如新 (NUS) 2011 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the first quarter 2011 Nu Skin Inc. earnings conference call. My name is Kesha and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today, Scott Pond. Please proceed.

Thank you, and good morning everyone. We appreciate you joining us. With us today are Truman Hunt, President and Chief Executive Office; 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 members may be discussed that differ from comparable numbers obtained in our financial statements. We believe 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 website for a reconciliation of these non-GAAP numbers. And with that, I'll turn the time over to Truman.

Thanks, Scott. Good morning, everybody. We appreciate you joining us. It is a beautiful spring day here in Provo, Utah, and it's actually a very historic day for us. In about 2 hours, we're going to walk across the street and demolish a bunch of buildings so that we can start the construction of our new Innovation Center which we're excited about. But before we do that, let's talk about the first quarter.

As we noted in our release this morning, we're happy to report another record quarter. We generated quarterly revenue just shy of $396 million which is a 9% increase over the prior year. Our growth was driven by strong performances in the majority of our markets, and we continue to benefit, obviously, from the weakening of the dollar. We're particularly pleased with our performance considering that we're up against tough comps in the first half of 2011, given the success of our ageLOC launch around the world in the first half of last year.

On the profitability side, we recorded earnings of $0.24 a share, but when excluding non-cash charges associated with the recent Japan Customs case, our earnings would have been $0.56 which compares against $0.48 in the first quarter of 2010. So earnings growth is about 17% in the quarter which is a reflection of our continued efforts to improve profitability.

Now as we look at market specific performances, let me first address the two tough markets. As previously announced, Japan's national disasters in March took about $5 million off of the top line. So in the absence of these disasters, we were tracking to be down about 3% and felt that we were on track to be back to even by the end of the year. Unfortunately, there will continue to be a negative impact from the disasters throughout the remainder of the year. The second quarter should see the most significant impact. We're estimating about a $10 million impact in Q2, with subsequent quarters beginning to see gradual improvement. Overall, we continue to feel that something in the range of $25 million in terms of negative impact to our Japan business this year is realistic.

Now subscription orders which represent 55% of sales in Japan worked to stabilize the business to some extent. But since the earthquake, there's just no question that commercial activity has slowed down throughout the country. So since March 11, I've visited Japan 3 times. We have about 20,000 distributors living in the Tohoku region which is the primary impact area, and that area represents about 10% of our business. So far, we've confirmed the unfortunate loss of 7 of our active distributors, and we have another 50 or so who have lost their homes or are unable to live in their homes. Fortunately, the much lesser level of damage in Tokyo has enabled us to escape without any significant damage to our employee base or to our facilities there. We continue to operate under slightly modified business hours to allow more time for commutes, but operationally, it's pretty much business as usual except at some parts of the Tohoku area, primarily those that have been evacuated and are still not receiving product shipments yet.

We've also been proactive in allocating available resources to relief efforts. The focus of these efforts was first, targeted at providing immediate relief to those who were in danger in the Tohoku area. Second, we're now really starting to focus on providing support to Nu Skin distributors who have been impacted. And third, over the course of the next year, we'll be engaged in ramping up long-term efforts to help rebuild the areas that have been most significantly impacted. Much of the financial support for these efforts comes from funds donated to the Nu Skin Force for Good Foundation by our distributors around the world as well as by our corporate staff around the world. But for the next 12 months, we're also implementing an allocation of JPY50 per unit sold of our ageLOC product line specifically for relief efforts. So we estimate that this effort will cost us about $2 million in 2011, but this effort is also designed to enable our sales force to get out and get back to work and engage in business building activities in a fashion that will be constructively viewed by the marketplace and is really in line with their societal disposition right now.

Having had the opportunity over the last few weeks to meet with our management team in Japan and with distributor leaders on multiple occasions, I can tell you that I'm extremely inspired by them and I'm confident in our ability to come out of this as quickly as possible. For example, last week several of us visited distributors in the Fukushima area. We actually got to within about 20 kilometers of the nuclear plant there. And while visiting that area, I learned that 5 of the 100 or so workers who were working in the Fukushima nuclear plant were actually Nu Skin distributors and one of them is an executive distributor. So it wasn't particularly surprising, but still makes us very proud that it's Nu Skin family members who would be the ones making a sacrifice of this nature to help others. We went there. We went to the Fukushima region last week to try to inspire others and instead we came away being the ones inspired. These people are very courageous and very resilient.

Prior to the quake, we were seeing positive trends in our sponsoring in our leadership development metrics. We were on the right track and our efforts now is to get back on the right track as quickly as possible.

In the United States, which represents about 12% of our first quarter revenue, we also experienced a decline as we ran up against difficult comp in the prior year when we were just launching the ageLOC Transformation system. We knew coming into the year that growth in the US was going to be tough in the first half. But looking forward, we expect to see some softness again in the remainder of the first half with business improving in the second half and turning positive as we ramp up for our global convention in October.

We're planning for this year's global distributor convention to be our largest in terms of both attendance and revenue. At this event we'll be taking the ageLOC story to the inside the body with the first global introduction of a new ageLOC nutrition product, and we're also going to introduce a new ageLOC skin care product that we have not yet revealed but we plan to reveal it at our upcoming [cumalee] trip in New York City in two weeks. We believe that these products will be very well received and will help us close 2011 on a high note. And it will certainly help jumpstart 2012 as we roll out these products to all of our markets in the first half of next year, beginning most importantly in the first quarter with the rollouts in the United States and Japan. The strength of virtually all of our other markets is enabling us to sustain growth overall and so that strength as well as favorable currency trends lead us to increase our guidance for the year.

It seems that the eyes of all of the world are on emerging markets these days and we're certainly pleased with what we're seeing there. Of particular note is mainland China which posted a year over year increase of 47%, as well as South Asia/Pacific at 41%, and Europe posting an 11% increase. We've also been very encouraged with continued growth in South Korea where the performance is particularly impressive given the $20 million ageLOC pre-launch event in that market in the first quarter of last year which obviously produced a tough comp. So overall, our geographic footprint continues to broaden, and we're becoming less dependent on any given market and also less dependent on any particular currency.

So as we look forward to the remainder of 2011, we're really focused on 3 key issues. First, we're focused on distributor growth. In the first quarter of this year, we generated 9% growth in executive distributors and also saw our active distributors increase 4%. There is still abundant enthusiasm for the ageLOC product platform and the attractive business opportunity that exists in the anti-aging market. As most of you know, distributor growth is critical to our success and is also a good barometer of the health of the business. So we're focused on keeping both our active count and executive count heading the right direction.

The second factor that we're working with again, is the encouraging trends that we're seeing in the emerging markets. In 2010, emerging markets represented about 22% of our overall business. In the first quarter, they represented 25% of the business. And at the end of last year in our Investor Day presentation, we felt that emerging markets would represent a majority of our sales by the year 2020, but as we re-do our forecasts and consider the trends in those markets, we believe that these emerging markets could easily represent half of our business or more by 2015.

Finally, our third area of focus is our continued effort to operate more efficiently. In the first quarter, our operating margin improved to 14.6% excluding the Japan Custom charges. This is a good start to the year and puts us in a favorable position to hit and perhaps exceed our earlier guidance of a 50 basis point improvement to operating margin for the full year. So in sum, we're pleased with the quarter. We're excited for what remainder of the year holds. And not only do we have a good plan for the remainder of the year, we have a good plan in place to achieve our goal of $4 in earnings per share by the end of 2015. We believe this is a realistic target and our team is motivated and enthusiastically going about executing against this plan. So with that, Ritch, I'll turn it over to you.

Thank you, Truman. Good morning, everybody. I too am very pleased all things considered with our first quarter results. We look forward to carrying this momentum into Q2 and expect to see acceleration throughout back half of 2011. And as Truman mentioned, we're especially happy that both our revenue and profitability were ahead of our expectations, and that's driven in part by our emerging market growth. We like the improving geographic diversity in our business. We like the progress in our margins. We like the alignment of management team around our corporate objectives to drive long term sustainable earnings growth, and the weakness in the dollar continues to provide a nice tailwind to our overall results.

Sales for the quarter at $395.8 million. And as Truman mentioned, we estimate the natural disasters negatively impacted revenue about $5 million. And our revenue is really being driven by strong distributor metrics, improving executive growth at 9% and active at 4%. Our subscription business continues to grow as well, providing stability to our sales and accounting for 57% of the business during the first quarter. The Company's operating margin was 14.6%. And that's 190 basis points improvement over the prior year and well on track to exceed our goals for the year. It really starts with gross margin at 82.8% which was slightly better than what we guided and probably the primary reason why our earnings per share were a little higher as well than our initial forecast. Here we're benefiting from a weak dollar, but we're also benefiting from a number of supply-chain initiatives that were initiated a few years back and focused on reducing freight and other costs in our supply chain. So this includes regional warehousing initiatives in South Asia, in Europe, as well as a new warehouse that was completed and became operational in Korea during the first quarter.

And then our selling expenses for the quarter were 42.7%, compared to 42.4% in the first quarter of last year. And normally, the first quarter is just a little bit higher than what the balance of the year tends to be. General administrative expenses for the quarter were 25.6% of revenue. That's 160 basis point improvement over 2010, and again, reflective of our global management team which remains so focused on driving efficiency as evidenced by the continual improvement. And we're leveraging our revenue growth over an increasingly efficient overhead base. Our operating income increased 25% for the quarter, and we're operating now at a 14.6% operating margin level.

Our tax rate for the quarter was 37.5% which is in line with our historical average, but higher than the 33.6% in the prior year. The lower tax rate in the first quarter of 2010 was due to the release of some FIN 48 tax reserves which created a benefit to that particular quarter. And as I mentioned before, we believe there are opportunities for us to continue to lower tax rate going forward. We're focused on this initiative and expect that throughout the balance of the year, our tax rate will be in the 36% to 36.5% rate and then expect to see that rate start to lower beginning in 2012.

Cash from operations again very strong, coming in at $42.3 million for the quarter. And we returned that cash to shareholders by paying $8.4 million in dividends and repurchasing $22 million of our outstanding shares. And at the end of the quarter, our remaining stock repurchase authorization was approximately $130 million.

We believe the impact of the Japan disasters will be in line with our guidance provided about a month ago. And we continue to see things develop and keep our eyes wide open on that, but would estimate that total impact to be around $25 million -- $10 million in Q2, $7 million in Q3, and $3 million in Q4. And we now model Japan's local currency revenue to decline approximately 8% for this year which again reflects that 5% negative impact from the disaster. And would also -- are modeling the US to be approximately flat this year compared to last year. We've taken that guidance down just a little bit.

So fortunately, the other markets have more than made up for that. And in fact from an overall guidance standpoint, we took Japan down by approximately $25 million, the US down by about $10 million. But then we took China up by $15 million, Southeast Asia up by $10 million, and currency benefits up by $20 million to $25 million compared against our initial guidance. So with respect to the guidance in the second quarter, we project revenue of $400 million to $408 million with earnings per share of $0.57 to $0.60. And this quarterly guidance assumes a positive foreign currency impact of approximately 4% to 5%. And then for 2011, we're increasing both revenue and earnings per share guidance.

We now forecast revenue to be in the $1.625 billion to $1.645 billion range, and we anticipate earnings per share in the $1.96 to $2.06 or $2.28 to $2.38 when we exclude the charge from the Japan Customs issue. And this guidance, by the way, does include the donation of about JPY50 per product in the ageLOC products for the Japan relief efforts as discussed by Truman. And the guidance for the year assumes a currency benefit of approximately 3%. So with that overview, we'll go ahead now and open the call up for questions.

(Operator Instructions) Olivia Tong, Bank of America, Merrill Lynch.

Good morning, thanks. I guess first question is on the new skin care product that you mentioned. What's different about that? Is it a regiment or just one SKU? And then also so soon after they ageLOC launch, I'm just curious what if any response you had from distributors if you've talked in a higher level distributors about it yet, what they're thinking in terms of appetite to take on a new product? Thanks.

Olivia, I assume that your question is related to the skin care product that we're referencing? Or are you questioning about the nutrition product?

No, the new skin care product that you had mentioned.

As I indicated, we have plans to unveil this product on our Team Lee trip in two weeks. I guess I'll just drop a little bit of a teaser by indicating that it is related to our highly successful Galvanic Spa system which has been just a really dramatically successful product for us over the last few years. So we think that it'll be very well received. With respect to distributor response to these product introductions, there's always a balancing act that we do trying to figure out the right moment in time to introduce new products. But with both of these, both on a nutrition side and on the personal care side, these are not disruptive introductions. These are introductions that are very consistent with our story, our ageLOC positioning over the last couple of years, and would expect minimal distributor disruption and in fact on the other hand a lot of distributor enthusiasm for both of these products.

I was just thinking more in terms of, they're pushing ageLOC still in year two. They've a couple -- Vitality, they've got obviously the alpha product that's coming, now you've got a skin care product. Is there any concern that, that just creates -- that's almost too much and distributors have a little bit of difficulty trying to sell that many new products to -- and recruit with that -- is it too much at that point?

We stage these launches on a little bit of a different timetable around the world. And the way that -- they'll be introduced at our Global Convention, but we'll roll out over the subsequent nine months or so. And no, I think that the thing that really differentiates these launches from perhaps others that might be overwhelming and confusing is the fact that they're all related and tied to the ageLOC story. It's all about our ability to influence and reset the genes that are responsible for various aspects of aging. So the story associated with these products is very consistent with the story that they're telling. They're not a big leap from where we've been over the past couple of years. So much easier introductions than perhaps products that would come in from different categories.

Thanks, that's great. And then just as a follow-up, in the US are you -- to combat the weakness that you're seeing, first, it looks like I if I assume that you're going to have a very good convention, it sounds like in Q2 and Q3 you probably are assuming that the decline decelerates versus the minus 10 minus 11 in Q1. Or it still declines, but declines by a lesser magnitude. And what's going to be driving that, are you increasing distributor incentive activity or is there anything else that's going on?

Just quickly from a modeling standpoint, yes, I think Q2 will improve a little bit from where we're at. Q3 we have a more difficult comparison because of the Vitality launch in the prior year, and we don't plan to launch any of the products until the fourth quarter at convention this year. So Q3 could be in this similar range, down 10%, but that would expect it US to actually show growth in the fourth quarter with the launch of the new product convention. I think generally we'll expect to see our executive numbers as we progress towards the convention. That will be the real sign as to whether we're getting traction with the new product launches and initiatives that we have in place. But generally it's blocking and tackling and executing on the initiatives that we have in place to increase our distributor force.

Great, thanks a bunch.

Peter Aslan, Jefferies and Company.

Good morning, everybody.

Hi, Peter.

Kind of following onto Olivia's question, if I may, I think when you pre- announced the first quarter results here in early April you referred to sales growth receiving a boost from the better than initially anticipated launch in the fourth quarter. Is that related to having a skin care launch augmenting the nutrition plan specifically or was there a different reason to be more optimistic about the launch itself?

Yes, I think a little bit of both of those as we've seen the forecast coming in from our markets as they've started to work with their key leaders and the energy starts to build. And particularly, I think it'll be real interesting as Truman unveils the personal care product at the Team Elite event. We just based on the energy we're seeing the forecasts that are coming in. We've upped our fourth quarter expectation. Again, I've tried to be conservative as we always try and do when we forecast that out. And my forecast would include a number that's still well below what the forecast is from our markets, but we just see more enthusiasm right now building for that product launch. And it'll continue to be a more and more global launch where we implement the factors that have been successful in product launches in our best markets. And I think as we do that, it gives us more and more confidence that the product launch will be successful.

Okay. Turning to specifically Pharmanex in the first quarter, I think that business was up 27%, 28%. Wondering if you might be able to parse through how much of that was Vitality specifically, and then how much of that's just sort of the intended enthusiasm around the brand that maybe comes with having had a higher profile launch?

I think Vitality generally is only really in the US and Japan. So although it performed very, very well, what we're seeing I think is the energy to start to build for, as Truman mentioned, taking the ageLOC story to the inside the body. So we see good stability and LifePak sales, we see continued growth in our weight management sales in South Asia and into Korea this quarter, those things are all building and all pushing our overall nutrition business higher.

Okay.

And let me just add to that, Peter, that South Korea actually launched the weight management program that we call TRA in Q1. And that also positively contributed to Pharmanex's results in the quarter and it's very encouraging to us because we want to be more relevant in this category. And we think that our success with the weight management product out there is encouraging. It's actually now our fourth selling SKU globally.

Great, okay. I appreciate that color. At the risk of asking maybe a dumb question, how broad is the weight management product globally then now? Is South Korea one of the earlier adopters or is it one of the later adopters?

The first adopters of the TRA system in terms of impact to results were really in Southeast Asia, Taiwan, and now all throughout the Southeast Asia region. Korea is the most recent adopter. Outside of those markets, weight management is still a fairly small category.

Okay. And then maybe just one last quick question if I may on the Japan Customs ruling. I think the Press Release indicated that you've appealed. Not that there's any way to really specifically predict, but optically how would you look at the timeline for resolution on that?

We're hearing that it should take about a year.

Okay.

And subjectively, by the way, we remain confident in our position. We obviously took the full charge in Q1 to not have to deal with this going forward, but we haven't given up the fight.

Great, thank you very much. Congratulations.

Thank you.

Bill Schmitz, Deutsche Bank.

Hi, guys, good morning.

Hi, Bill.

Just a little bit more color on China. What's the commercial impact of getting the broader direct selling license and what really drove the outsize growth in the quarter, because I don't think you had a lot of new products launching in the quarter, did you?

No, we didn't really launch anything meaningful in the quarter from a product perspective. The impact of the licenses is, frankly it's primarily psychological and image enhancement. It's just helpful to have that seal of approval on your business as we go from province to province and start to extend the business more. The accelerated rate of growth there is obviously impressive and frankly, our guidance is still well below the bullishness of our management team on the ground there. One thing we did do in the quarter, for example, and I almost hesitate to say this because no one should be modeling this, but our management team talked us into taking a step that really is adding fuel to the fire. Our thirtieth corporate anniversary will be in the year 2014, and because our payout to our sales force in China has been slightly below our global averages, we actually put an incentive in place to pay out $30 million in conjunction with our thirtieth anniversary if sales leaders in the greater China region reach the $1 billion sales mark by the end of the year 2014. That's how bullish they are. And essentially our business there is just in good momentum right now.

How does that work though? Because I thought there was statutory limits on the percentage you could pay out in China?

Yes, it'll have to be constructed in a fashion that falls within the bounds of the rules. And remember that's a regional incentive and not just mainland China incentive, but we're confident we can get around that.

Okay, got you. And then ageLOC, can you just tell us what the sales in the quarter and what it increased or decreased year over year?

Yes, I'm just glancing at that. We actually have several pieces of the ageLOC puzzle now. So if you look at it on a consolidated basis which is probably the best way to do it, you had Transformation, Vitality, and the Galvanic Spa came to about $130 million.

Wow.

So very good traction on all those products together.

And do you know what that growth was year over year? Was the basis 65%, is that about right, or am I totally off base?

Good question. I don't think it was -- it wasn't that substantial. I'm thinking probably 15% would be -- but I'm guessing a little bit. I don't have a number right in front of me.

Okay, got you. And then kind of a nation point, but maybe important. Now that Cosmetics Labs of America is getting transferred to Unilever, does that have any concerns for you in terms of supply or execution because I know they do a fairly large chunk of your skin care manufacturing?

Yes, good catch, Bill. It is something that we're taking a hard look at. And our communication with them, we're confident that it's not a short-term issue. But, our view is that Unilever is probably going to be less excited about the contract manufacturing business than Alberto Culver has been, and so we're making plans accordingly.

Would you want to own a business like that? I know it's small enough not to be material, but would that help you at all?

Possibly. We're evaluating that. There definitely are some pros connected with possibly owning that plant, and that's very much a possibility by the way. We are already in discussions with them and evaluating that possibility. The issue on the manufacturing side though, Bill, is that we're really trying to strategically deal with locations and manufacturing to try to improve our tax rate.

Okay.

And that's probably the one factor that if we choose not to jump into that plant, we may manufacture elsewhere.

Got you. Thanks very much, guys.

Tim Ramey, D.A. Davidson.

Hi, good morning. Congratulations on a great performance in a pretty tough environment. Just concerned a little bit about the SKU proliferation and maybe the worry of losing focus in the distributors with more product stories to tell around ageLOC. And I know it all comes back to the statement that Truman made, resetting the genes. But can you talk a little bit about how you're dealing with that concern with distributors who on balance are part-time employees?

I think this is, it's a fair question and it's fair concerned and obviously strikes essentially the software of the business and how we deal with the infusion of additional products into the story. One of the things that we're doing that actually is going to help a lot on this front, and those of you who -- I know several of those who follow us are actually planning on dropping into our Team Elite presentation in a couple of weeks. You will see at that event the presentation of a little bit of a new look of the positioning of ageLOC. And working with Joe Chang, our Chief Scientist, and Dan Chard on the marketing side, we're really constructing a positioning for ageLOC that isn't a huge deviation of where we've been, but that does make the story easier to tell on multiple product front. And essentially, it's based on attacking all of the key aspects of the aging process, and how we have a plan in place from a product perspective to be able to attack each of these key areas.

We're dividing the key areas into five different categories. And hopefully -- and so far those distributors who have seen this presentation are very enthusiastic about it, and find that it adds a context that makes it easier for them to plug additional products into the story. So that's one of the tangible things we're doing to create a platform that enables us to continue build on the ageLOC story. But at the heart of the ageLOC story is still the same story. It's our unique ability to target, to identify the genes responsible for critical aspects of the aging process, our ability to measure the impact of our products on genetic expression and reset genetic functioning to a youthful state. Those elements of the story are not changing it and will continue be the foundation for all ageLOC products for several years to come.

Maybe just one other thought, Tim. As these products roll out, the two products will really be staggered across the next 12 to 18 months really. It's not -- they'll be staggered throughout the market, throughout the world. And there will be a time period where the distributors really have opportunity to focus, get educated, train, build subscription customers as we go forward to build that base strong.

And let me just further add that, Tim as you know, we're one of the few direct selling companies out there that has really been able to successfully bridge and build both a personal care and nutrition business. And we've always felt and continue to believe that you can't fight the aging battle on just one front. And so, our distributors see it as a unique competitive advantage to be able to offer compelling products in both of these areas, and they love the fact that we have the ability to do that and consequently, that they can take products in both of these categories to the marketplace.

Thanks, Truman. Just maybe a bit of minutia if you would, Canada seems particularly weak. Was that -- is there any kind of bullet point answer to that?

Yes, it has been a little bit soft. It's related to a couple of things that are somewhat unique to our business, but a couple of leaders who have had some health challenges and have been a little bit less engaged over the last year than they were previously. We are also cracking down on an issue that is somewhat unique to us, and that is the issue of product diversion, the possibility of people shipping products from Canada into China or other markets which we don't like and don't appreciate. And we're disciplining those people and terminating them and whatnot. So it's a combination of those factors.

Thanks.

Thank you, Tim.

Mark Astrachan, Stifel Nicolaus.

Hi, good morning, everybody.

Hi, Mark.

First on the second quarter guidance, just curious why your or what allows you to anticipate the acceleration in currency neutral sales growth in the second quarter if you back out the benefit from the sales convention in the prior year period?

I think it's just overall a building of the overall business. We continue to see strength in the markets that have been strong. US should be a just little bit better in Q2 versus Q1 as a year over year percentage look. China continues to see acceleration. And I think all of those factors just coming in very, very strong right now. So we are pleased. It is our most difficult comp of the entire year, and to be able to show continued growth, although modest local currency growth, is very, very positive to us. It's also giving guidance at a time where we feel pretty comfortable because we've been through April so we can have a pretty good picture at the way the business is trending to, so it's guidance that we feel comfortable with at this point.

Great, and related to that, Southeast Asia, China, you touched on it, just continues to grow at pretty substantial rates. So I'm curious, a, how you see those market playing out at what the drivers are? What has surprised you in terms of the continued strong growth in this markets? And then related to another question, the incremental markets that you have from direct selling standpoint and China, how are you thinking about that adding to overall growth, meaning China's 6% to 7% of sales at this point, but if it's growing 45% plus a quarter, what can it be in the next two to three years, let alone what you said about 2015?

The interesting thing about the growth in Southeast Asia is that it really is spread throughout the region. Singapore, Malaysia, Thailand, the Philippines all growing at very healthy rates which is really encouraging. It's not a one market phenomenon. The market is managed by a central manager who coordinates execution of the business in all of the markets. And so the business is really executed very much the same on a country to country basis in terms of product launches, product initiatives, and whatnot. But we're still relatively small in all of those environments. There's just a lot more room to run in the market given our relative size in each of those countries. Singapore is the one where we're perhaps far more penetrated than Malaysia, Thailand, and the Philippines, but the most recent growth drivers have been, the Galvanic Spa was positive to the business there. The TRA weight management program has been surprisingly successful. They took it and have done with it what other markets really haven't been able to do.

We have been surprised by the successes of that product system in the market and very encouraged by that as well because we believe that we can't be all that we need to be without a substantial weight management business, so we're very encouraged by that. The incremental markets in China, again, provide perhaps more of a psychological benefit than they do a tangible benefit to the top line. We're already doing business in those markets to our modified business model, having the stamp of approval to start signing up pure direct sellers. It's helpful in that it represents government endorsement of the business, but the momentum that's currently in the market is going to continue -- probably would have continued even without that stamp of approval frankly, but the stamp of approval will help support that momentum.

As just as an overall comment on the greater China business, I would expect greater China and my model of around $300 million for this year. So continuing to become a more and more key player to our overall business.

That's great. Just one follow-up on the weakness in Taiwan and Hong Kong, just curious what caused that and how you think about that going forward?

I think primarily what we're going to see as we go forward, first of all, we have started to pre-launch the ageLOC Transformation even in February and March last year in those two markets specifically. So we're dealing with a little bit tougher comp. But I think as we go forward, we're going to see more and more attention focused on mainland China from these markets. So we'll need to look at the region more and more I believe as a region as opposed to market specific because we'll have more and more of our key leaders spending time training and doing work in China. So that's probably part of the reason it was just a little bit softer as well.

And just with respect to shorter-term expectations to there, Mark, this initiative that I talked, this incentive that I talked about is an end 2014 incentive. So that's only three in three years out. And that's how bullish the management team is there.

Thank you.

Scott Van Winkle, Canaccord Genuity

Hi, good morning. My question was kind of along the same lines as the last question, that was what kind of -- can you maybe put an estimate on the cost fertilization you'd see between Hong Kong, Taiwan and mainland China? And is that a phenomenon that started up more recently for you? And I don't remember seeing that a couple of years ago.

What happened, if you look back on the history of our experience in China since 2003, 2004, 2005 is that we had a lot of foreign leaders go into the market initially and frankly, when the market took the recoil in the 2006, 2007 timeframe, a lot of foreign leaders withdrew just feeling like they'd given China their best shot. And you go into an environment where you don't speak the language and it's tough. So on the ground in the market, we are seeing over the course of the last couple years an increase in foreign leaders going in primarily from Taiwan and Hong Kong because they can communicate. And because they're closer to the market and have the ability to be there frequently.

We're also seeing leaders, a couple of leaders from southeast Asia work China aggressively. In fact, the two who we had visit with us at our Investor Day conference in November, [Ryan Hao] and Angela Lau, are very active in the market, they're from Singapore. So China is a magnet for Chinese speaking people. And as Ritch indicated, it is a little bit of a distraction to many of our leaders in Hong Kong and Taiwan, but on the other hand it also presents what I think is the most significant opportunity in the history of the world from a direct selling standpoint to go into this market and build a business.

And kind of on the same note, is there anything we should watch beyond Japan that's impacted by Japan, other markets or markets that maybe they've been in Japan or maybe the other direction? Is there anything we should worry beyond Japan if Japan turns out to be a little worse or better than you're expecting?

Japan itself is really relatively insular. In fact, it's a little surprising to me that we don't get more of our heavy hitters in Japan working outside of the market, very few of them do. And on the other hand, Japan is also substantially large that it isn't terribly influenced by non-Japanese coming into the market to try to build there. So Japan, I guess you could say it really is an island and kind of a world unto itself because it's fairly insular in its impacts.

Thanks, Truman.

Thanks.

Mina Noel, Sidoti and Company.

It's Mimi, good morning everybody.

Hi, Mimi.

Just a quick easy question, maybe you covered this on the Analyst Day in November, but any pending regulatory approvals for the nutritional, the ageLOC nutritional supplement? Or have you covered all those bases?

In what markets?

Any key markets.

As you know, Mimi, there's a lengthy list of regulatory approvals associated with introducing nutritional products in every country around the world.

Sure.

With respect to the products that we're launching this fall, we're in good shape from a regulatory perspective to launch them on the timeline that we've talked about.

Okay. That's what I'm looking for. That's all I have. Thank you very much.

Thank you, Mimi.

Bret Jordan, Avondale Partners

Hi, this is Anand in for Brett. Just a question on Vitality. Can you provide us any insight as far as the penetration of Vitality goes? How many active associates in the launched regions have purchased Vitality?

We don't have that information right now. We like the uptick that we saw from Q4 to Q1. It seems to be well received. The price point seems to be something that's been very attractive at bringing customers in. So we like the direction of it, but again it's only really in the US and Japan at this point in time. So we probably don't have a global look at what the potential is of that product yet. So, we'll probably be able to give more color as we come a little bit more down the road going forward.

Okay, perfect. And then turning back to Japan, after the disaster did you see any affect on the number of subscription orders that you have in the country? I know that it was that 55%, but have you seen that move down at all?

The only factor that's really influenced the subscription levels so far, Anand, is the fact that some of the areas of Tohoku are still not receiving shipments. And that's really the only thing that's been a negative influence on subscription level there so far.

Okay. And then, just turning to the new skin care line, as far as margins on the new skin care line go, should we be assuming the gross margin pickup is similar to the other blended ageLOC products?

Yes and certainly not a headwind at all. I think we've been very disciplined in how we've launched products, and so would expect to be able to maintain -- always as we go forward here, maintain our margins on the new products we're launching.

Okay, perfect. Thank you.

You bet. With that operator, we're going to conclude the call. But thank you all again for joining us, we welcome any further questions that you have. We're all going to go and knock down some buildings right now, so have a great day.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day.