如新 (NUS) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter, 2009 Nu Skin earnings conference call. I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, today's conference is being recorded for replay purpose. I would now like to turn the presentation over to Mr. Scott Pond, Director of Investor Relations, please proceed, sir.

Thanks. We appreciate you joining us today. Sitting in the room is Truman Hunt, President and Chief Executive Officer; Ritch Wood, Chief Financial Officer; Dan Chard, President of Global Sales and Operations; and Joe Chang, Chief Scientific Officer.

Just a reminder during this call comments may be made that include forward-looking statements. These statements involve risks and uncertainties and actual results may differ materially from those discussed or anticipated. We encourage you to refer to today's earnings release and our SEC filings for a complete discussion of these risks. Also during this call, certain financial numbers may be discussed that differ from comparable numbers contained in our financial statement. We believe that these non-GAAP financial numbers assist management and investors in evaluating and comparing period to period results in a more meaningful and consistent manner. Please refer to our investor portion of the Company's website for a reconciliation of these non-GAAP numbers and with that, I will turn the time over to Truman.

Thank you, Scott, and good morning everyone. We appreciate you joining us this morning to review our second quarter results. Last month in the month of June, we celebrated the 25th anniversary of the incorporation of Nu Skin Enterprises. And we were pleased that last month ended up being our largest-volume month in our Company's history. As our press release indicates, we're also pleased to have generated record results for the second quarter. We posted revenue of $322.6 million, which represents a 4% constant currency revenue improvement over the prior year quarter.

Earnings per share, excluding restructuring charges in Japan were $0.36, which is a 13% improvement year-over-year. We're also pleased with the 24% improvement in operating income, which is reflected in our operating margin at 11.2%, excluding charges and which is the result of the business transformation effort we began about three years ago.

So our strong second quarter performance leads us to increase our EPS guidance for the year and we'll talk about that a little bit more in a moment. We continue to see really solid results in all of our geographic regions with continued strength in Europe, South Korea and the United States, in particular and as our second quarter results also reflect we're seeing encouraging signs in Japan and China.

I would attribute our positive second quarter results to three primary factors. First, our innovative antiaging products continue to attract a loyal following. Our Nu Skin brand grew 14% over the prior year with the Star skin care product continuing to be the Galvanic Spa System. Galvanic actually grew 68% over the prior year and jumped up about 20% over the prior quarter. This Galvanic Spa is just a fantastic product for our channel. There is high-perceived value in the product. It's ideal for demonstration and can show immediate improvement in skin tone and skin texture? So frankly Galvanic momentum is continuing to build globally and we feel still has a lot of room to run around the world.

Second, our business model remains highly attractive to increasing numbers of people who are facing financial reality and who to seek to supplement or replace income. Thinking back about about nine months or so ago, when the economic crunch began, the theory was that direct-selling would be a hedge in times of economic turmoil and I think we're seeing that theory prove out in 2009. We're seeing increases in those interested in pursuing the business on a full-time base and we're also seeing an improvement in our average order volumes. Over the past year we have implemented, as you know, an innovative enhancement to our distributor compensation plan called the Wealth Maximizer. This enhancement augments income in the early stages of distributorship, which leads to improved retention and also incentives given to reach higher levels of productivity. Compensation plan changes are almost always tricky for direct-selling companies, but in this case, I think the change was well-executed and the enhancement has positively impacted our results in 2009.

And third, I'm really pleased with our profitability improvements. Our business transformation efforts dating back to 2006 are clearly paying dividends. We have made significant progress in cutting costs. Just to cite one example, you'll recall that in 2007 we invested about $23 million in unprofitable markets and I'm happy to report that in 2009 those same markets will operate profitably. So we're operating with a higher level of discipline and very pleased with the progress we're making here. We're making good strides as well in getting our operator margin where we would like it to be and anticipate continued improvement over the next three years.

Our results reflect improvement in two key markets in particular. We're pleased with year-over-year growth in Mainland China, which you may recall we projected a couple of quarters ago. Andrew Fan and his team there are going a great job with what continues to be a significant business model transition. In addition, our Japan team has done a terrific job in executing a business transformation plan there, that has generated improving top-line trends while simultaneously restructuring the labor force to improve the bottom line. So we're encouraged with recent results in Japan and we look forward to the ageLOC introduction there in the fourth quarter this of year.

Now, we'll be holding our 25th global distributor convention this coming October and we're really looking forward to this event, because it will present -- we'll have the opportunity to present the full ageLOC story to our global sales leaders for the first time. ageLOC has tremendous potential for our business. So I want to take just a moment and expose you a little bit to ageLOC and to our product direction.

As you'll recall for the past 18 months or so we have been talking about wanting to stake our competitive proposition on the principle of being the Company that attacks the sources of aging and not just the signs of aging, which is where we feel our competitors are. We want to cut through all of the noise and the clutter in our product categories with a competitive message that is different and more compelling than what anybody else is offering. Phase 1 of ageLOC was announced with the discovery of the arNOX enzyme, this is a free radical-producing enzyme that significantly escalates aging in the skin as we get older. The Galvanic Spa gels, which were launched last year include arNOX inhibitors that generate significant improvement in the skin, but arNOX inhibition as compelling as it is, is really just a small part of the ageLOC story.

The ultimate source of aging is found in the human genome. The way that our genes respond to aging and to all of the external and internal influences that weigh on our genes are what really dictate how we age and how we look as we age. The biological study of aging, the study of the human genome, as well as advancements in computer technology are all converging to put Nu Skin Enterprises in the right place at the right time.

So going forward we want to distinguish our products by formulating them to ensure that they are supporting the healthy functioning of particular sets of genes or supermarkers that we have labeled as Youth Gene Clusters. These are the genes that we believe are most responsible for helping us -- helping keep us as youthful as possible. So in the next few years you're going to hear a lot more about the impact of nutrition and skin care products on genetic expression. This is the future of our product categories and we're pleased to have a significant head start on the competition in this regard.

So at our convention now, Pharminex will be unveiling much more of the science behind ageLOC and we'll be launching our first ageLOC skin treatment system. This will be a four-product system that includes a cleanser, toner, a day cream a night cream as well as a daily use serum that we referred to in past discussions as MOAS, which stands for mother of all serums. But its real name is actually the Nu Skin Future Serum. We're very excited about this system and equally excited to continue to infusing ageLOC into a wide range of Nu Skin (inaudible) products. The ageLOC system will be available as a limited time offer at convention and then will launch in the U.S., Europe and Japan in January of 2010.

I personally believe that ageLOC will be the most significant platform launch in Nu Skin's history and in fact we have already begun to see great momentum with the Galvanic Spa gels, with ageLOC and we expect that to continue in the second half of the year and well into 2010.

Overall we have started 2009 off well. We expect to make further gains in the second half of the year. I'm very encouraged with the direction of the business, and we remain on track to exceed our goals for the year and post another record year. So with that, let me ask Ritch to provide some details on the numbers.

Thank you, Chairman. Good morning, everyone. I will provide the local currency revenue figures in our major markets and then some discussion here as to our financial results. In the North Asia region second quarter revenue in Japan was JPY10.8 billion compared to JPY11.5 billion in the same quarter of 2008. South Korea achieved another record revenue with local revenue of KRW46.2 billion versus KRW41.7 billion in the prior year. In the Americas the U.S. posted $51.3 million in revenue, compared against $48.8 million in the prior year. Canada showed tremendous growth and reported CAD7.0 million compared to CAD4.1 million in the prior year. And Latin America revenue was $4.9 million compared to $4.4 million in the prior year quarter.

In the greater China region, mainland China revenue was CNY119.0 million during the quarter versus CNY112.6 million in the prior year and quarterly revenue from Hong Kong was HKD93.6 million compared against HKD113.9 million in the same quarter last year, which you will recall benefited from a successful greater China convention held in Hong Kong during the prior year. Taiwan revenue was TWD770 million compared against TWD761 million in 2008.

Our gross margin for the quarter was 81.2% that is a 40 basis point decline over the prior year and the decline is primarily related to foreign currency fluctuations, which you will recall impacted revenue by about 4%. And also slightly impacted by the Galvanic Spa unit sales, which have a slightly lower gross margin than our other personal care products. Selling expenses for the quarter were 41.7%, compared against 41.6% -- 42.6%, in the second quarter of 2008. And this improvement as Truman mentioned can attributed to the Wealth Maximizer modification to distributor compensation. That plan has now been adopted by nearly every market in which we operate and we're pleased with the recent successful rollout of this plan in Japan and many of our Southeast Asia markets during the second quarter. Taiwan and Hong Kong adopted this plan in July.

The objective, again, of this plan are to achieve retention income for early executives, and increase productivity of our sales leaders and we're seeing success on both of these fronts. General and administrative expenses for the quarter were $91.3 million or 28.3% of sales compared to 30.0% of sales in the prior year period. Note that the prior year period did include convention-related expenses in greater China and Japan. Overall, though, this represents solid progress in streamlining our business and we'll continue to stay focused in in this regard. We incurred a restructuring charge of $1.6 million during the quarter, that again, is related to our restructuring of operations in Japan and the majority of our planned restructuring efforts and costs for this year are now behind us. We anticipate approximately 2.5 million to $3 million of remaining restructuring costs, again, associated with Japan, spread across the final two quarters of 2009.

When fully implemented we expect our restructuring efforts in Japan to save approximately $10 million annually off the 2008 overhead base in this market. The Company's operating margin was 11.2% for the second quarter, excluding restructuring charges, representing a 220 basis point improvement over the prior year, we're tracking well ahead of our planned operating margin target during the first half of 2009 and so we now we revise our 2009 operating margin, excluding planned restructuring charges close to 10.5%. Operating income for the quarter excluding restructuring charges increased 24% over the prior year.

During the quarter we reported a net gain of approximately $900,000 in the other income expense line of our income statement. Foreign currency translation gains of about $1.9 million in the current quarter more than offset net interest expense. In the prior year the Company reported a foreign currency translation gain of $5.3 million. Our tax rate for the quarter was 37.4% we paid $7.2 million of dividends and purchased $3.9 million of Company stock, which leaves our Company's approved repurchase authorization at approximately $78 million at the end of the second quarter.

In the past 12 months our cash has improved approximately $30 million and debt has decreased $20 million resulting in an approximate $50 million improvement in our net debt position in the past 12 months. We now estimate our 2009 revenue to be in the $1.26 billion to $1.27 billion range. This includes a projected negative foreign currency impact for the year of about 3 to 4%. Based upon the higher operating margins that we're generating we're increasing our earnings per share estimate for 2009 to $1.23 to $1.28, excluding 2009 restructuring charges of approximately $0.14 and for modeling purposes we remind you that our global convention is planned for October, and that has a cost of approximately $6 million to $7 million, which we'll hit in the fourth quarter of this year. That is all built into these projections that we provided to you.

For the third quarter we project revenue to be in the $312 million to $317 million range, putting earnings per share in the $0.32 to $0.34 range, excluding $0.02 of restructuring charges and this reflects a negative currency impact of approximately 1 to 3% during the quarter and again, a sales growth on a constant currency basis in the 3 to 5% range. With that detail, we'll go ahead now and open up the call for questions.

(Operator Instructions). And our first question comes from the line of Olivia Tong from Bank of America. Please proceed.

Good morning, guys, how are you.

Hi, Olivia, good, thanks.

Wanted to start -- just maybe if we could go over a couple of the countries since Japan declined at a much lower pace than had been in the past couple of quarters and also, the U.S. saw a decline in the growth. So just wondering if you could give a little more detail behind those two markets?

Sure. Let's take Japan first. As you will recall, Olivia, we parachuted a new management team in there just over a year-ago and they really have undertaken a complete start-to-finish reformat of how our business opportunities is presented to the field there. They have done a terrific job growing the top line and really putting business initiatives in place that are turning the top line around to get ahead in the right direction. It's really just a question of doing there what we are doing everywhere else in the world that is working so well and they are executing at that very effectively and at the same time, have significantly restructured the labor force and some of our overhead there to result in a significant improvement on the bottom line. In 2010, just so you know, we're looking at about a $10 million improvement to the bottom line in Japan, based on the restructuring that has already happened so far this year. So good things happening there.

In the U.S. we see continued enthusiasm for the business and strength for the business. You'll recall that we grew at a very robust rate of about 20% in 2008, that growth rate has come down a little bit as reflected in our second quarter results, but what leaves me feeling really pretty comfortable with the direction of the United States is that we just have great ammunition to work with here in the second quarter -- or in the second half. We just introduced some of the ageLOC story, a good part of the ageLOC story to our top sales force leaders about a month ago and they are just catching the vision now. Reformatting their presentations to incorporate the ageLOC story, and working towards convention in October here in the United States, we feel we just have great ammunition to work with.

For Japan, for the minus 6, do you think that -- things that you said in the past is you should expect declines that are slower paced. Do you think in the second half that you should see less than a minus 6 or rephrased better than a minus 6 growth rate decline in Japan?

Yes, you will recall that we guided Japan to be down around 8% for the year and we expect to deliver on this and possibly exceed our commitment. So we're working our best to improve the decline even further, but we expect the third quarter to be probably in the same range, down 6 to 8% or so. And then we'll see what we can do to further improve that with the launch of ageLOC in the fourth quarter in Japan.

Got it. And then I was kind of surprised at the gross margin decline and I understand that part of it is FX, but I thought with Japan getting a little bit better in relative terms, that being your highest-margin region, that would have helped a little bit offset that. Can you talk a little bit about some of the dynamics that went into the gross margin number this quarter.

Sure, Olivia. If we were just to be on a constant currency basis our gross margin would have been slightly higher than the prior year. So pretty much the full impact was related to a currency issue. We have several initiatives in place that continue to improve our gross margin going forward including the launch of ageLOC products, which will have very nice gross margins for us. So we'll continue to stay focused on that. We did see a little impact in the second quarter, but expect to really continue to see slow improvements in the future.

So there is nothing that concerns me substantially. The changes in Japan, the U.S. really didn't impact much in the second quarter. We did have very strong sales of the Galvanic Spa, which has a slightly lower gross margin than our weighted average personal care products, but that continues to balance out with sales of the Galvanic gels, which have strong margins. So not concerned. I don't anticipate that it will drop going forward. So I think we'll see it strengthen up a little bit in the future.

And then just, lastly, Truman you talked a little bit about countercyclicality of direct sale and how people turn to direct sale for income opportunity in tough times, but I have a little bit of trouble with that, considering when I look at the distributor numbers, that relative to sort of -- you look at Q1, Q2, it seems like the active numbers which is where I would expect it to show up, those were -- they were worse in Q2 than they were in Q1 when you look at it now. So just, if you could, talk a little bit about that, that would be great.

That is a fair observation, Olivia. I think that my comment with respect to direct selling being a hedge against economic turmoil is really reflected in our overall results more than it is distributor trends specifically. You will recall that we include in our active count anyone who places an order in the time period referenced. And so that includes, frankly, a lot of people who aren't acting as distributors, they are just acting as consumers. In our case with the implementation of the Wealth Maximizer compensation plan, we redirected some compensation incentives away from customer acquisition and more towards distributor acquisition. We feel that the shift in our active number is really more a reflection of the Wealth Maximizer incentives than it is economic impact.

Okay, so the active is really probably not the right number to look at, because it reflects people who enter into the business just to get a discount on the product?

That is correct.

And that should come down?

That is right. I think as we see consumers contract a little bit, I think we would chalk that up, somewhat, to economic impact. But my point is that we're more than making up for that through people who are coming into the business to supplement income.

Those are really the people who end up driving the business going forward. So this is a very strategic shift that we've made as we have rolled out the adjustments in the compensation plan, which we believe will help to drive future growth.

Got it, Thanks very much.

Your next question comes from the line of Tim Ramey from D.A. Davidson.

Good morning. Congratulations guys.

Hi, Tim.

I wondered if you might discuss the price points on the four product ageLOC system and what exactly the mother of all serums might do for me or anybody else.

You won't believe what it will do for you Tim.

I could use the help.

The new skin care system will really be the flagship skin care system that we offer and will be offered at our highest price point versus other existing systems. So the three core component, the cleanser toner, the day cream, and the night cream will be offered for a price in the $100 range with the future serum, the mother of all serums being added on top of that in approximately the $150 range. So this is not a cheap product, but it comes with a tremendous story and the feedback we're getting from the clinical trials on this product are off the charts. So we're just very optimistic about how consumers in the field will respond to this new system.

What is the expected usage cycle on this? I s this a monthly cycle?

Yes. In fact, we have really formulated it and packaged it for a 30-day supply. We work on monthly cycles. And our salesforce likes the monthly replenishment programs and so this product is formulated and packaged for a month specifically.

And just questions on your strategy of cash management, you've maintain fairly large cash balances and now almost no debt, I think. Net $30 million, whatever. Can that -- I think you have shrunk it a bit, but can that shrink even further?

Well, we do operate very conservatively, and have never been huge fans of debt, but I think our record also shows that we have used cash very generously with our shareholders. We have increased our dividend now, for what? Nine years in a row. We have a very healthy track record of using cash and even incurring some debt to buy stock back. So we're really pleased to be in such a healthy financial condition at this moment in time and enjoy the flexibility that comes with being in the position we're in and we'll continue to use our cash to benefit shareholders.

Great. Thanks.

Our next question comes from the line of Mark Astrachan from Stifel Nicolaus.

Good morning everyone. First question just relates to what your views are on cannibalization from the new products and in particular, as you sit here and think about these new product launches which sound pretty exciting, how do you think about what the impact is on your other products plus what the potential long-term outlook is, meaning what potential impact do you see for 2010 and beyond?

Yes, I think that is a good question and clearly every time we launch a new product that is essentially in the same category as existing products, there is going to be cannibalization. We do take that into consideration when we project revenue and really forecast demand for a new system. In this case, we're actually welcoming, for the most part, cannibalization, because we're pricing the ageLOC system at price points that enjoy a healthier gross margin than our existing gross margin is at. So there will be some cannibalization, but know, we have also seen through our 25-year history that people, consumers become very wed to whatever product they may be using and it's still, frankly, a little bit surprising to me, that we have a very, very loyal customer base on skin care products that we launched 25 years ago. And people tend to stick with what they use and with what they like, so there is some cannibalization, but there is also a high-level of loyalty among consumers.

The story associated with ageLOC is so different than other line and wrinkle stories that we think we're really opening up a whole new world of people who we can convince of the ageLOC story and the fact that ageLOC products are really attacking the source of aging and not just the signs of aging to make them all the more compelling.

And maybe just one other comment is that this new line of products works perfectly with the Galvanic Spa, so it continues to complement and harmonize with the Galvanic Spa story.

Great, and then in terms of just thinking about what the potential impact would be on longer term top-line trends, it seems like then it would stand to be a bit incremental there, especially given the price point?

Yes, we really haven't given any guidance yet for 2010 or beyond, and we probably won't do that until our investor-day meeting in November. But we view, as I indicated in my opening remarks, we view ageLOC as the most significant product platform the Company has ever launched and we're just delighted with the competitive proposition and the really differentiated story that we have to go to the market with and we're confident that as we tell that story effectively, we will see incremental improvement on the top line.

Great. Then just two more housekeeping-oriented questions. The savings you talk about from Japan, I'm assuming most of that will fall to the bottom line versus being reinvested in the business?

That is true. We'll get about half of the savings, $5 million this year. That is not including the restructuring charges that we're taking. The full $10 million next year, anticipate most of that falling to the bottom line. We have upped our promotional activity, particularly our event spending consistent with what we're doing in other markets there a little bit, but generally it's going to be savings that will improve profitability.

Right and the $5 million for this year is in the guidance, I'm assuming?

That is right, yes.

And then just on the tax rate, 34.4 does that seem to be a good number using going forward?

I think probably right around 35% for this year should drop down to around 30% in the third quarter and then be back up in the 37 to 38% for the fourth quarter.

Great. Thank you.

You bet.

And our next question comes from the line of Doug Lane from Jefferies.

Good morning, everybody. Back on the new product, the ageLOC system, you mentioned it's a $100 price point, is that for each of the four components, or three components?

No, that is for the set.

So a month's supply of the set is $100 and then if you want the future, that is another $150 for a month's supply?

That is correct.

Can you help me put this in perspective with some of your exiting products like True Face Essence, which is also a very premium-priced skin care product. Is there a rebranding that is going to go on with True Face Essence? I s it going to operate in parallel with it? How does that fit into the new system, if you will?

That is a good question, Doug. We love the True Face Essence product and it's become very significant to our top line and to our bottom line. And frankly, if there is a single product where the new system, where there might be overlap with the new system to some degree it is with the True Face Essence product.

Ideally, in the perfect world, we probably would have infused ageLOC into True Face Essence also, but unfortunately the formulations were just not compatible. So True Face Essence, also, you will recall, Doug, is really all about firming, and we will not be making firming claims with the new future serum product. So a consumer really can use -- continue to use True Face Essence Ultra for firming specifically, or they will have to decide just based on which serum they prefer, which product they prefer to use. But they are compatible to be used together. It's just a question of whether a consumer, who is really a skin care aficionado really wants to go all out and buy both the new system and continue to use True Face Essence Ultra or not.

Now you haven't incorporated the True Face Essence product line with the Galvanic Spa, right?

Well, no. With the Galvanic Spa, a consumer can use whatever skin treatment/skin care system they want. So most of the people who use True Face Essence Ultra I would venture to guess are also using the Galvanic Spa and that will continue to be the case.

I just wasn't sure.

True Face Essence Ultra is not applied with the Galvanic Spa.

That's what I'm asking. Okay. Shifting to, back on the recruiting front, on the executive distributors it seems to be sequentially moving in the right direction. The two areas that stand out are greater China -- well, Europe, but still double-digits, 20%, so you can't really -- that is just -- continues to grow strongly, but maybe China, greater China, where both executives -- well, executives went from declining 2.7 to declining 4.9 and also your active distributors there have been declining pretty sharply in the past couple of quarters. It seems to be bucking the trend. Can you give us some color on that?

That is an issue of essentially reformatting the business model in China and we have been at that now for a couple of years and in light of the new regulations, and so I would encourage you to look more at just overall top-line results than how that active number looks for the time being. Because I think the dust is still yet to settle on the transition of the business model and we might continue to see some contraction in the actives, but what we're really delighted with is the commencement of business-filling activity there that is reflected on the top line.

Just one other comment on the active number there, because of the convention in the prior year, sometimes we get a push for people to qualify and be recognized. So executive number in the prior year would have been a little higher, likely in the second quarter which impacted the comparison a little bit.

Got it. Okay, thanks.

And our next question comes from the line of Scott Van Winkle from Canaccord Adams. Please proceed.

Hi guys. Congrats. Doug took all my questions, but I will try to make a couple here. First, the products being launched at convention, limited availability and then a full launch in January in U.S., Europe and Japan, I think you said. Is that the way you wanted it or was there a push back? I just wonder if that two-month blackout window hurts?

Scott, let me have Dan Chard, our president of global sales hit that question.

Scott, one the reasons we did it the way that we are, is what we found is there is a critical period between convention and launch, which is essentially used to train our entire executive force. So convention is going to be launched to the general public and then we have in the various markets, of U.S. and Japan, a series of essentially road shows, training and sales meetings that will go on throughout the various countries to start driving bong the interest, the excitement, but really putting together all of the sales tools and components to make the January launch as successful as possible. This is a system that has been perfected largely in South Korea where we've consistently had our most successful launches and we're spreading that out and using the same tactics in our other markets. So that is the primary reason for doing it that way.

Are have all necessary approvals, particularly in Japan, product approvals been obtained?

Well, I'm not exactly sure, Scott, where we are in registration of each of the new ageLOC products, but the skin care products are typically much, much easier to qualify for sale everywhere in the world than the nutrition products are and we don't anticipate a registration issue with this new skin care system?

Okay. Is there, the MOAS, I like that name better, actually, is there an ingestible that is going to be involved there? Or just the skin care product at this point?

Yes. Eventually we will infuse ageLOC technology and ageLOC components into the Pharminex line as well, and we're working to do that -- we're prepared to do that the fall of 2010. Whether or not we actually pull the trigger on that launch will probably depend on how sales are trending generally. And, Scott, we're just not anxious to disrupt good momentum in the business and, frankly, if things are going well and things are on track, we'll probably save a Pharminex launch for a later point in time, but we'll be prepared with an ageLOC Pharminex offering in the fall of 2010.

There were several questions about the price point and that suite of products. If you took a guess on all of the products that might be cannibalized, what would be the average monthly cost of the products that could be cannibalized be?

The 180 system is probably the most comparable system and its price point for the whole system is more in the $150 range. So we're really moving the average price point up significantly with a higher gross margin on the new offering.

So cannibalization certainly won't be bad?

No.

And I had kind of a different take on the China distributors. It looks like active distributors were up sequentially for the first time in three years or so. Am I reading that right? And is -- that is a greater China number, is that all Mainland-driven?

Yes. The greater China number is really reflective of Hong Kong and Taiwan as well, but I think you are reading the sequential increase correctly. We're seeing a similar impact, anticipate that we'll wrap around this business model change probably in the next couple of quarters. So the year-over-year comparison will begin to look more realistic probably somewhere fourth quarter or first quarter next year. We'll keep our eye very closely on the sequential change as well.

Okay. And, Ritch, that 6 million to $7 million spend for the convention, could you remind us what last year's spend was -- or the last event spend was? Pardon me.

We spent -- it would have been a year and a half ago and we spent about $5.5 million to $6 million. That was in, I believe the first quarter of '08. Or first quarter of '07, maybe. So it's been a while since we had the global convention. This one will be a little bit more expensive as we celebrate the $25th anniversary and really put a lot of energy behind the ageLOC launch. We think that will be a good investment that will come back to us as we start to roll out these products.

Is the higher spending associated with higher attendance or just a lot more excitement?

Primarily associated with the different venue. We're holding our 25th anniversary in Los Angeles this time, versus our historical conventions which have been in Salt Lake City.

Okay, great. Thanks very much.

(Operator Instructions). Our next question comes from the line of Mimi Noel with Sidoti & Company.

Good morning, Truman, good morning, Ritch. Just a few questions. First, as you make your way through the overhaul in Japan and China, do you look beyond that? Are there any other markets that could benefit for some right-sizing or at that point are you going to be uniform across all markets and there is no best-practices to implement, et cetera?

Well, Mimi, Japan is really the final stopping place for our transformation efforts, and we have been through a similar transformation over the course of the last year and a half or so in China as well, but frankly, Japan is the last place where we anticipate doing significant restructuring and we're really happy with the work that has been done there. Let me just touch on the last point of your question, which is best practices. And to tell you the truth, one of th things that Dan Chard is doing so well is really implementing taking best-practices from all over the world and sharing them globally. He just referred to the fact that South Korea has really been the all-star market in terms of product launches and we're learning a lot from them and implementing globally what we are learning there. So best-practicewise, the focus really, at this point now and going forward is best-practices on the top line.

Okay. Also wanted to ask Truman, you mentioned the average order volumes. I don't know if it was exactly as I heard it, but is sounds like they are increasing. Is that correct? Would you elaborate on the comment you made in your prepared remarks?

Yes, that is correct. We, as part of the Wealth Maximizer implementation, we put an incentive in place to improve productivity and that incentive that is offered has proven to be very valuable to our 2009 results, because we simply have a carrot out there that people are chasing after, and it's increasing our average order volumes almost everywhere in the world.

Okay. And then the last question, L.A. for the global convention, it's a little bit more expensive. Why is the convention there this year? Is that just the place to do the silver anniversary or is there something else at work?

Yes, we wanted to just do something different for our 25th anniversary. It's going to be a spectacular event. I'm really excited about it, but more than the location, it's really all about excitement for the ageLOC launch. That is really what is going to make it a great event.

Okay. And do you have any reason to think that because it's in Los Angeles over Salt Lake City that you actually could draw more attendees?

Well, actually the opposite. The event will be hold in the Nokia theater in L.A. which only seats 7,000 people.

Okay.

And we will have an overflow area, but the fact that we can only put 7,000 in the room will put a little bit of a cap on attendance. So what we did this year was also put an incentive in place, where people have to qualify in order to get in the room. And so, it's been a nice dynamic on overall business results to essentially require our salesforce to reach certain levels in order to attend.

Okay, so the exclusivity of it is creating some competition too?

Right.

That is all I have. Thank you very much.

Thanks, Mimi.

And there are no further questions in the queue at this time. I would like to turn the presentation over to Mr. Truman Hunt for any closing remarks.

Thanks for joining us again this morning, everyone. Ritch and I are going to be in Boston and New York in the upcoming few weeks and look forward to visiting with you. We also want you to know that we'd welcome your participation and attendance at our convention in October. Let us know through Scott Pond or Ritch if you are interested in attending. Also scheduling our traditional investor day in the month of November, which will be a great opportunity for us to really talk to the Street more about the science behind ageLOC, which you are going to find very interesting and very compelling.

And let me just conclude by saying that we're very optimistic about the remainder of 2009 and going into 2010. We're confident that '09 is going to be another record year and that will set us up well to continue to reach our objective of becoming the world's leader direct-selling Company in the upcoming few years. Thanks very much.

Thank you for your participation in today's conference. This concludes today's presentation. You may now disconnect and have a great day.