如新 (NUS) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 Nu Skin earnings conference call. My name is [Malelia], and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of this conference. (Operator Instructions.) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Mr. Scott Pond, Director of Investor Relations. Please proceed, sir.

Thank you. We appreciate you joining us today. With us in the room today are Truman Hunt, President and Chief Executive Officer, Ritch Wood, Chief Financial Officer, 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 statements. 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. With that, I will now turn the time over to Truman.

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

I'll say right at the outset here that it's a little bit frustrating to have released our results on a day where there's negative news in the market, because for us, the news has never been better. As our release indicates, we posted record revenue for both the fourth quarter and for the year.

For the quarter, revenue exceeded $378 million, which is a 19% year-over-year improvement and includes about a 7% currency benefit. Prior to the fourth quarter, our largest quarterly revenue level was $334 million, which we posted in just the third quarter of last year.

So needless to say, we're very pleased to have grown $44 million on the top line, or about 13% sequentially on the heels of what had been a very strong third quarter. With positive momentum that built throughout the year, we generated record annual revenue of $1.33 billion, a 7% improvement over 2008.

Earnings for the quarter were $0.47 per share, and when excluding items that impact comparability, this represents a 31% year-over-year improvement. For the year our earnings per share grew 22% on an apples-to-apples basis.

So not only are we pleased with our top line growth, but we're also delighted with the results of our restructuring efforts and our focus on profitability over the past four years.

During our third quarter conference call in October, I stated that the third quarter had been our most graphically consistent quarter to date, with each of our geographic regions enjoying healthy growth. I am pleased to say that this was even more evident in the fourth quarter, as we saw improving or sustaining trends in virtually all of our markets.

We were particularly encouraged with continued trend improvement in Japan and with healthy double-digit growth rates in North America, Europe, Southeast Asia, China and South Korea.

During the past 18 months in what has been the most difficult of economic environments, our success is really reflected in one word. And that word is innovation. For us, our latest innovation is branded under the trademark ageLOC. We're generating terrific momentum in our skin care business with the introduction of our ageLOC skin care system.

As we mentioned at our investor day conference in November, initial sales for the ageLOC skin care system at our October convention topped $15 million in just a couple of days. And we saw excitement for ageLOC continue to develop during the quarter and really grow after the convention throughout the entire quarter.

Now, for those who may be new to our story, let me just say that ageLOC represents our focus on not just the signs and symptoms of aging, but is differentiated by proprietary technology that also enables us to attack the underlying sources of aging, with the ultimate source of aging lying in the human genome. This focus is enabling us to develop products that offer superior anti-aging benefits.

It's been interesting to note during the past month that both TIME Magazine, as well as US News and World Report have run cover stories on the latest developments in anti-aging research. Both magazines noted, as we have discovered and as we have been saying over the past year, that indeed products can be formulated to positively influence the way our genes function.

This is a very big story. And as the world learns more about it, we believe that we'll enjoy a meaningful competitive advantage and head start in the market place.

I'd also like to note that with the launch of ageLOC, we're employing a different geographic launch strategy, which is playing out well. In the past, a global rollout of a new product could take anywhere from one to three years. But with the ageLOC skin care system, our rollout timeline has been much more compressed.

And in fact, following the limited time offering in October, we've now launched ageLOC skin care in the Americas, in Europe, Japan and South Korea in just the last six weeks. So this compressed timeline, we feel, has helped us generate stronger than our historical level of distributor enthusiasm and a focus on this growth initiative around the globe.

Also contributing to our prospects in 2010 is the January introduction of a new and improved ageLOC addition, Galvanic Spa. We've made the Galvanic Spa more user friendly, added some new features and improved the delivery of the product's applied to the skin, using the spa by as much as five times. With the Galvanic Spa and associated treatment gels already being our largest selling product globally, we're optimistic about the impact of the new spa on an established and a growing consumer base.

In addition, as those of you who have followed us for some time will recall, whenever we launch a product in either skin care or nutrition, which are our two primary product categories, attention on one of those categories typically cannibalizes sales in the other category. But one thing that was particularly encouraging in the fourth quarter is that, despite all of the focus on ageLOC skin care, Pharmanex sales volumes still increased 4% on a constant currency basis. So this is very encouraging and obviously makes the impact of the ageLOC launch all the more incremental.

Let me add just a little color to our results in a couple of key markets. First we saw encouraging trend improvement in Japan throughout 2009. We installed a new management team there about 18 months ago. With the charge to implement in Japan the same strategies and tactics and growth initiatives that have been working so well elsewhere around the world. Specifically we've aligned Japan with the rest of the world in terms of our distributor compensation program, as well as in our distributor training programs and in our product launch processes. And with those efforts, the market has responded better than we had expected, particularly in the second half of 2009.

Now, we still have work to do, and you'll note as we talk about 2010 guidance that our guidance for the year is based on results in Japan that are more conservative than our actual Q4 results. This is because Q4 results benefited perhaps to a bit of an extraordinary degree from the launch of the ageLOC Future Serum during the fourth quarter. But we're confident and optimistic that we'll see improvement in Japan in 2010 versus results for the market in 2009.

We're also encouraged by continued growth in China. Over the past three years our business transformation there has been a significant undertaking, and we're really pleased with the outcome of that effort and with what we see in an encouraging fundamental trend in the market. We anticipate, for example, that the active distributor count in China in the first quarter of 2010 will show year-over-year improvement. We've been seeing sequential improvement throughout 2009, but will lap the year-over-year numbers in the first quarter and start to see year-over-year improvement in the active count.

So we would conclude that there's a very high likelihood of continued trend improvement in China throughout 2010, and we remain optimistic that China can become a very substantial market for us.

Elsewhere, we saw continued double-digit growth in the fourth quarter, with particularly strong growth rates in Southeast Asia, emanating primarily out of Malaysia and Thailand, as well as in South Korea, which has been our all-star performer over the past decade. And in Europe, which continues to perform very well.

We're also encouraged with our performance in the US, where our very capable management team and our terrific sales leaders are as engaged and enthusiastic as they've ever been. Now when we went into the recession about 18 months ago or so, we felt that the opportunity we provide people to supplement or replace their income would be a very natural hedge against contraction and consumer spending.

And as we have effectively executed our business and, as I mentioned, continue to innovate over this period of time, that natural hedge has played out for us. So even in the face of US jobs data, like what we've seen this morning, we believe that a continued focus on innovation is the way to get through this.

And in 2010, that innovation will be the result of us taking ageLOC science, ageLOC technology to the inside of the body with the launch of the first Pharmanex ageLOC product in the fall of this year.

We believe that we're the only direct-selling company that has successfully been able to manage and build a business in the two largest product categories for anti-aging, personal care and nutrition. So we have very good ammunition to continue to thrive, even in the face of an economic environment here in the United States.

Now, on a profitability note, our operating margin improvement during 2009 is something that we're extremely proud of, and we know that our shareholders will appreciate. We've worked hard over the past four years to get where we are today, and we anticipate further operating margin improvement in 2010 versus 2009.

So in summary, we're pleased with the success of the past year, and we look forward to another great year in 2010. Before asking Ritch to address more detailed financial results, I would just add on a personal note that as I look back on my tenure here with the company and consider the state of where our business is today, I can say without reservation that Nu Skin Enterprises is in better shape today than it's ever been during my 14 years with the Company.

We're pursuing a focus and a differentiated growth strategy. We've proven that we can continually innovate. We're financially sound and have demonstrated that we're serious about improving profitability. We're streamlined organizationally. We have a great team that's working cooperatively to achieve objectives that are aligned with shareholder interest. And I would add that we've also accumulated an impressive track record of allocating resources in a fashion that creates shareholder value. All of that adds up, to me, to the conclusion that Nu Skin Enterprises has a bright future ahead.

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

Thank you, Truman. Good morning, everyone. I'll first provide the local currency revenue figures in our major markets.

In North Asia region, fourth quarter revenue in Japan was JPY11.4 billion, compared to JPY11.5 billion in the same quarter of 2008. In quarterly revenue, in South Korea was KRW47.3 billion versus KRW42.3 billion in the prior year.

In the Americas the US posted $67.6 million in revenue, compared against $50.5 million in the prior year. Note that approximately $11 million of these reported sales in the US came from purchases made by foreign distributors attending the global convention held during the quarter. So this $11 million benefited the US sales number and pulled out some volume out of our foreign markets. And particularly, I'd highlight South Korea and Hong Kong where impacted by those convention purchases.

Canada reported CAD7.2 million in the quarter, compared against CAD5.3 million in the prior year. Latin America revenue was $4.5 million compared to $4 million in the prior year quarter. In the greater China region, Mainland China revenue was CNY130.9 million versus CNY117.7 million during the prior year, and quarterly revenue from Hong Kong was HKD90.2 million compared to HKD100.6 million in the last year. Finally, Taiwan revenue was TWD805 million, compared against TWD749 million in 2008.

Our gross margin for the quarter jumped nicely to 82.3%. This is a 60 basis-point improvement over the prior-year period. And the improvement is related primarily to the sales of the higher margin ageLOC products. Also benefited a little bit from currency, as well as some -- several supply chain initiatives to reduce freight expenses and improve efficiencies that we've been working on for quite some time and are now beginning to bear fruit.

Our selling expenses for the quarter were 41.0%, compared to 41.6% in the fourth quarter of 2008. The majority of this improvement can be attributed to convention revenue, including ticket sales and [sales aid] sales upon which we do not pay distributor commissions. So we expect the commission rate to move back into our forecasted range of 41.2% to 41.7% in the first quarter and hold in that range throughout 2010.

General and administrative expenses for the quarter were $104.9 million or 27.8% of sales, compared to the same percent of sales in the prior year period. As projected we spent $7 million on the global convention in October, which is included in this $104.9 million total. And we continue to benefit from the transformation initiatives that we've been -- that we put into place over the past three years.

And during the quarter, I just want to point out that we did report a benefit of $1 million from a reversal of a prior quarter restructuring accrual in Japan. This relates to an expense that was accrued based on a plan lease hold change that we were not able to fully execute before the end of the year, and therefore we reversed this expense in the fourth quarter.

The company's operating margin was 13.5% for the quarter when excluding this restructuring benefit. That's a 130 basis-point improvement over the prior year. We feel very good about that, especially in a convention quarter. During the quarter, we sustained a net expense of $3.4 million in the other income expense line of our income statement, related primarily to interest expense, foreign currency translation and other expenses.

Our balance sheet continues to become stronger. At the end of the year, we reported $158 million in cash and $157 million in debt. Putting us in a net cash position. Our strong cash position and the improving balance sheet continue to put us in a solid position to create shareholder value as we go forward.

Our tax rate for the quarter was 37.8%, compared against 39.7% in the prior year. And during the quarter, we paid $7.2 million of dividends and purchased $7.4 million of company stock.

The outstanding share count, you'll note, jumped from 63.7 million dollars (sic) in the prior year period to 65.1 million dilutive shares in the first quarter of 2009, which is really a function of the increase in our stock price. The stock price appreciation caused a number of underwater options to become dilutive during the quarter, and the 61.5 -- sorry, the 65.1 million share count now includes virtually all outstanding options, so we should not see an increase to that number as we go forward.

We're increasing both our revenue and earnings per share guidance for 2010, as we noted in our press release today. We're increasing our revenue guidance by $10 million. That puts us at $1.38 billion to $1.41 billion. And this change in guidance is primarily related to our anticipation of a strong launch of the ageLOC products here in the first half of the year. And it's reflected in the guidance that we're providing for our first quarter revenue.

We're also increasing our expected earnings per share range for 2010 by $0.05. That puts it $1.65 to $1.75. And in addition, we're projecting now an operating margin range for 2010 of 12.5% to 12.9%. And this is really based upon our outlook for now stronger gross margin, which we're raising by approximately 40 basis points from our earlier guidance. So we now guide our gross margin for 2010 to be in the 81.8% to 82.2% range for the year.

For the first quarter we project our revenue to be $337 million to $345 million. And with earnings per share of $0.39 to $0.42. This revenue forecast assumes currency will positively impact revenue by 5% to 6% the first quarter, and it projects local currency decline in Japan of approximately 4%.

We expect the first quarter tax rate to be a little bit better, around 33%, slightly lower than the previous -- than the percentage in the previous year. And then it will climb back up to about 37% in the second quarter, about 33% in the third quarter, and then approximately 37% in the fourth quarter as you model out the year. So again, that's 33%, around 37%, 33% and then 37% again.

As you build your models, I'd highlight that we really expect to have a nice year in 2010. Just note a couple items for your consideration. First we expect a very strong first quarter with the rollout of the ageLOC products. We do have a more difficult comparison from the revenue line in the fourth quarter when we're comparing against the global convention that was held in 2009, as well as the prelaunch of the ageLOC Transformation set. And we modeled that into our numbers.

We've also modeled currency to be neutral for the year. So, I just noted that we expect a 5% to 6% benefit in the first quarter, so we expect to actually have a currency headwind in the last half of the year. At least that's what we've modeled.

If we are to keep currently essentially where it's trading today, we'd end up with about a 3% benefit, 3% to 4% benefit for the year. So we've got modeled into our financial model, currency moving somewhat so that we have a headwind in the latter part of the year. We believe that's conservative and prudent based on the economic conditions around the world. Although it's always difficult to project out currency.

So overall, we continue to see top line business very strong, that's propelled by growth in executive distributors, strong product initiative. We continue to anticipate nice improvements in our operating margins, driven primarily by gains in gross margins, and then continued efficiencies with overhead expenses. And this growth altogether will drive solid cash flow. This puts us just in a very enviable position to continue to create shareholder value.

We look forward to a great year this year. And with that, we'll now open it up for questions.

Operator?

(Operator Instructions.)Your first question comes from the line of Olivia Tong.

Hi, good morning. Just wanted to first touch on Japan. First a point of clarification. I think you guys had local currency sales down 4% in Q1. First, is that correct?

Yeah, that is correct, Olivia.

Thanks. And then maybe if you could talk about how trends in Japan progressed in Q4. I know you had the initial launch of the serum, but kind of wondering how they progressed, given that you are looking for a decline again in Q1. And then, also, marry into that the executive distributor count going up in North Asia in Q4. If you could sort of talk about that as well.

Sure. We had a very positive reception to the launch of ageLOC Serum in Q4. Now recall the ageLOC skin care system includes what we call the Elements products, which are daily use, morning and night products, as well as what we call the ageLOC Future Serum.

Just the Future Serum component of the Transformation set launched in Q4 -- late in Q4 in Japan. The Elements component of the ageLOC Transformation set will not launch in Japan until April. So they won't be the full beneficiary of the ageLOC skin care launch, really, until the second quarter. So, as Ritch indicated, we do expect the business to track down a little bit on a year-over-year basis, but we did see a nice uptick in the quarter sequentially in our executive count. We are seeing signs of hope. But we'd like to see some continued improvement in key metrics before we get any more bullish on the market.

Was the exec count up in Japan?

Yes, for over Q3 sequentially, not (inaudible).

Sequentially. Okay, and with that --.

For the fourth quarter, Olivia, the executive count was down 5% in Japan, which was a nice improvement over where we have seen it tracking throughout the year. We were down 5% revenue-wise in the third quarter. So fourth quarter improved, and we expect some of that came from the launch of the ageLOC Serum.

So, conservatively, we're trying to model out a business in the first quarter that doesn't have that promotional push of a new product, and still expect the business to continue to show improvement and especially for the year. We expect it to continue to improve throughout the year. But try to model in conservatively where we'd expect Q1 to be.

Got it. Thanks. So if I understand this correctly, ageLOC is launching in most of the other markets in Q1, but not until Q2 for Japan? The Elements package?

The Elements component of the ageLOC Transformation set, yes.

Okay. Thanks for the clarification on that. And then secondly on Pharmanex, the 4% volume growth. What drove that? And then also, what was the comp last year?

Well, what drove it was the intentional focus on Pharmanex promotions that were designed to enable the ageLOC skin care launch to be as incremental as possible. Our management teams around the world are doing a great job of keeping Pharmanex in front of consumers in the face of all of the promotional attention on ageLOC skin care. But the region of the world that's also performing very well from a Pharmanex perspective is Southeast Asia, where the Pharmanex TRA Weight Management System is a very hot product. And that continues to help our Pharmanex numbers global.

Throughout the year, Olivia, we saw our Pharmanex business actually very stable. We're about $130 million in the first quarter, $137 million, $146 million and $153 million. So as we went throughout the year, we continued to see the Pharmanex business very solid and stable. And so the growth in the personal care business became more and more accretive, I guess, to the overall story.

Would you expect to post local currency growth in Pharmanex in 2010?

We really don't model out the different, I guess, the different sides of the business. We look for overall growth. We do anticipate a solid launch of the ageLOC nutrition supplement later in the year. We're not sure how many markets will actually take that launch in the fourth quarter. So it's a little bit hard to project at this point in time. But we like the stability we see and don't anticipate that it's gonna reverse from where we're at today.

Fair enough. And then just lastly on the balance sheet, working capital. It looks like inventory days and payables days improved. I'm just wondering if that's a timing issue, or if there's something specific that's going on? Thanks.

No, that's really -- we really, when we transformed the business three years ago and started that process, tried to look at every aspect of the business, including supply chain. As we've analyzed best practice and so forth, we believe there's a lot of opportunity to show improvement. So I believe that's very real progress. I believe it's progress you'll continue to see. We're somewhere around 2.2 turns at the end of the year. Our goal is to push that closer to even 2.5 turns over the next 18 months. So you'll see us, I think, continue to make nice progress on our inventory balances.

Great. And then just one last question. Are you expecting for 2010 for the share count to stay roughly in line with where it was in Q4?

Yes. We'll continue to participate in the market in terms of buying our stock back. But generally speaking, I think if you were to model around 65 million shares, that would be a good number to keep.

Great. Thanks very much.

Your next question comes from the line of Doug Lane.

Hi. Good morning, everybody.

Hey, Doug.

You had raised your forecast for the quarter back in November, following the convention. And still beat the rates forecast pretty handily. What was the key delta at the end of the quarter that really drove the upside following your release in November?

Well, we projected Japan to be down around 2%, came in 1%, so we picked up a little upside there. Generally speaking, every region in the world just performed a little bit stronger than what we had anticipated. We had a very solid November, very solid December. So, it's hard to pinpoint, Doug. I would say one item. I think the $10 million of incremental above and beyond our guidance was really a spread across every region in the world just doing a little bit better than what we had anticipated.

Would it be fair to read the Japan upside as the reception to the ageLOC launch?

Yes, clearly.

And are you seeing similar receptions elsewhere following the first of the year? Maybe we can back up and just refresh us or me on what the plan is for the launch of the ageLOC skin care lines. It's staggered geographically, isn't it?

It is a little bit staggered, but the age -- full ageLOC system is now available in the Americas, in Europe and in South Korea, as of the month of January. And yes, we remain optimistic about the impact of the ageLOC launch in the quarter. That's all reflected in the guidance that Ritch provided.

Of course. Then on the nice improvement in the executive distributors, can you give us some color there on what you think is driving it? I mean, that was probably the -- it's been a while since you've had that kind of sequential growth in executive distributors.

Yes, we saw the executive count tick up in almost every market of the world. And in every region for sure. But almost literally in every country where we do business. And that's really a reflection of the fact that more and more people are looking for alternative ways to supplement or replace income. And they're finding it with us. The proposition that we're putting in front of them is compelling and it's fresh and it's exciting. AgeLOC is a big story. It has proprietary components to it. So it's just very compelling. And to see the executive count tick up in the fourth quarter sequentially even in Japan is very encouraging.

Okay. Thank you.

Okay. Next question comes from the line of Mark Astrachan.

Good morning, everyone.

Hello, Mark.

First question on the rollout in Japan. What was the Japan growth number X the ageLOC rollout? Or do you know what the sales were for ageLOC in the fourth quarter there?

Yes. The sales -- trying to think if I have that number. It was probably -- I mean, the growth rate probably would have been similar to where we were at in Q3. Kind of a down 4% to 5%. Then ageLOC just pushed it a little bit. It's always a little bit tricky in our business, because people have to reach certain volume requirements.

Some of the volume that's purchased becomes a little bit cannibalizing to the other products in the business. But probably without the launch of the ageLOC products -- which we prelaunched, by the way, a little bit in October, at the same time the convention was going, the ageLOC Serum, and then the primary launch of the ageLOC Serum happened in December. But we saw a strong attraction to the ageLOC Serum in both of those months, which helped the business be strong in the fourth quarter.

Okay. Great. And then, Galvanic Spa sales in the quarter, what was that number? And then relatedly with the rollout of the Spa II, what do you anticipate, if any sort of margin expansion as a result?

Yes, Galvanic Spa sales in Q4 ticked up slightly over Q3. It's going to be interesting to see in Q1 whether the rollout of the ageLOC skin care system cannibalizes to some degree spend on the Galvanic Spa -- on the new ageLOC addition Galvanic Spa.

But, I personally believe that with a large consumer base already installed and using the Galvanic Spa, there is going to be huge interest in upgrading those -- their prior units to the new units. So I think we'll continue to see some good growth there. The new unit does enjoy better pricing, and from a gross-margin perspective will contribute, along with the ageLOC skin care system, to an improving gross margin line.

Great. Just thinking broadly about ageLOC, given what I think has been a pretty positive response in the market, that it's rolled out. Including, by the way, you've made a fan out of my grandmother, for what it's worth. Can you keep up with demand in terms of what you're anticipating now and what you're producing?

Yes. We obviously ran into a bit of a supply chain buzz saw at convention, where we blew through our expectations there. And to be totally honest and transparent, one of the things that is impacting us here to some degree is that we've had to put our markets on allocations for ageLOC products here in the first quarter. But those -- the allocation process will pretty much be relieved after the first quarter, so that going forward in the second quarter, we'll no longer have any supply chain constraints.

Okay. Great. Thank you.

Your next question comes from the line of Scott Van Winkle.

Hi. Good morning, guys.

(Multiple voices.) Hey, Scott.

Following up with a question earlier about the share count. There was some incentive stock that was coming your way in the management team I think at $1.50. Is that included in that jump in the share count in Q4?

Yes. Most of the shares were already included, because we were anticipating that we would hit that number. But the primary shares that came into the share count were stock options that had strike prices at $21, $22, $23, granted a few years ago when our stock price was a little higher, that have not been in the dilutive share count for the last year or two because we've been trading in the $18 to $16 range. So as the average stock price for the quarter pushed up above $25, those options all became part of the dilutive share count.

And, Ritch, last year was the first year in a couple of years at least that share count rose, ending share count year-over-year. What were the buyback numbers in 2009 in total, if you have them? And now that you're in a net cash position, should we assume, you said you're gonna be active in the market. But should we assume we're gonna get a little more aggressive?

We purchased $20 million for the year, I believe, for the year. Cash flow continues to be very, very strong. So we'd anticipate that we use excess cash to drive shareholder value. And so the two options really for us are to buy back stock and to increase dividend. We'll continue to evaluate those going forward. But, yes, if we're sitting on a great deal of excess cash, we'd expect to be using that, particularly opportunistically.

Our focus is really, number one, to make sure that our option incentives -- our equity incentives to management are not dilutive. And we have granted, as you know, some performance-based incentives, some which vested $1.50 and the others that vested $2 per share. Those were a little bit larger grants, so we need to buy back to make sure those are not dilutive. But secondly, to look opportunistically for opportunities to support the stock and to support our shareholders as we have excess cash to do so.

I think the long-term debt came down sequentially in Q4. What percentage of that remaining debt is your yen denominated debt that I assume you're not going to touch? And what was the actual interest expense in that fourth quarter, and what should we think of that going forward when we consider before the effect of currency on your other income line?

Interest expense was about $1.8 million for the quarter. Approximately half our debt resides in Japanese yen today. It's really on an amortization schedule that we're paying off over the next seven years. Really not something we can -- we can't adjust that amortization schedule, so to speak.

From an overall standpoint, we will pay down about $35 million in debt this year. And then from this year forward, so 2011 forward, our debt payments dropped down, because we'll have completed a couple of the tranches of our debt, to about $15 million to $17 million over the next, I think it's six to seven years, to pay off completely the balance of debt. But we would expect this year for it to drop in 2010 from about $157 million down into -- around $130 million or slightly below. And then from there, again, the debt payments drop down. And so, nice for cash flow really beginning in 2011 and forward.

Okay. And to stick with the numbers quiz. In Q4, if you take out the $7 million of convention expense, throw back the $1 million of the accrual reversal, which I assume would be on the G&A line, you had about - -what $98 million of G&A in that Q4, up a bunch sequentially and year-over-year. Is there something in there that I missed, or is that a kind of a quarterly run rate we should consider?

It is a little bit higher, Scott. We pulled in some incentive pay, including the $1.50 options, which we hadn't anticipated hitting in the fourth quarter. That accounted for $1 million. I think as you look at our -- as I model it out going forward, we'll probably drop closer into the $97 million, $96 million range as we go into the first part of this year. Obviously that depends on where sales go and so forth. But it was a little bit high, due primarily to some incentive-related expenses that kicked in in the fourth quarter.

Truman, a couple questions for you. This is going to seem somewhat unfair, but you went through a whole list of accomplishments and things that you've done at the end of your remarks before turning it over to Ritch. Things like margin and innovation, etc., etc. I guess, what's next from your mind of what the big agenda is? I think of the last couple years as being around ageLOC and margins. But what's the next agenda you were going to be talking about?

And then second, if you can comment, I wonder if you have any thoughts as to whether there's risk or opportunity or something to do with one of your competitors in the skin care world, Arbonne, filing for bankruptcy.

Well, yes, no, I think that's a fair question, Scott. So on the innovation front, we're going to continue to innovate from a product perspective, and the big story here in 2010 and 2011 is going to be taking ageLOC to the inside of the body and starting to fight the aging battle from the inside out while we also fight it topically.

We have a lot of innovation to do on that front. And we also have continued innovation to do down the road on the skin care front. So from a product perspective, I mean, again, in my 14-year tenure with the Company, our product strategy and our R&D pipeline has never been more compelling. We're starting to plan three, four and five years out, because we just have a lot of good stuff in the pine line.

Other innovation areas will include some continued innovation from a compensation plan perspective for our distributors. So, in 2010, we will continue to distinguish ourselves in the direct-selling space, with further innovation on that front that we are not yet prepared to talk about in detail, but that we will be talking about as the year goes on.

And then the third area of innovation is continued innovation in our sales model, so we're working on various concepts that we believe will further distinguish us in the direct-selling space, just in terms of how distributors are able to build their business. So, lots of room to run there.

The Arbonne question, the Arbonne issue is just a question of them having levered up to too high a degree. It's a mistake that sometimes companies make, and they're now paying the price for it. And, hopefully, they'll be able to restructure their debt and continue to be viable. I have every expectation that they will.

There's no opportunities for other direct sellers, particularly with similar product lines. If -- and as you always know, this direct-selling space, momentum kind of goes against you and it starts to impact your distributor force. I'm wondering if there's an opportunity there.

Well, there always is kind of a little bit of a feeding frenzy whenever a direct-selling company struggles. But I know those people. I know their management team. It is an impressive company, and they'll figure out a way to survive.

Okay. Thank you very much.

Your next question comes from the line of Bret Jordan.

Hi, good morning.

(Multiple voices.) Good morning.

A couple of quick questions. And one of them just, on a year-over-year basis, you talk about the Americas $67.6 million benefiting from $11 million at convention. What was the contribution to the prior year convention product launch? Just to get apples-to-apples on that.

We really didn't have a substantial convention in the prior year. If we factor out what was purchased by the -- and I hope I'm answering your question correctly here.

Yes, you are.

If we factor out really the push that we got from international distributors at the convention, on a kind of an apples-to-apples basis, the US business was up about 12% over the prior year.

Okay. And then the 60 basis -- bps of gross margin, you mentioned ageLOC and FX. What was the ageLOC contribution, if you were to carve that out to the gross margin gain in the quarter?

It was just over half of the total benefit that we received. We sold about $28 million of ageLOC during the quarter, and the rest -- the majority of the other benefit came really from foreign currency benefit. We had a 7% overall foreign currency benefit. That ends up playing through the gross margin line and benefiting us there. But over half of it came from the ageLOC.

It's ageLOC, and we mention that. But there are really several initiatives that we put in place in the supply chain, initiatives to improve margins on several products and continue to rationalize our SKU count. Those are all beginning to bear fruit today. We're able to keep our air freight down. We've put a warehouse in Singapore that helps with the building and manufacturing of the Spa. So we're not having to ship that back into the US and then back to Asia. So all of those initiatives are benefiting that gross margin line.

Right. And then this question, maybe, it's something you don't want to talk about in advance. But when you think about taking ageLOC to an internal product, what product SKUs do you think of? Is this meal replacement or vitamin packs? How does one apply the ageLOC product line to an ingested product?

That's a good question. And we are working on various delivery mechanisms right now and are not yet prepared to talk about what the manifestation will look like in the fall of 2010. But we're considering a number of different delivery alternatives.

Great. Thank you.

Next question comes from the line of Mimi Noel.

Hi. Good morning.

Hi, Mimi.

First I wanted to get an idea of just how addictive ageLOC is. Can you give me a sense of what replenishment orders look like for that?

It's too soon to say.

Okay.

The October offering was just a convention limited and time offering and, the system has really only rolled out in the last few weeks. So we just don't have reorder information yet

And is it typically a supply for about a four week period?

Yes. Right. That's actually a very good point. Because historically, it was far easier to craft automatic shipment programs around nutrition, because you can more easily measure a 30-day supply of the nutrition product. We went to great lengths with the ageLOC system to package it in a way that also facilitates a 30-day automatic delivery program. So the Transformation set is designed to last 30 days. I think, frankly, it's an innovation in this category from a packaging perspective that's going to be meaningful to us.

Okay. The other thing I had wanted to ask about also is -- would you mind reviewing what you said earlier on the Galvanic Spa? How the new unit is different from the old one?

Yes. It's more user-friendly. Have you used the Spa, Mimi?

I have held it in my hands. I stay out of the sun, so I haven't used it myself.

Not that you need it, but you would like it. The new unit is just easier to use. The interface is larger, it's more intuitive. We've changed the [GUI], so to speak, interface, so the consumers can figure out how to use it a little more easily. And the heads that attach to the top of the unit have also been reconfigured quite significantly. So the head that's used to apply the pretreatment, as well as the treatment gel, is significantly larger and has a tread on it that looks somewhat like a tire tread, which our engineers designed to enable a higher level of interactivity between the Galvanic Spa itself and the user, with the active ingredients in between.

Okay.

We're still collecting clinical data, but we expect the new unit to be even more effective than the old unit.

And you said the margins on this one are more attractive than the prior?

Yes.

Is the pricing the same?

It was increased just slightly.

Okay. And can you remind me how big the Galvanic franchise is now, with the units and the gels?

Yes, the Galvanic Spa franchise now represents close to about a $70 million a quarter franchise.

That's great. And then the last question I had, at the analyst day you mentioned that there was a proposal before the Board to develop a new facility for product development. Is there any update on that?

We are close to being able to provide an update on that. And in fact you'll be hearing of developments on that front in the next 30 days or so.

Okay, great. Thank you. Good quarter and good luck with this one.

Thanks, Mimi.

(Operator Instructions.)Your next question is a follow-up question from the line of Scott Van Winkle.

Can you give us the timing of events that you have scheduled for this year, all of your conventions and relative to last year? And which convention will there be the launch of the Pharmanex ageLOC product?

Okay, in the spring of this year we have a Korea convention in October. Or in April, excuse me. We have a greater China convention in May for the greater China region. We will have a US regional convention in the fall, October, and the ageLOC Pharmanex product is scheduled to roll out in connection with the fall event, so in the fourth quarter of 2010.

And we have also a Japan convention in the fourth quarter. Not sure on the timing of the ageLOC nutrition product rollout yet in that market.

So in last year you had a similar -- events, except you had US and Japan kind of in one in the global convention?

Yes. Well, Japan had an event in the fourth quarter of 2009 that wasn't technically a convention. It was a Gateway to Success seminar, but the response was so huge from people who wanted to attend that it ended up looking like a convention. It wasn't technically a convention. They will have a convention in the fall of 2010.

Great. Thank you.

Thanks, Scott.

You bet. And let's just wrap up here by thanking you all again for joining us on the call. It was a great quarter. It was a great year. And our sights now turn towards making sure that 2010 becomes another record year for us. And we have every expectation and all the confidence that we can muster that it will be, as we continue our March to the $2 per share earnings level, which is where our management incentives are and which is where we intend to get as quickly as we possibly can. So thanks for joining us. We're available to answer any further questions you may have.

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