如新 (NUS) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the second quarter 2010 Nu Skin earnings conference call. My name is Ann, and I will be your coordinator for today's call. As a reminder, this conference is being recorded for replay purposes. At this time, all participants are in a listen-only mode.

(Operator Instructions)

We will be facilitating a question-and-answer session following the presentation.

I would like to now turn the call over to Scott Pond, Director of Investor Relations. Please proceed, sir.

Thank you, Ann. Good afternoon, everyone, or good afternoon. We appreciate you joining us on the call today.

In the room today are 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 quick 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 obtained 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.

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

Thank you, Scott. Good morning, everyone. We appreciate you joining this morning.

Today, we are pleased to announce our largest quarterly results in our Company's history. We generated revenue of $388.4 million, which is a 20% improvement over the second quarter of 2009, and a 16% growth in constant currency. Our second quarter earnings came in at $0.50 a share, which represents a 39% improvement after excluding restructuring charges of a $0.01 last year. And given our strong first half results and healthy activity we are seeing in almost every market, we once again increased our guidance in this release for the remainder of 2010.

As with the past several quarters, much of our growth is a result of the strong demand for our new ageLOC anti-aging products. In the second quarter, we continued the global roll out of ageLOC skin care by launching the system in Greater China, at a regional convention we held in Hong Kong in the month of May. Our Chinese sales leaders were quite anxious to outperform launches in other markets, and they were very successful in doing so. As we anticipated a year ago, the ageLOC Transformation skin care system has become our biggest product launch ever, with sales of $150 million in the first three quarters. So, ageLOC Transformation is available virtually everywhere accept mainland China, where the set will pre-launch in the fourth quarter of this year, and then be available on a full-time basis in the first quarter of next year; and in Hong Kong, where the set goes on sale on a full-time basis in a few days in the month of August.

So for those who may be new to our story, I want to just take a minute and explain what ageLOC is all about. AgeLOC science is based on addressing aging at its ultimate source, which lies in the human genome. Over the past decade, progress in various scientific disciplines has enabled us to identify groups of genes that have a significant influence on how we age. We are then able to use this knowledge to formulate products, that we have labeled age response modulators, that reset these important gene clusters towards a more youthful state. Since we first started talking about this unique approach to product development, we've noted frequent confirmation of our product direction appearing in trade journals and even in the popular impress. So, we are confident we are on the right track, and the exclusive and proprietary resources we have at our disposal give us a very compelling, competitive position in this new frontier of anti-aging.

The strength of our products, as well as our business opportunity we offer to entrepreneurs, is also reflected in the second quarter results. You will note that we generated 15% growth in the number of executive-level distributors in the second quarter. These executive distributors are the key group of sales leaders who are most active in building the Nu Skin business.

While we are pleased with the tremendous response to ageLOC, we are also encouraged by the consistently strong sales of other anti-aging products. For example, during the quarter our Galvanic Spa system remained our best-selling product, generating about $69 million of revenue, which represented continued growth sequentially, as well as strong growth year-over-over obviously. Our nutrition business also remains very strong, with sales of LifePak, our core multi-vitamin and phytonutrient product, also increasing sequentially as well as year-over-year. So we really like the balance that we have in the two most important anti-aging product categories, skin care and nutrition, and want to just remind you that this balance in product categories is quite unique in the direct selling channel, and gives us we think a very compelling, competitive advantage.

Given the success of ageLOC to date, and the significance of the Pharmanex business generally, we are also very optimistic about the potential impact of taking the ageLOC story now inside the body. We will launch the first Pharmanex product incorporating ageLOC in just two months. The product will be called ageLOC Vitality, and as you can tell from its name, the product will focus on energy and vitality, and will be introduced this fall in the United States, Europe and Japan. Our research has showed and confirmed that one of the leading consumer concerns related to the aging process is diminished vitality. It seems that virtually everyone feels tired these days; and caffeine and short-term stimulants are not the ideal solution. This new Pharmanex product will address the production of cellular energy, which will then manifest in promoting both physical vigor and mental acuity.

One of the most common questions I get as we talk to people about our nutrition business around the world is whether I, or others, really feel a difference when they take our nutrition products. I will confess that many dietary supplements really don't generate a perceptible change in the way a person feels; but with ageLOC Vitality, that will not be the case. In our test groups we have had very positive feedback to this product, and we are confident that most consumers will a definite benefit to their energy level and their overall vitality.

But the launch of ageLOC Vitality is really just the beginning. In the fall of 2011, we will begin the global launch of a comprehensive ageLOC nutritional product that is designed to be a flagship Pharmanex product globally. So we have a lot to look forward to in both the second half of 2010, as well as going into and well into 2011.

In addition to our strong revenue-driving initiatives, we are also very pleased with the in-roads that we are making with regards to efficiency. Our operating margin improved 400-plus basis points to a record 15.2% in the second quarter, which we are very pleased with. As a result, we are now projecting operating margin in the 13.5% to 13.9% range for the year, and Ritch will provide a little more color on this estimate here in a moment.

Before he does that, however, let me just comment briefly on a few of our specific geographies. First, I would like to point out that we are much more geographically balanced in terms of in terms of revenue than we've ever been in the past. For example, Japan represented 29% of sales in the second quarter, which is a much lower percentage than has been the case in the past. And we're continuing to make progress in stabilizing this important market. As we indicated going into 2010, we expected 2010 to show continued trend improvement over 2009 in Japan, and we continue to expect that to be the case.

Growth in the US slowed a bit in the second quarter, but ageLOC sales ticked up sequentially, and we're pleased overall with continued growth in a difficult consumer environment. The timing of the ageLOC Vitality launch this fall will provide a healthful shot of energy, not only to those who are consuming the product but to the US business, as well.

As the second quarter results reflect, our business continues to be very robust in Greater China. All three of the markets that comprise this region, mainland China, Hong Kong and Taiwan, are all growing at a very healthy clip. The launch of ageLOC was hugely successful there, and we continue to believe, based on our trends and the strength and success of our competitors, that mainland China will become a very significant market for us. We are also pleased the growth we are seeing in Southeast Asia, which has really become the jewel of the Nu Skin empire right now, growing at a faster rate than almost anywhere. We expect very strong growth to continue in this region throughout the remainder of the year. It's particularly gratifying to see the growth is really emanating from virtually every country in the region, but particularly strong in Malaysia and Thailand.

So overall, I am very pleased with our results, and very happy with the results of the quarter. I am going to be a little bit crotchety this morning, because I think that our success in the first half of this year and our increased guidance for the remainder of the year justifies a little bit of a better response from the street this morning, but we are going to continue to generate solid topline growth; our restructuring efforts over the past several years have enabled us to leverage growth to the bottom line, and we have very compelling ammunition at our disposal to continue to grow the business throughout 2010 and into 2011.

With that, let me turn the time over to Ritch to go through some financial details.

Thank you, Truman. Hello, everyone.

The local currency revenue figures for each of our major markets are posted on our Investor Relations website. Overall, I would also just mention I am very pleased with the quarter and the improvements we are seeing in our business, and it really gives us confidence in both the processes we put in place to manage, but also to grow our business from a top and bottom line standpoint; so we look forward to continued improvements as we move into the future, as well.

The Company's operating margin for the second quarter improved to 15.2%; and over the past four years, we have consistently driven profitability improvements as we have grown our revenue, and this quarter was no exception to that. We look to achieve an operating margin now of 13.5% to 13.9% for this year of 2010. Our gross margin for the quarter jumped to 82.5%; that is a substantial improvement over the prior year period, and a 30 basis point improvement over the first quarter. The higher margin primarily resulted as a consequence of increased sales of our more profitable ageLOC product, combined with the positive benefit from foreign currency fluctuations, as you compare that to the prior year.

Selling expenses for the quarter were 41.4%, compared to 42.6% in the second quarter of 2009. The selling expenses rate for this quarter dropped primarily due to the increase in non-commissionable revenue from both convention fee income and sales [day] sales at our conventions in Greater China and South Korea during the quarter. We would expect selling expenses to be approximately 42% in the latter half of 2010.

General and administrative expenses for the quarter were $100.5 million, or 25.9% of sales, compared to 27.5% of sales in the prior year. While we continue to invest back into the business and strategic markets, and increase R&D spending, which will sustain top line growth going forward, we have instilled in our management team a level of discipline surrounding profitability, which is generating leverage on our global infrastructure. Each market is working to improve efficiencies, which should continue to drive profitability in both the short and long term.

In the other income expense line of the income statement, you will note that we reported a loss of $7.3 million. Of this total loss, about $1.3 million relates to net interest expense, and then the balance related primarily to unrealized foreign currency translation losses. Approximately half of that, or about $3 million, of the currency losses generated by the translation of our Yen denominated debt back into dollars, as the Yen moved from JPY93.5 on March 31st to JPY88.4 on June 30th. So we also had unrealized losses related to Europe and Korea for intercompany balances, which both accounted to a little more than $1 million each. Note that these losses are unrealized losses; a portion or all of the losses could reverse if the currencies return to previous levels against the US dollar.

As a reminder, we utilized the Yen-denominated liability as a natural hedge to our Japanese business. So if the Yen to the dollar change rate remains in the JPY87 to JPY88 range where it is today, we can expect a very nice benefit in the latter part of the year on both the top and bottom lines of our business there.

One more thought as it relates to currency. From a currency standpoint, our revenue is fairly balanced around the world. So in a simplified way, we can look at this as having about 30% of our business denominated in Japanese Yen, about 30% in US dollars or currencies that are essentially pegged to the US dollar, and then the balance of 40% of our revenue in various currencies including the Korean Won, the Euro and a number of Southeast Asian currencies.

Over the past couple of years, the Yen movements against the dollar have generally moved opposite to the move that the dollar has made against other currencies. For example, a strengthening of the dollar against the Euro and the Won was coupled with the strengthening of the Yen against the dollar. These offsetting fluctuations have neutralized each other to a significant degree. Because of our revenue distribution, overall currency movements, therefore, have been generally less impactful to the top line of our business than many of our peers.

The tax rate for quarter was 37.6%. We finished the quarter with $173 million of cash, and $146 million of debt. During the quarter, we paid $7.9 million of dividends and repurchased $29.1 million of stock; that was mostly in the latter part of the quarter. We stepped up our stock repurchases following the announcement of the increase in our repurchase authorization. By the way, as of June 30th, we had about $173 million remaining in that repurchase authorization.

The outstanding share count was 65.1 million shares. We are also pleased that during the quarter we completed our secondary offering, and attracted a number of very strong new and current shareholders who participated in the offering.

We are increasing both our revenue and earnings per share guidance for 2010. We now project revenue for the year to be in the $1.47 billion to $1.49 billion range, and continue to expect currency to benefit the year by about 1% to 2% overall. We are increasing our expected earnings per share for 2010 to $1.90 to $1.96. With the stronger operating margin in the first half of the year, we now project 2010 operating margin to be in the 13.5% to 13.9% range for the year.

Looking to the third quarter, we forecast revenue to be in the $352 million to $360 million range, with earnings per share in the $0.45 to $0.48 range. We expect revenue impact from foreign currencies to be neutral in the third quarter compared to the prior year, and expect our tax rate in the third quarter to be approximately 34% to 35%.

Then in the fourth quarter, we've modeled currency to be a headwind of approximately 4% to 5%. If currencies remain where they are at today, obviously that will not be the case. It will be much less of a headwind than that, but we for example forecast the Yen going back into the JPY92 to JPY93 range, and the Korean Won hanging our in kind of a KRW1,225 range. So that is what we've modeled, and I'm very encouraged about the direction of the business.

So with those details, we will go ahead and open up call the for questions.

Okay, thank you. (Operator Instructions)

Your first question comes from the line of Tim Ramey with D.A. Davidson. Please proceed.

Good morning, and congratulations, and count me among the enthusiastic rather than the truculent here on Wall Street. Interested in knowing a little bit more about the ageLOC Vitality product. Can you tell us, number one, what the mechanism is that gives you more energy, what sort of the active ingredient would be? And how soon the samples will go out to the investment communities? I suffer from the same issues.

Yes. You will like this product, Tim. I can assure you that. Let me ask Joe Chang to talk about the mechanism of ageLOC Vitality.

Good morning Tim, this is Joe here. The mechanism is really related to the fact that we have identified several genes that are directly relevant to modulate and to influence a cellular component that is called a mitochondria. And to put it simply, this mitochondria component in the cell is considered to be the battery that drives and energies the cell metabolism. So now that we know how the genetic basis of mitochondria functions, if you will, we are now able to influence those genes, and therefore the mitochondria function, and ultimately resulting in the cell being more alive and more energetic, to put it simply.

So -- and specifically, we are focusing this product based on this mechanism on three metabolically active tissues in the body, and that would be the heart, the brain, and muscle. Because, as you can imagine, these three tissues require a lot of energy to drive them in terms of cell metabolism, and tissue metabolism for that matter; so that by taking the Vitality product, we can preserve these tissues and optimize their function.

So, as far as you getting a sample, we will see what we can do to get you a sample very quickly, Tim.

Let me just add to that, Tim, that one of the differences between this product and others is that typically people have grown accustomed to short-term energy spikes, to other mechanisms, most notably caffeine. AgeLOC Vitality is designed to raise the base level of a consumer's energy. So this is a long-term energy boost, not an immediate short-term spike.

Importantly, to add to that, obviously that means that our product, Vitality, doesn't contain any stimulants.

Can you tell me what the -- other than the genetic item that is you discussed, is there choline, is there betaine, is there anything that might be recognizable and something we could research a little bit?

Yes, they are all recognizable, but I can't tell you right now, because it is under patent application. So once we can get some action on that patent application, then we will be able to disclose to you. But clearly by October, when this product is formally launched in the United States, we will be able to disclose the ingredients that we put together in Vitality.

Terrific. Thanks so much.

Thanks, Tim.

And our next question comes from the line of Olivia Tong with Bank of America Merrill Lynch. Please proceed.

Thanks, and good morning. First, I want to ask a little about -- I know it is still early, we are only in the second half -- with half the year completed, but just looking at next year, what do you think next year and longer term, whats your top line expectations are, given you have a pretty strong base going into next year? Vitality sounds like you are pretty excited about it, but probably quite a bit smaller in terms of top line impact than the ageLOC product, so thoughts on next year?

Okay. So Vitality is a lower price-point product. It will have about a $50 price point on it. So, it is not going to be as impactful to the top line as ageLOC Transformation has been to the top line. However, in the fall of 2011 we will launch, as we indicated, a new Pharmanex flagship product that we think really will become the core of the Pharmanex regiment.

Olivia, over the last several years we have kind of maintained about, say, a 6% organic growth rate. If you take out these huge launches of ageLOC Transformation in the past three quarters, we are still ticking up our core growth rate in 2010 up to the 8% to 10% range. We will talk more about what our expectations are for 2011 at our November Investor Day meeting, when we will first initiate essentially the 2011 projection. But our goal is to keep our core growth rate elevated, as it is this year. And we think we have a real shot at doing that with the launch of next fall's nutrition product.

Is it a fair assumption to think that in 2011 you can grow at sort of a 6% growth rate on the top line?

I think that would be conservative, yes.

For 2011?

For 2011. I mean, in the first half of 2011, Olivia, we are going to be bumping up against huge ageLOC launches in the first half, right?

Yes.

In the second half, we have a better shot at showing real -- more significant growth rates, because that is when we will launch the Pharmanex products, going up against a little better comps.

Got it. Okay. Then, just on the US, a little bit slower than would have expected, and another quarter where you are seeing a deceleration in growth. I know it has been a tough environment for a lot -- for yourself and the competitors, but you also mentioned that ageLOC was sequentially up. So can you sort of just give a little more color behind what is going on in the US, is there a specific area that is not doing well in terms of product or geography, and what are you going to sort of combat that? Thank you.

Well, as everyone on this call is painfully aware, we went into an environment two years ago in which none of us have ever done business. Our strategy to get through these difficult economic times was to just innovate like crazy in our product categories and our business opportunities, so that our offering is so compelling that we would continue to attract people to both our products and opportunity, and I think we have been very successful at doing that. Our 2008 core growth rate, if we exclude convention sales, was about 14%. In 2009 our core US business, excluding convention sales, was up 5%, 6% or so, and in 2010 we expect to see a comparable growth rate. So we are pleased that we have grown at all in the most difficult of economic environments, when few companies are, and we note that our competitors are not.

So in the second quarter, we did see good ageLOC trends. We are encouraged to see the percentage of ageLOC sales that are coming through subscription orders, which is very good for retention. And the nutrition business in the US is actually quite strong. I mean, our focus pre-ageLOC launch was really on nutrition in the prior five years, and consequently our sales force is very enthusiastic about the upcoming launch of Vitality, which is now only about two months away. We think that Vitality is the key to reinjecting some energy into the US business, and we expect that to be the case in the second half.

Thanks a bunch.

Yes.

Our next question comes from the line of Paul [Schmitz] with Deutsche Bank. Please proceed.

Hi Scott. My name's been changed to Paul. A handful of questions. If I took the ageLOC sales off of the quarter, it looks like the base business declined just a little bit, and obviously that probably changes. How do the distributors think about that? Are they like, we will buy a lot of ageLOC because it helps our earnings potential, and then maybe as some of the buzz wears off, we go back to the base business? Is there anything endemic about that trend? If so, I think you did about $67 million of ageLOC sales in the quarter, so if I took that out of the sales number, it looks like the base business declined a couple percent maybe?

The distributors really don't think about it that way, Bill, because they are trying to accomplish their monthly volumes. To them it doesn't matter which products they buy so much, as making sure they are meeting their qualifications to continue to put the business forward.

So we don't look at it that way either. We think this has been an amazing launch for us, because generally we see a much higher degree of cannabilization with the new product lunch than what we have seen with this product launch. It has been generally incremental to the business overall, and so for us we are actually very, very encouraged by the direction that ageLOC has driven the business overall.

Okay, great. And then is there any read on the mainland China launch? Did you guys pre-launch? Did that happen already? I know that is happening this quarter, but did you already start it?

We did the convention introduction of ageLOC to those who attended the convention in Hong Kong. Then in the fourth quarter of this year, when registration is complete in mainland China, we will do a -- what we are really calling the prelaunch, meaning that salespeople will have to engage in certain sales activities in order to qualify to purchase the product. Then the product will go on sale on a full-time basis in Q1 of 2011.

So, ageLOC -- the launch of ageLOC has benefited mainland China, because it certainly has stimulated activity there. I am sure there is some cross-border purchasing going on in Hong Kong, for example, but the product really isn't available to the whole salesforce or to the masses in China until later this year and early year.

Got you. And then, I agree with your assertion earlier about the reaction to the print today. When can you start buying back stock, because I think your authorization is still pretty hefty, and so I imagine you will start being active as soon as you can; is that factually correct?

I think I am sufficiently irritated by this morning's reaction that it makes me all the more willing to go out and buy so, yes, we have three days.

All right. Thank you very much.

All right. Our next question comes from the line of Mark Astrachan with Stifel Nicolaus. Please proceed.

Good morning, everyone. I guess just starting off, can you talk a bit about what you are seeing in Southeast Asia in terms of just these really massive increases in business. I mean, is it ageLOC-related, do you have management that is sort of hitting on all the right buttons there? It certainly seems like that business now is growing at a rate it hasn't in quite some time?

Yes. It is rocking. It is really incredible what we are seeing out there. The momentum in Southeast Asia actually started a couple of years ago, where we started to see really improving trends. We do have a very capable, very skilled manager out there in the region, Melissa [Kihano], who is as good a manager as we have in the Nu Skin world. She is just doing a terrific job of partnering with field leaders to make sure that we are maximizing the pot that we are getting our with everything we do out there. So it's region-wide, really strong growth in Thailand, Malaysia, Singapore, the Philippines, Indonesia.

We just came off a very successful convention there just a couple weeks ago, so we're still, even us, here in Provo, are in a little bit of a Southeast Asia high. It is an incredible market. The economies are still relatively vibrant out there. Frankly, of all the geographies of the world, I think the future of direct selling is as bright in Southeast Asia and in mainland China as it is anywhere else in the world.

Okay. Great. Then on the longer term expectations, just going back to what you had said last fall at the investor meeting, can you talk a bit about where you see your views of longer-term revenue and earnings growth now that you have had a few quarters to digest what ageLOC has been able to do to your business, and as you think about the nutrition business, and also thinking about what you can do with the ageLOC trademark into other categories longer term?

Well, as I was thinking about this morning, Mark, I mean, I really believe that we are basically just beginning, say the third inning, of the ageLOC platform. The first inning was the infusion of ageLOC science into our Galvanic Spa regimen. The second inning was the launch of ageLOC Transformation, and the third inning will be Vitality. The fourth inning next year is the launch of the flagship Pharmanex product. We have a lot of room to run here on this platform.

And consumers still -- I mean I would venture to guess that the consumer awareness of the role that genes play in the aging process, and the extent to which we can impact gene functionality to influence the aging process is very, very low. Maybe 2%, maybe 1%, of consumers have even had this hit their radar screens yet, so this is a very early-stage story. We are way out ahead of where the competition is, and I think we just have a lot of room to run.

Our management goal is $5 billion on the top line, $2 billion in commissions; that is our vision of becoming the world's leading direct selling company, and that's a 2020 goal for us. We are optimistic and determined to stay on that path.

Great. Finally, as it relates to that, the opportunity into other markets where you are not as large as you are now, so a little of the weakness in the Americas, Latin America in particular, just thoughts generally on how you right the ship and how you make that a bigger percentage of your business going forward?

Yes. We obviously (inaudible).

Ladies and gentlemen, thank you for your patience. Your conference will resume in just a few moments. Thank you for your patience and please continue to standby.

Ladies and gentlemen, again, thank you for your patience. Your conference will resume in just a few moments. Again, thank you for your patience and please continue to stand by.

Okay, Operator, can you hear us on the speaker line? Does anyone know what is going on? Operator, we are back on the line. Can you hear us?

I can. Thank you.

We are ready for the next question then.

Okay. And the next question comes from the line of Doug Lane of Jefferies. Please proceed.

Hi, good morning, Truman and Ritch. In the Americas, if you back out the convention sales in the fourth quarter, it has really been in the $60 million to $65 million range for four or five quarters now. So it doesn't really look like it's seen much of a lift from all of the buzz around ageLOC. Does that surprise you? Even with the economy, is there something structurally different about North American, given the response you've seen elsewhere, which has been tremendous?

There is really not anything structurally different, Doug. We are doing business here the way we are doing business the way we're doing business elsewhere. We have a terrific corporate team and a terrific group of sales leaders.

I haven't been one to want to blame anything on economic pressures. We kind of refuse to do that around here. But when you look at the results of our competitors, we are ahead of the pack.

It has been pretty tough for direct sellers here, that is for sure. Let me ask you, you know, the history of the Company -- you made the Pharmanex acquisition, and you do have a balance between nutrition and skin care. Can you give us some color among your leadership, is there a substantial or even some proportion of your leadership that really focuses on one or the other and not both, that might be an opportunity for cross-selling?

Okay. This is just anecdotal, because I don't have any data in front of me to prove this or demonstrate this, but my impression is that 90% of our sales leaders cross-sell both categories very effectively, and maybe 10% are fully dedicated to one category or the other. These are people who are fighting anti-aging. We have believed for some time, and we continue to believe this, that we are very distinguished in the direct selling world because we are the only company, I believe, who can effectively fight the battle against aging on both fronts, with equal effectiveness. That is why we are confident that the infusion of ageLOC into the Pharmanex space will be beneficial to our business over the course of the next two years.

Okay. And lastly, in China, where we have seen the recent acceleration there, is that a function of ageLOC, or is there something else going on in that market that is driving the resumption of growth there?

Well, similar to Southeast Asia, the turnaround in China really started a couple of years ago when we put a new management team on the ground in 2007, and they started to really reformat the business there. Since that time, we have seen continual improvements in the overall business, and in the business environment. We are operating in a much more efficient and effective format, and have renewed enthusiasm for the potential of this market, which for a couple of years there was really a drag on our overall results, and that is not going to be the case going forward.

And I know nutrition is big in China. Are you as balanced in China as you are globally, or is it skewed more towards nutrition there?

In China we are about 70% personal care and 30% nutrition today. So slightly less oriented in the nutrition direction; but when we look at our competitors there and we see the size of their nutrition businesses, with the infusion of ageLOC in the nutrition story in the next couple of years, that will start to skew more in the nutrition direction.

Makes sense. Okay. Thanks.

Thanks, Doug.

Our next question comes from the line of Bret Jordan of Avondale Partners. Please proceed.

Hello. Just a couple of quick questions, one of them ageLOC Vitality. Do you have a target margin at that $50 price point for that category, or how does it compare to aggregate margin?

It will be slightly better than our overall nutrition line margins, so it should be margin accretive.

Okay. And then on the Galvanic Spa, I think this generation is carrying a better margin than the prior generation; what was the Delta in that category?

It is not huge, but it's slightly more beneficial. It basically has a very similar cost, but we raised the price about 10%. So a slightly better margin on that one, as well.

Great. One last question. I was taking notes, but the rollout of ageLOC in China on the mainland, can you give us a timeframe, at what point do we have that category fully rolled?

Pre-launched in Q4, and fully rolled in Q1 of 2011 .

Great. Thank you very much.

Thank you.

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

Hi, guys. A couple of questions. The executive numbers in Greater China, that growth sequentially, is that just driven by qualification needs prior to going to convention?

Yes, partially that, but it is also just a lot of energy in that whole business. I think it's a build-up in anticipation for the launch of ageLOC. It's a lot of energy happening in China; a lot of that growth came out of mainland China itself. So I think we are just starting to hit on a lot of cylinders there in those countries.

If you mentioned it, I apologize, but can you talk a little about Korea? The sequential change was a little more dramatic than I had expected.

Yes. Korea continues to be another star of the world, up 28%, I believe, right in Q2? And an incredible market for Nu Skin. A market where our industry is actually suffering a little bit, and despite that, we continue to just blow right through the industry trends there. We have made what we think is an important decision in the management of that market by putting the North Asia region under Luke [Hu], who has been managing our business in South Korea for the past ten years. He has done a terrific job. We relocated him to Tokyo, so he could be a little bit closer to the Japan business. But we are just firing on all cylinders in Korea, and really have been for the past decade.

And the pre-launch was in the first quarter, is that correct?

That's right.

It doesn't seem like the pre-launch kind of stole any business out of the second quarter. Is that what you are seeing in all regions? Or is that just Korea?

Well, Korea probably does it a little better than most regions, but we have seen -- we are actually really pleased with the tick-up in the United States, for example, in Q2 of ageLOC sales over Q1, which was really the official launch quarter for the US. So it is happening in other markets, as well.

And lastly, in Taiwan, if you look at Q1 to Q2, the growth is quite significant; I would have thought that some of those sales would have been in the Hong Kong results. Is that not the case? If they were at a convention and purchased at a convention, would those be credited to the Taiwan market or the Hong Kong market?

Taiwan actually had both. They had some sales locally, as well as the better half of them happening in Hong Kong. Whereas mainland China, the only place the purchases happened were in Hong Kong. So Taiwan did benefit from some pre-launch of ageLOC during the quarter in its market.

Okay. Thank you.

And our next question comes from the line of Mimi Noel from Sidoti & Company. Please proceed.

A couple of housekeeping questions to get out of the way; can you give me what ageLOC has done in each of the last three quarters?

It was $28.5 million I believe in the fourth quarter, about $55 million in the first quarter, and $66 million here in Q2.

Okay. And I haven't heard much mention of it, but Galvanic Spa not -- unrelated, but how has that franchise been doing? Has it slipped at all?

We were actually really delighted to see Galvanic sales tick up in the second quarter over the first quarter. Galvanic was about $65 million in Q1, and $69 million in Q2.

Okay. Sounds good. And the other question, Truman, I had for you, was that you touched on the lack of widespread awareness of ageLOC; by my more pedestrian observations, it seems as though it is something quite unique in a (inaudible) direct selling company, and I would never expect that to change. Do you think about the other opportunity to distribute the product, or do something in the way of creating consumer awareness that as a direct selling company you don't typically do?

We are kind of continually exploring innovative ideas to get out of the box of what direct selling companies typically do in terms of creating consumer awareness. We will be doing some things in the course of the next year that you will see coming down the path that we have not done before that we think will help fuel consumer awareness of the whole gene story.

I mean, don't expect to see advertising on television, but we are going to do some things that we haven't done in the past, and slowly but surely. And actually, it has been really interesting for me to see even cover stories in Time in the first half of the year, where people are realizing that DNA does not necessarily define destiny. I think over time, the story with expect to genetic expression will become as prevalent in consumer awareness as antioxidants have become, you know, 25 years later.

And somewhat related to -- in getting the word out, there is an element of somewhat sophisticated education that is required or at least requested. And just listening to Joe talk about ageLOC Vitality and keeping up with that, with my background, was a challenge. So is that a challenge for direct sellers, or is it more the case that this is another product where the effects are demonstrable, and that is really what clinches the sale for the consumer in any way?

Well, it's a challenge, but it is the very challenge that gives direct selling its potency. That is that we have the opportunity to spend time with consumers that traditional companies don't, and that is why we are as emotional about the story as we are. Our distributors have the opportunity to sit with the consumers and tell the story, as opposed to relying on an image in a magazine.

Okay.

We think the story is just perfectly suited for what we do, and our sales force is very good at telling stories of this nature.

Okay. Thank you very much. That is helpful.

Yes.

And our next question comes from the line of John Faucher with JPMorgan. Please proceed.

I apologize if you said this, but have you talked about the repeat rate, in terms of what you're seeing with purchasers coming back on this? And secondly, obviously the margin expansion so far year-to-date has just been tremendous. Can you give us any thoughts in terms of how you are viewing the incremental margin benefit as you continue to roll ageLOC out, and you hit new markets?

Thanks, John. To respond quickly, we tracked very carefully what the trial penetration has been with the ageLOC products. We have actually had -- about 36% of our active sales reps around the world have purchased ageLOC, which is pretty good for a new product purchase. In addition to that, and this is a -- a lot of the markets haven't even had the product a full two to three months, but almost half of those who have purchased have repurchased.

Another stat that we are very encouraged about is that about 35% of our ageLOC sales in the US came through ADP or subscription, automated delivery program, orders. We are seeing a lot of people liking the product, wanting to stay on it a longer period of time, and we are very encouraged as that continues to develop.

Just in terms of the margin, you know, when we talked about margin last year at our Investor Day, we kind of guided to the fact it would be around 12.9% this year. It would add 50 basis points in 2011 and 2012, and would expect to be about 14% by 2012. Because our revenue has been somewhat higher than we forecast, and because ageLOC has gotten a lot of traction, it has really accelerated that margin expansion to where we should be in the high 13% this year, and really, where we had anticipated being in about 2012.

So we are well ahead of our plans. I think going forward, can we continue to add 50 basis points a year, yes, I think that is a good possibility. So pushing us even up above 14%, closer to 15% in the next couple of years is now in our sights, and something we can move toward.

Great. Thank you very much.

Thanks, John.

(Operator Instructions)

And we have Scott Van Winkle of Canaccord again. Please proceed.

Ritch, what was the big jump in PP&E, the CapEx in the quarter? I probably should know and I don't.

Well, we are starting to -- there are actually several projects we have around the world. We are building out more stores in China. We re-did a walk-in center in Japan. We are building a warehouse in Korea, and we have the new innovation center that we are beginning to work on here in Provo. So we are at $12 million or something for the quarter. I would expect our CapEx this year probably to be in the $40 million range, and holding up a little stronger as we continue to invest back into some of these markets that we think have some great opportunity right now.

Thank you.

And our next question is from the line of Mark Astrachan with Stifel Nicolaus. Please proceed.

I didn't hear the end of the question I asked on Latin America. Truman, if you can give that again, that would be helpful.

Yes. That is where we dropped the call, right?

Yes.

We have experimented with a number of different models and product line tweaks over the years, to figure out how we could be more successful in Latin America. It is really interesting to me, frankly, Mark, that in Southeast Asia, for example, you might expect the Philippines to behave a little bit like a Latin American market would; and we are actually generating some nice traction in the Philippines now, and in Indonesia, for example, with a model that is really quite consistent with what we do in more developed economies. And so we will continue to work on Latin America, because we know that we have to have some success there to be all that we can be. But we tend to believe at this point that consistency with our global market may be the way to go, even in these developing economies.

Okay. Great. And in terms of just looking at the US, anything new or notable that Fred has done in his first, call it 60 days, on the job?

Well, I think that the transition both in Japan and in the US has really been quite seamless, with Brett leaving Japan and with his repatriation in the US business, I think he's been very well received here. He is a known commodity, because he has been involved with Nu Skin for 20 years, so it's not like people don't know him. He works very effectively with Scott Schwerdt, who manages our Americas, Europe and South Pacific businesses. Brett has just plugged in really quite seamlessly, and is up and running.

Great. Thank you.

Thanks, Mark. Let's conclude the call, Operator with just a statement that we appreciate everyone, again, joining us this morning. I would reiterate that in a world that is filled with no small amount of economic turmoil, these continue to be the best of times for Nu Skin Enterprises. We are committed to providing our shareholders with solid returns, and with a long-term investment opportunity. So thank you for joining us, and we look forward to answering any questions you may have on a one-on-one basis. Thank you.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a good day.