% is a very doable number and believe that's achievable for next year.

Our major focus however will be on operating margins. So this is an area where I think as a company we have disappointed the Street and so our primary focus around the world, and it's not just in Provo, but around the world, it's to improve our operating margins. We have -- we've simply incentivized our management team to focus on this and have an effort that we really haven't had up to date, at least in the five years that I've been the CFO of the Company.

Our goal is to get to 10.5%. Let me kind of break down where we anticipate seeing improvement there. Gross margin, we expect to take to 85%. There are a few initiatives. First of all in April, the first price increase globally, which we've never done. It'll be an approximately 2% price increase around the world, which adds about 25 basis points to our gross margin.

Secondly, I mentioned the Galvanic Spa. We have just dramatically increased the number of units we're selling. To give you our estimate, we would expect to sell approximately 200,000 Galvanic Spa units next year compared to a year ago when we were well under 50,000. So that unit has dramatically increased, we're in the process of negotiating better pricing on that unit right now and expect to save about 500,000 on our costs of Galvanic Spa next year.

g3 is a product that's also slightly lower margin than Life Pak and so we've had some people who don't take Life Pak anymore, but take the g3. It's about $100 million product and we are going to move the manufacturing of this product to the U.S. Currently we manufacture it in Japan for our Japanese business and we sell approximately 100,000 units a month there. That will save us about $1 per unit and so we should pick up about $1 million in savings in g3 next year.

We're really organizing the troops to manage our SKUs better. We have made slow progress in improving our terms and managing our business, or sorry, our product portfolio better. But as of today, we still have 85% of our revenue coming from 15% of our SKUs. So there's a lot of opportunities here to really refine our structure, working on focusing on those products that are most effective and have the best margins and we expect to make good progress on this front next year.

And then finally reduce freight. We've just renegotiated, for example, a contract with UPS in the U.S., which will save approximately $2 million out of our freight expenses next year. We're looking at air freight as another area where we can refine our strategy and get some savings.

Basically in summary, you can see where our guidance is, again, a yen at 115. This is somewhat impactful to our overall gross margin. We do manufacture primarily everything in the U.S. and ship it to Japan. As our largest market, we want to make sure we mention that.

We'd expect to be back in the range where we've been in the past and frankly with some focus and some alignment around the globe and some incentive to our general managers on how they're managing the business. We believe we can actually improve on where we've been in the past with gross margin.

There are three kinds of factors that are hard to predict. First of all, currency fluctuations, which impact our gross margins. The global revenue shift, Japan is our highest gross margin market. And so turning that business around will be helpful and also a change in product mix. We have about 150 basis points margin benefit in Nu Skin compared to Pharmanex.

Over the last two years, we've kind of seen a shift from Nu Skin over to Pharmanex. We're kind of starting to see that shift back. That would be a positive as we go forward, but those are the three factors as we try and forecast out that we have to be careful in, in managing our gross margin.

Let me talk just a bit about distributor incentives. Our plan is not to reduce our distributor incentives, so to speak. But there are a couple of issues that we have. First of all, in China this year we'll pay out 52% in distributor incentives and that includes our employment costs, it includes social benefits and its just way higher than what we can afford to be in a profitable model. In the model that Andrew was kicking out, that is expected to drop at least 5% next year, it's come down into the 47% range and that's about a $3.5 million on a 70 million base, $3.5 million improvement.

Also, our general managers have some flexibility in managing some minor local incentives that we have. They only make up 2% to 3% of our pay-out. But these are areas that from time to time get a little bit out of control. So we are doing alignment exercises, the general managers will be accountable for this spend, their incentive will be tied to it and help us get our arms around that issue.

So generally, again, we look to be in around the 42.5% to 42.9% range next year, the area that is pushing that up a little bit is the -- as Dan and some of the others have mentioned, these front-end money initiatives that we have going on. They only pay when you sponsor new people, but our sponsorship in the U.S. for example is dramatically increasing, I should say when you sponsor somebody with a new kit, that is when you receive a piece of that promotion.

And in the U.S. for example, in the last quarter, we paid out a little bit over $1 million in that incentive bonus. So that's continuing to drive a lot of energy and obviously our revenue would be up more than 4% if that incentive paid out higher than what we anticipated next year. So there's our guidance, somewhere in the 42.5% to 42.9% range.

Okay. G&A. We announced that we would take about a -- somewhere between a 10 to $14 million charge this quarter. That is really a global initiative to reduce our overhead in areas that are not driving revenue, or not getting the sort of benefit, that we should get on that spend.

There three primary areas. First of all, the U.S., about $5 to $6 million will be associated with severance and other costs related to U.S., I should say, corporate primarily costs. There's about a $3 million charge related to China and some of the restructuring that Andrew talked about. There's another piece, a couple of million, $2 million, related to some Japan initiatives. And then finally, the rest of the world will have another $3 million to $4 million, so that's Australia, New Zealand, some Russia expenses, things like that.

Overall our goal is to reduce G&A $10 million from our markets, $5 million -- I'm sorry, $10 million for corporate and $5 million from our markets. So let me just walk you through how our G&A breaks out. This year, our G&A costs will be $365 million. The 230 here is basically the G&A that happens outside our markets. It's in Japan, it's in China, this is handling our distributors, working with them, processing orders and so forth.

In corporate overhead is $135 million and it clearly includes our IT infrastructure, includes amortization of intangibles, it includes our management there, stock option expense, those sort of things. By the way, stock option expense is about $10 million per year starting last year when we added that in.

Our convention related expense is in there as well. So as we look to next year, here's what we would guide. We're anticipating decreasing our overall market G&A by approximately 5 million. We talked about China, Brazil goes away, Australia and New Zealand, we're making some restructuring efforts there. There will be increases in markets that are actually showing growth. So we'll put spending behind South Korea, which continues to grow.

This is actually pushing the U.S. to our second largest market here. The U.S., Hong Kong, Southeast Asia are our markets that are growing. Japan's budget for next year is an increase in G&A of approximately 2%. So even though we're going to reduce some headcount and some overhead, we will actually be bringing in some headcount and expertise and we don't anticipate the overall budget dropping there.

In the corporate budget, we expect to drop that about $10 million. Again, if we're going to drop it more than $10 million, we will add back some expense related to some marketing, leadership programs, some CRM initiatives that we believe can be very positive to our top-line business. Convention alone will take out about $6 million.

We'll take out at least 10 more million associated with labor and other related expense and addition back for the leadership overall program. So $350 million is where we're shooting for, that would be an approximately $1.2 billion level in revenue, so if we were to exceed $1.2 billion or below that, that number would fluctuate slightly.

I talked to you about investment markets. These are not duplicative of what I talked about before. They're folded into our G&A savings, but you can see where we expect losses to be this year in these markets. China continues to be an investment market, we believe, this year. The level of break even based on Andrew's plan, will bring it from about $110 million today to about $80 million in revenue. At about $110 million in revenue, we would have a 10% operating margin in China.

Europe is actually profitable. In the fourth quarter it will be profitable. So this is primarily Russia and Israel related losses for next year. Latin America, we closed down Brazil, so part of that expense this year, the $4 million is Brazil. Mexico and Guatemala, Central America, we would expect to be profitable by the end of the year.

So that basically, Scott, you've got an appointment coming up. Basically that puts our G&A at 29.2 million to 29.7 million. This will be the best level we've been for awhile and we believe there's still room to make progress here. Our goal by 2010 is to get that down to the 27% range, which would put our operating margin right around 13%.

We do plan to execute a share repurchase. We have not built that into our earnings per share growth next year. We had an increase and currently have 14 million in our authorization. We had an increase of $100 million that we announced this morning, so $114 million is available for our authorization. Let me just kind of tell you too how that works. We would expect to use basically every dollar of free cash flow after paying back current debt and after paying back -- paying dividends, to buy back stock. That seems to be the best use of our cash today.

We have approximately a need for about $100 million in cash around the world. That's a sort of a generous level, but we would typically keep about $100 million of cash on our balance sheet. Today we have about 126 million, so we have some excess cash there.

In addition to that, as you model out our cash flow next year, actually this is just a summary. Let me touch on one point before I go to the next slide. 37% is what we expect our tax rate to be. We actually have a shift in our tax rate as we did this year. In third quarter it drops down, fourth quarter it'll be up. But for the year, it would be 37%.

Now the only other thing that you should be aware of as you model out quarter-to-quarter next year would be some convention-related expenses in Japan and in Southeast Asia, Greater China will hit in the second quarter. It's probably an increase of about $4 million on G&A line during the second quarter. Outside of that, we have the tax rate. It'll be somewhere in the 25% to 30% range in the third quarter and back up slightly above 40% in the fourth quarter, but again, for the year, 37%.

Here is a quick summary of where our guidance is. Let me just walk you through our cash modeling for next year. We'll have that income after taxes kind of around these numbers and $1.20 would be right around $80 million. So if you add back about 30 million of D&A and 10 million of stock option expense, we have about -- cash flow from operations somewhere around $120 million.

Our CapEx is expected to be $20 million to $25 million and $60 million in debt repayment and in dividend payment, so total that adds up to $80 million, at least about $40 million available for stock repurchase. We just pulled out about a month ago, or two months ago, $20 million that we financed in Japan. Then yen denominated debt at 2.59% for ten-year money.

We would anticipate as we go forward to continue to keep yen denominated debt on our balance sheet. We have about $185 million in debt today and about half of it right now is in Japan and half in U.S. denominated debt and we'll continue to look for opportunities to either push some more debt into Japan or by basically transferring U.S. denominated debt into Japanese yen or keeping our debt level about where it is today. Again it's about 185 million.

The fourth quarter guidance is a little bit difficult because there's some moving parts. So first of all, we expect revenue to be 295 to 200 -- or $300 million, it's about 4% growth. First half of the year, we're growing at about 2%, last half of the year will be 4% to 5% growth. So I think as you look at 2008, that's kind of where we're coming in, at a 4% growth rate.

We're looking at the yen to be 115 for the quarter, our gross margin is going to be kind of in this 82.3% to 82.5% range and you can kind of see where the rest falls out. Our tax rate is affected by the amount of restructuring charge. So it's tough for me to tell exactly where that will be, but on a normalized tax rate, our EPS number would be somewhere in the $0.26 range for the fourth quarter. We have not provided tight guidance because of all these non-GAAP moving pieces, but as you model out, you can come to your own EPS number.

So there's a quick summary of our guidance. We believe 2008's going to be a great year. We've taken, I think, steps forward that we really haven't taken in terms of how we're trying to manage our business. Next year's the year to focus on operating income. And that's -- that will be our focus, we'll report on that throughout the year and those metrics are really on the strategy grid that we handed out. So I'll turn the (inaudible) back to Truman.

Before jumping to Q&A here, just a couple of personal observations. Number one, I hope you'll leave today feeling the same sense of confidence that I do in this team right here. I'm really very comfortable them and have a lot of confidence that we have people in place to achieve what I think is a very doable 4% top-line growth next year and what I also think is really doable on the bottom line next year. That sense of confidence, again, is reflected in our Board's willingness to put our own corporate skin in the game through continuing our stock repurchase program.

You'll also see a commitment from everyone at this table, as soon as our trading window opens, to put our own skin in the game as we've all made a commitment as a management team to be purchasing stock as soon as we're able to. And we have also gone to our Board and requested that our 2008 equity incentive plan be restructured and so for the top 20, 25 managers in our company, we're converting our '08 plan into a performance based equity incentive plan instead of having a time based equity incentive plan.

This will include some jumbo option grants of a little larger size than what we have typically done historically. But in order for those grants to vest, we as a management team will have 50% of our options vest when we hit $1.50 EPS on a trailing four-quarter basis, and the second 50% when we hit $2 on a trailing four-quarter basis. So we're actually very excited to incent our management team in that fashion and think that it will go a long ways towards our own internal alignment and our own level of commitment.

So Andrew used this crouching tiger analogy on you. I have one more to give you before we're done. A couple of weeks ago, when we were hunkered down in Hong Kong going over our '08 plans and making sure that we were all aligned as a management team, it happened to be the world rugby championships going on at that time, so rugby was all that was on television. I'm sure that most of you are familiar with what the New Zealand All Blacks did before their rugby games. I have a little video clip here that I wanted to just show you really quickly, if we can run that. Do I need to do that from here?

(VIDEO PLAYS AND RESUMPTION OF SESSION)

Okay. That's the way the All Blacks signal their commitment as they go into battle. The words that they chant at the beginning of the [hawk out] is [Camate words], it literally means in Maori, I die. Or as it's come to be referred to in these chants is basically a signal to these players to play to the death. And so our corporate management's commitment for 2008 is [Camate]. And we've had all of our managers from around the world make a commitment to the 2008 plan. And I think that frankly this commitment is something that we haven't had in the past and it's needed and it's going to make this 2008 plan doable.

Okay. Let's open it up for Q&A.

Yes. So I believe all these microphones will be on and maybe I can just call on people. Yes, go ahead, [Kathy].

Yes. Just on the slide when you take a look at revenue guidance for '08, (inaudible)?

All local currency.

Okay. And can you elaborate (inaudible) as well, why Japan -- why you're being conservative with Japan being down 3% if I understand that right? And Japan and China flat with all of the initiatives that you talked about and all the exciting growth opportunities and things like that?

Let's see, Gary, do you want to address Japan and then Andrew, China?

Well the first thing is that Japan's been down and we're going to grow it for the first time since 2002. So in order to grow that, we have to restructure the business. And that means that I'm going to be reducing my headcount, I'm going to be realigning that organization and it also means going out into the field a lot more.

Now to do that, it takes time. Again, with seven months of business, I know that we can turn this market around, but I want to take it on a conservative basis because I need to make sure that the field, all of the distributors out there, understand the story and the direction of the Company. So, yes, that is conservative guidance, but I do believe that it is good guidance.

It's not actually Gary's budget, that would be our Street commitment. So --. Andrew?

Well I guess my response will be similar to Gary's. And the key in 3D, we are reorganizing, we are consolidating, so there will be -- we try to be conservative in putting together the guidance. But at the same time, I think the key thing is really about realigning with the leaders. A week ago, well, about a week ago, we put together 500 sales leaders in China and one of the results in China, we really presented -- we presented a whole interaction of what we put together, we presented to you other smaller things.

And the leaders are actually very positive, even though it could be interpreted in a very pedantic way when we're talking about reorganization sometimes, in the field. But the sales leaders actually all recognize the needs, that we should crouch before we can sprint ahead. And they are all in alignment with the Company's direction. We are confident that we can do better than what we projected here. But still we just try to be conservative in putting together this forecast.

I think one other comment as you model out the year, the full plan will be fairly implemented -- pretty much implemented by the second quarter, so we would anticipate at that point in time, expecting to see improvement in our China business.

So one quick clarification, if Japan's going to grow for the first time since 2002, are we still expecting it to be down 3% or is that what you expect in -- you expect it to down 3%?

We are committing to the Street that. And I think the parts and pieces move around in those and I don't want to get -- I don't want the 3% to be more important than the 4%. The key is we're going to grow the business 4%, there's a lot of difference pieces in there that we try and be conservative when we project and I have conservatively modeled Japan down 3% for next year.

And just finally the labor laws. Can you just elaborate on the changes for the Chinese labor laws and what that means for Nu Skin? Thanks.

Okay. In the past, well, the key difference will be in the past when the labor laws or the employment contract is something every two years or every three years renewable and if we want to terminate an employee, we can just wait until the expiry of the contract and then we can let people go.

But in the future, with the new labor laws in place, for the long-term employee, even though you have something like a definite term of contract, but they will still count back the years of service if we want to let people go. So it will be coming -- it will be becoming kind of a cost to the Company as well.

Yes.

Does that explain? Well --.

Does that make sense? So basically the labor laws tightened in terms of people coming in and going out. That's part of the reason we're doing a different model going forward.

Yes.

Thanks. Back to China, just after your provisioning, what kinds of sales growth are you expecting after all that's said and done? And then also, on the distributor incentives, what are the major pieces that are going into that five point decline in the selling expenses and percentage of sales? How much of that has to do with the change in employee laws and how much is initiatives that you guys are taking?

Okay. In the first place, we are now focusing on building a more healthy organization in China so that we might not see the -- a drastic improvement on the top line, but the bottom line, I would say we are very confident that in the year 2008, we can see a very significant improvement on the bottom line. You're going to see some (inaudible) in fact after a quarter or two, in 2008.

And we're expecting also to see some growth in the top line after about a year of consolidation and reorganization of the staff force as well putting together some consistent incentive plan, past I guess the incentive plan that we have in China is something that they keep changing every year. But what we're trying to put in place is to fit into the most important piece of the business in terms of that thing is to put together a consistent plan that will be carrying out from year to yea.

And this is actually -- well maybe I should backtrack a little bit. It is supply that for you, I present here is not something that I just figured out by myself, but it's we have been in China for the last five months and the first three months I have been going around the whole country, China's much bigger than the U.S., it's a big place. And people are very, dispersed.

So the first three months now I didn't do anything new. But what I did was to go around the country and talk to each and every one of the sales leaders and consolidate their opinion and put together this plan.

And this is why I guess that we have a plan in place that the leaders are really, really excited in the last week when we finally consolidated the whole plan and presented it to the 400 or 500 leaders of our sales force. A week ago in Shenzhen, in Guangzhou we have a local incentive trip there, so we are very confident about moving forward in about 12 months or so that we will improvement the top line.

I would just comment on the 5% reduction, it's primarily unemployment charges and social cost savings. Is that right?

Yes. Correct. And more, real, income going into the pocket of the sales people.

If we fast forward past '08, you've got 4% top line and 115 to 122 on the bottom line. What is it setting up for expectations for the long term, both on the top line and the bottom line for us?

Do you want to address that, Truman, or do you want me to?

Well, go ahead.

Okay. Just in terms of modeling, as I mentioned, our goal is to be somewhere between 12% and 13% operating income in the year 2010. So as you model forward, you can kind of spread that in 2009, 2010 equally. Top line revenue in the mid single-digits I would say.

Okay. Alex? Mimi?

Just one quick one. I think it was in 2006 perhaps that you adjusted the compensation structure in Japan. Maybe even twice that year or twice over 12 months. Was this more front-line money that you're talking about? Without increasing the overall pay-out? How is it not going to be upsetting for another channel distributor?

Let me just take a quick shot at it and then anybody else. It will add a little bit to the pay-out in terms of front-line money, it all depends on how fast our business is growing. It's in addition to. It's not so much a subtraction from. And so generally that doesn't create a lot of upset people.

At the same time, we'll do all we can to manage the pay-out to be most effective, whatever the dollars are paying out, they get the biggest benefit from those. Would you add anything?

Let me just add to that. Mimi, even though I can't see you over there, that what we're trying to do is help our distributors capture retail margin. So this GRP program that we talked about, gross retail profit program, is really kind of new dollars, into the compensation structure and is what is most significantly adding to early stage income for our distributors.

Thank you.

And nobody complains about that.

Okay. Yes. Yes.

I guess I have two questions, but one is just the same thing, I really don't understand how you're increasing the up-front pay and you're going after more distributors in Japan as opposed to just the preferred customers and those are the people who are getting paid.

And what we're cutting back on in order to get that incentive ratio improved? You're saying well you're just going to do it more effectively, but I don't understand what that means and usually a cut in that ratio, often it huts sales. So can you give us more examples of how you're cutting that ratio while you're spending in these incremental ways that we've heard about?

Just let me give you an overview of -- as I look at the business, the difference between a preferred customer and a distributor. A distributor will sponsor, and that means we'll get more distributors into the pipeline. That by itself means there's more productivity and more sales for the Company, a preferred customer just purchases and they're self consuming.

So in order to grow the business, we need to make sure that we have programs in place to grow that distributor field. The example that they mentioned was GRP. In Japan, we call that, special product promotions. And what that does is it allows the distributor to go out and sell and it gets the forced retail back to the distributor by sponsoring people. So it's a sponsoring tool more than anything else.

Alice, let me also add to that just a little bit. It is true that to a degree there's a slight shift of distributor commissions from the back-end to the front-end through some of these mechanisms. So if you take for example a Galvanic Spa kit, we'll use round numbers just to make it a little bit easier.

Let's say a Galvanic Spa kit sells for $250, which is roughly what it is here in the United States. What we're doing is taking $50 of that $200 and paying it to the immediate sponsor, and putting 200 points on the kit for commission purposes. So we're basically capturing retail margin for the benefit of the immediate up line sponsor and putting the same 200 points into the commission plan that we typically would.

So it's -- there is a slight shift from the back-end to the front-end because they're -- instead of having 250 points on the kit, there's 200 points on the kit, which does mean we're allocating from the back to the front. But what we've seen, where we've implemented this, and in particular in the United States, is that people welcome the early stage income, the front end money and it has not been disruptive, it's been very well received.

So you hope that the incremental sales will more than offset the reduced ratios on the later end?

Yes. It's just -- this hasn't been disruptive to field psyche. It just has other compensation plan changes have been in the past.

Okay. And then my other question is on China. You said that you're trying to learn from the Amway model a little bit. And could you explain what you mean by that and specifically, I mean I understand that the challenge in China is that multi-tiered sales aren't allowed unless, I guess, people are employees. Could you comment on that?

Are you going to -- are you pushing to make people employees more and finding that the enthusiasm for multi-tiered sales more than offsets the incremental cost of having these more employees? Or what is the model? And how are you learning from Amway? And how are you dealing with those strictures on multi-tiered sales in China?

Let me just preface that in the answer here, Alice, by one comment. That is, that as we look at the state of our business there today and try to chart a course for the future, of the various paths we could pursue to improve our lot, be more successful on the top line and also be able to best manage our investment in the market, we frankly have -- we frankly think that it's smart to look at what Amway's doing and to model, to parallel that to a great degree.

Because they're huge, they're growing, they have been very successful and the government is letting them operate the way they're operating. So we think that that buys us some cover to somewhat model their business as the execution of the regulations really become more developed throughout the country.

And then how has Amway adjusted their model to deal with inter-regulation?

The model that Andrew presented today is essentially the Amway model. I mean, they're doing what we're doing going forward.

I actually have a three-part question. It's about South Korea. Firstly, you mentioned that it's becoming your second largest business segment. I just was wondering what percentage of your business that was. I was also wondering what your market share is there and also in the third quarter did you see a dropping off subscriptions?

Okay. In South Korea specifically or a drop in subscriptions globally?

South Korea specifically.

Yes. You should answer the (inaudible).

Yes. South Korea will do about $140 million this year, which represents a bout 13% of our business, growing at about a 15% rate. Subscription sales have not dropped off at all in South Korea, but continue to grow sort of in line with our revenue. And let's see, your other question --.

(inaudible - microphone inaccessible)

Market share. Well Amway is certainly the biggest company there, at about, I believe, $600 million or $700 million, I think is the size of Amway in Korea. So at 140, they're certainly in a lot of sites. We are, I believe, the third largest direct selling company in --

I think top five there. Top-five, selling company in Korea.

I'm sorry, top-five company, top three.

And let me just mention by the way that I hope no one is under the impression that we don't welcome the preferred customers into our world, because we do. We love customers, we love preferred customers, it's just that as we have marketed that program over the last few years in certain markets, and in particularly in Japan, they have put a disproportionate focus on acquisition of preferred customers and that's what we need to fix.

Okay. We've got you. Hey, Ritch. Thanks for drilling down a little bit on the G&A expenses, corporate versus the field. I wondered how far you could go within that 230 million field as far as how much is fixed, how much is variable, if you could give us some more flavor for what's in that? Is there a marketing nut in there that we can talk about?

Certainly. In that overhead of $230 million, 70% is labor and occupancy related costs with the other 30% promotion, travel, other related expenses. So most of it, I would say, is fairly fixed and so as the revenue grows, as we add $1 of revenue above and beyond the $1.2 million, approximately 40% of that is going to fall through to the bottom line.

So we have 18% distributor -- or 18% cost of sales, 42% distributor incentive and approximately the rest of the balance, the 40%, basically drops to the bottom line. So we can scale very quickly as we grow our revenue above and beyond what we forecasted.

I know in the past you had talked about marketing initiatives, maybe some more brand building initiatives. Is that going to be layered into the G&A or is that in -- part of your selling expenses outlook?

We have had a little bit of a shift frankly under Gary's leadership, with respect to our attitude towards traditional marketing campaigns in Japan, we ran some ads in local newspapers.

The -- we really don't think that we're leveraging those dollars very effectively right now. So as Dan indicated, our best promotion dollar is another dollar of commissions.

Yes, we're certainly not cutting back any promotion dollars, but we're refocusing them to the efforts that seem to be most meaningful.

Okay. Next question? [Kathy] has a question here. Kathy?

Can -- the -- can you just clarify your fourth quarter guidance of, is it -- when you gave the restructuring charges and then you gave the EPS of $0.26, does that include or exclude the charges?

Excludes the restructuring charges.

Okay. So it seems like your full year '07 bottom line numbers are a bit shy of what you gave at the beginning of the year and can you -- is it -- does it seem -- is it more of a margin issue or is it a G&A issue? And I mean how do we think about that going into '08?

I mentioned, I think the issue for the year is very similar to the issue for the quarter, gross margins have been down. And if you remember back to the first quarter, we had some air freight and other charges through gross margin that pushed our gross margin down to about 81.5% or so. So it's been primarily a gross margin issue with some higher G&A expenses than we had anticipated.

So we're going to be somewhere probably $0.03 to $0.04 lower for the year than what we had anticipated at the first of the year. We got, I think, 88 to 94, maybe it's to 92. So if we're at $0.90, we'll be somewhere between $0.04 and $0.05 lower than that. Probably $0.02 to $0.03 is in the gross margin, $0.02 to $0.03 is in the overhead. And generally speaking $1 million is one penny per share.

Okay. And can you elaborate I guess a little bit on -- because we heard some of the restructuring moves for China, like the specifics in terms of the stores reducing doors, reducing employees. What does the restructuring in Japan actually relate to?

As I look at the profitability of employees, I'm used to far more significant figures of dollar sales per employee. I think we simply have too many employees and in part that's because there was no performance management system in place. So we'll be instituting a voluntary early retirement program, or a VERP, and we hope to accomplish that in the next several weeks.

In addition to that, I start to look at some of the distribution and analysis and I think that there are opportunities for saving in our distribution as well as our call centers. A lot of our call center activity is in the house, I'd like to consider more outsourcing of the call center. Some of our IT infrastructure is in-house. I'd like to consider more outsourcing of the IT activity as well. So I continue to see opportunities for driving savings in Japan.

We have, as Ritch talked about, advertising, I don't find advertising in Japan to be that meaningful or that successful. I don't think that the dollar spend that we're doing there, that we have retention or awareness among the advertising. I'd rather use that money to incent the distributors. So it's reallocation of some of the dollars spent.

Okay, next question? Yes. Go ahead. Yes.

The Galvanic Spa, I think you said $250 per unit. That's a tool that you actually, you sell that product to customers. Right?

That's correct.

That isn't one that the distributors use. Can you just tell us what markets it's in already worldwide and I think you said it's just beginning to go to Japan? And what quota that hits in Japan and if there's any other markets it's not already in?

Joe?

Yes. It's -- the unit itself and the pre-treatment gels and all the other consumable products that go with the Galvanic, they're already in all the markets that we have. The difference being is the sponsoring model that goes with it, the GRP, the so-called gross retail profit, model, that's the one that we are launching in all the markets, especially in Japan and Southeast Asia.

Yes. Just another comment on that, we actually don't have it in China and Taiwan, I think those are the only two markets. But the unit actually launched several years ago and as Truman mentioned, it actually became highly successful in Europe, that was the first place it really got some traction.

We took the model that was being used there, kind of duplicated that in what was going on in the U.S. at a time when we were selling about 300 units a month, last month we sold over 7,000 units and so we just really had some good traction.

Korea, a very similar example that was launched about a year --. restaged about a year and a half ago with a great deal of success. We restaged it on the tenth of, I think, October in Japan. And again, it just seems to be getting some good traction there. So it's taking learnings kind of from one market and expanding those to others.

Any other questions? (inaudible)

I had a quick question for Dan as well. I apologize. I wasn't able to give you my full attention when you were giving those numbers. So if you wouldn't mind, what was the most illuminating figure that you were able to determine and what does that tell you about what you need to do with the business now going forward, either more of or less than?

Well we'll use the term pipeline management several times and what we find is that those markets that have healthy growth were able to grow all the key segments at the same time. So they're able to grow our preferred customer segment, which is an important piece. They're able to grow our wholesale buys, so the number of distributors coming in who are associated with our products. So that product usage along with the outside retailing is a core piece of our business. The -- but to keep the -- our business growing, we also need to be finding distributors who aren't -- have a high level of involvement in the business, who are also sponsoring other distributors.

So I'd say there's healthy growth is about addressing all of our segments effectively. It's not ignoring one or losing the balance, it's about bringing in the right preferred customers, the right wholesale buyers and the right sponsor distributors, one that gives back to that customer relationship management. If we lose that balance, and I think we have indicated that we believe that we did in Japan, then our business doesn't grow in as healthy a way.

Okay. That's not a big surprise. (inaudible).

Well our distributor channel is sensitive to the messages we send. In other words we -- the leadership role that our distributors play is the most significant, but when we put for example, promotions in place that suggest that preferred customers are more of our focus, it becomes more of their focus.

As an example, in Japan, we -- a little while ago, we changed, this is roughly I think 24 months ago, we changed the cost of signing up a preferred customer and the rewards associated with becoming a preferred customer. And so essentially it was easier to become a preferred customer than it was to become a distributor.

The message that that sent to our distributor force is here's where we want you to focus, here's where the motivation is. And as a result, we've been -- we began signing up fewer preferred customers -- fewer wholesale buyers who then would go on to become executive and more preferred customers. And that's a far less valuable segment for us. So it's about being careful about what we communicate, the incentives that we put in place and how we communicate to our distributor force.

(inaudible - microphone inaccessible)

Sure. Hi. This is a quick question for Andrew in just a sense of thinking. I was kind of surprised you're in [Zion]. Because my sense of the place is a little less developed than it is Shanghai or Beijing. What's the nature of the market in Zion and how do you look at it versus Shanghai and Beijing and Guangzhou?

Zion was actually the most ancient capital of China. If you know the history of Zion and we have actually very key leaders residing there. Zion in the -- and the surrounding area's about 15% of our whole business in China right now. So this is why we are trying to build a base from there as well.

But incentive development (inaudible) other major cities. Do you have to operate differently there? (inaudible)

No, it's the same.

The same?

Yes. (inaudible) the same.

Okay. Any other questions?

We will be around a little bit, so we welcome you to grab us or we can talk. We really do appreciate you spending this much time with us today. We're -- and we believe for a great year and we look forward to working with you as we go forward.

Thank you.