如新 (NUS) 2011 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the second quarter 2011 Nu Skin Enterprises earnings conference call. My name is Jennifer and I will be your operator for today. At this time, all participants are in listen-only mode and 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 conference over to your host for today, Mr. Scott Pond, Director of Investor Relations. Please proceed.

Thanks Jennifer. Good morning everybody; we appreciate you joining us. With us today in the room are -- Truman Hunt, President and Chief Executive Officer; Ritch Wood, Chief Financial Officer; Dr Joe Chang, Chief Scientific Officer; and Dan Chard, President Global Sales and Operations.

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 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.

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

Thanks Scott, good morning and good afternoon everyone. We appreciate you participating in our call today and we are particularly pleased to announce another record quarter. In fact, this one was the best quarterly result in our Company's history. As our release indicates, we generated revenue of $424.4 million, which represents a 9% improvement over the second quarter of last year.

We are pleased with these results as we faced tough comparisons in the first half of 2011, wrapping around the sizeable ageLOC product launches that we experienced in 2010. We're really happy to have generated growth in the first half of 2011, despite these tough comps. And we are now set to go into the second half of the year in a position to post higher growth rates.

We also improved our operating profit margin to an all-time high of 15.6%. So, sales growth and improving profitability and the impact of favorable currency movement resulted in earnings growth of 30% or $0.65 per share. In the second quarter, we also generated 8% growth in our Executive distributor level and 5% growth in our Active distributor level, both reaching record levels and this obviously bodes well for our continued growth.

So, given our solid first half results, as well as the continued favorable foreign currency movement, and the healthy activity we are seeing in almost all of our markets, we are once again increasing our guidance for the remainder of 2011.

We continue to generate very solid growth in a majority of our markets, particularly in emerging markets. Mainland China, as you could tell from our release, had an outstanding quarter. Looking back to the second quarter of last year, you will recall that we launched ageLOC skin care products at a greater China regional convention in Hong Kong, where we sold about $25 million of those ageLOC products. Most of the sales from that event were booked as Hong Kong revenue. So last year, Hong Kong showed 160% growth and this launch obviously made for a tough comp in the greater China region.

But even with that tough comp, the region performed well in the quarter driven by growth in mainland China. If we were to normalized the impact of convention sales from last year, mainland China continued to grow at a rate of about 50%, year-over-year, which was consistent with our first quarter growth rate.

We are also pleased with what we are seeing throughout the South Asia and Pacific region. This region has been our fastest growing region for the past couple of years and continues to grow at a very strong and consistent pace. The region now accounts for about 13% of our total global revenue. So, it is becoming of increasing importance to our global profile.

South Korea continues to impress, growing at a 25% local currency growth rate in the quarter and this market now represents 17% of our global revenue. Those of you who have followed us for some time know that for the past 10 years to 12 years, South Korea has maintained a very steady 20% plus growth rate as the result of a disciplined approach to business development that we are trying to leverage and implement globally. And, we believe that South Korea still has the potential to double its current size over the next 4 to 5 years. So, continued room to grow there.

Looking at our more developed markets, Japan finished the quarter exactly where we projected it would be shortly after the natural disasters in March. Revenue for the quarter was negatively impacted about $10 million after a $3 million impact in March and we continue to project a total impact of about $25 million for 2011.

Overall, we are seeing life in Japan getting back to normal and even within the Tohoku region, which is the most heavily impacted area of Japan, as a result of the earthquakes and tsunami, we saw during the quarter activity rates really start to normalize in the Tohoku region. In fact, in the month of June, Tohoku region was really performing in line with the rest of the country. So, we expect Japan to see improvement in the second half and in the fourth quarter, in particular, with the launch of new products that we will be introduced at our global distributor convention in October.

In the United States, we saw a trend improvement in the second quarter and we continue to project a return to growth in our home market in the fourth quarter, again as we hold our global distributor convention in October and with the launch of the new ageLOC products. We expect the third quarter to continue to be a bit soft as we lap the launch of ageLOC Vitality a year ago. But, the number of Active distributors in the US is showing improvement, both sequentially and on a year-over-year basis. And, we believe that continued improvement in this key metric will be the key to seeing the market turn in a positive direction by the fourth quarter.

So, looking at the remainder of 2011, we are increasing, today, our revenue and earnings guidance for the year. Part of this raise reflects favorable foreign currency movement, but we are also increasingly bullish, frankly, about our planned product launches at our global convention.

On the personal care side, we will be introducing a follow-up product to our best-selling ageLOC Galvanic Spa, which as you know is used primarily on the face. The new product is an ageLOC Galvanic Spa for the body and it is specifically designed to tighten and firm and improve the overall appearance of skin everywhere on the body. It will be paired with two consumable products, to enhance the benefits of the Galvanic Spa.

We will introduce this product at the global convention for a limited time only, with plans to roll out the product into our markets in 2012 and 2013. In the US, for example, we will make the body Galvanic Spa available full-time beginning in January of 2012. And other markets around the world will roll out in the following 4 to 6 quarters.

On the nutrition side of our business, we will be introducing an ageLOC product called R2, which is designed to help to recharge and renew the body at the cellular level. So this product consists of a morning and a night regimen that targets the loss of energy that we all experience as we grow older and then that also supports the cells' natural ability to purify themselves from toxins.

Our sales team is projecting record convention related sales when we introduce these two products this fall. You may recall that when we introduced the first ageLOC product at our global convention in the fall of 2009, we generated about $17 million of convention sales. This year we expect to surpass that level by a healthy margin.

Now, one of the reasons we are very confident about that is that we are doing something that we've never done before in that we are making the convention products available, not only at the convention, but we are also making them available in most of our markets around the world on the same LTO basis that convention attendees will enjoy. So, sales at the convention itself, as well as sales at the local level will make this year's product introduction our largest ever.

Looking a little more at the midterm, we continue to be very positive about the impact of continued innovation down the road. We are still in the early innings of our ageLOC product development plans and we are confident that the best of ageLOC is yet to come.

We recently formally broke ground on our new innovation center here in Provo, which will take about 2 years of construction to complete. The new building will expand our corporate headquarters and will feature a new, state of the art, anti-aging research and development lab. It will serve as our IT technology hub as well as providing modern and beautiful meeting space and workspaces for our distributors and our employees to enjoy. We also recently announced our plans to build a new headquarters and a manufacturing facility in mainland China to support our growth and our potential in what is becoming an increasingly important market.

So, notably, while we continue to drive revenue growth, we also continue to focus on ways to operate more efficiently. Our operating margin target for 2011 that we presented last November, at our investor day meeting, was 14% to 14.5%. Now, hitting 15.6% in Q2, and 15.1% for the first half of 2011, when we exclude the Japan customs charges, obviously puts us in a position to surpass this target.

Our results in the first half justified the mid-year dividend increase which we recently announced, building on our 10 year history of consistent dividend increases. And we remain committed to using our cash to benefit our shareholders.

So, overall, we are very pleased with our results for the first half and we remain optimistic about our prospects for the remainder of the year as well as going forward. So with that, let me turn the time over to Ritch to go through some financial details.

Thank you, Truman. Q2 was certainly a solid quarter for us. It was highlighted by continued, impressive growth in our emerging markets, achievement of our highest operating margin level in our Company history, relative stability in Japan, improving trends in the US; and we now head to the back half of the year, which we expect to be very, very strong.

So, sales for the quarter at $424.4 million is a record level. And our revenue growth was really driven by strong distributor metrics, with Executive distributors growing 8% and Actives up 5%, even compared to difficult comparisons in the prior year. These indicators point to the health of the core business. And the strength in these numbers is the primary reason for our confidence in our ability to deliver a very strong back half of this year.

Our subscription business also continues to grow very well, providing stability to our sales numbers and accounting for 57% of the business during the second quarter, with an average of approximately 480,000 orders per month delivered through this program.

The Company achieved an all-time high operating margin for the quarter of 15.6% and the improvement really breaks down as follows. First of all, our gross margin for the quarter improved to 83.2%, up from 82.5% in the prior year. We continue to benefit from a weak dollar and we are also benefiting from supply chain efficiencies implemented to reduce freight costs, import duty and warehousing costs.

We expect the benefits we have gained to date to remain with us as we have improved our inventory levels, producing a corresponding improvement in our inventory turns which has increased by approximately 20% in the past 2 years. So, we now anticipate our gross margin in the 83% to 83.3% range for the balance of this year.

Our selling expenses for the quarter increased to 43.2%, up from 41.4% in the second quarter of 2010. And note that the second quarter of 2010 was unusually low, because of the convention and ageLOC product launch in greater China.

However, the 43.2% in the current year is also high on a sequential basis due to 2 primary reasons. First of all, as mentioned in our previous quarter, we agreed to subsidize commissions for Executives in the Tohoku region in Japan, which we estimate cost us approximately 25 basis points in the quarter.

Secondly, we are experiencing a higher number than usual of distributors who are qualifying for various incentive trips and promotions, which caused the expense to be slightly higher. I should mention that our core compensation structure continues to pay out a consistent percentage of sales. So, the increase is due specifically to these other items. And although the Japan subsidy will begin to phase out in the third quarter, the higher trip expenses will likely continue forward, and we would anticipate our commission expense for the balance of the year to remain fairly close to 43%.

General and administrative expenses for the quarter were 24.4%, that's a 140 basis point improvement over the prior year. Our global management team continues to drive efficiencies in our operations, as evidenced by this continued improvement. We're leveraging our revenue growth over an increasingly efficient overhead base, helping us achieve a 15.6% operating margin in the quarter. I now expect us to achieve an operating margin for the year of around 15% or slightly better, which is approximately 50 basis point higher than our original guidance that we provided at the beginning of year.

Also, as a modeling note, we will host our global convention in October this year in Salt Lake City, which we anticipate will cost approximately $7 million, and this has been modeled into the numbers that I just provided.

Our tax rate for the quarter was 36.7%. That's in line with our historical average and compares to 37.6% in the prior year. We expect our tax rate for the balance of the year to be around 36.5% and then we'd expect to gain benefits from our tax planning strategies and initiatives starting in 2012.

We continue to see strong cash from operations and we returned cash to shareholders during the quarter by paying $8.4 million in dividends and repurchasing $11.8 million of our outstanding shares. And at the quarter end our remaining stock repurchase authorization was approximately $119 million.

With respect to our future guidance, in the third quarter we project revenue of $405 million to $415 million, with earnings per share in the $0.58 to $0.61 range. And this quarterly guidance assumes a positive foreign currency impact of approximately 5%. Then my modeling would have our fourth quarter revenue guidance in the $430 million to $440 million range and that assumes only a 1% benefit from currency.

For 2011 we are increasing both revenue and earnings per share guidance. We now forecast revenue to be in the $1.655 billion range to $1.675 billion, and we anticipate earnings per share to be $2.38 to $2.46 or $2.06 to $2.14 when excluding the Japan charges. This guidance overall assumes a currency benefit for the year of approximately 5%. So with that overview, we'll now open the call up for questions.

(Operator Instructions) Olivia Tong.

Was wondering if you could give a little bit more detail on Japan, just with it only decelerating by 3 percentage points despite a full quarter's impact from the disaster, maybe if you could give a little bit more color behind what is going on in that market? Thank you.

Yes, as we had previously talked about, Olivia, we expected about a $10 million impact from the natural disasters in March. And, that's essentially what we got in the second quarter. Very close to that.

As I indicated in my remarks, the natural disasters there, we feel represent a delay in our recovery, but not a derailing of our recovery. We see good trends within the distributor force, with Actives and Executives; we see a good level of activity. During the quarter, we saw a good level of activity returning to the Tohoku region.

So, we were delayed there but not derailed and we continue to think that we are on the right path to get that market back to flat to perhaps even slight growth by the end of 2012.

I've got it. And Ritch, it was helpful to parse out the incremental impact on selling expense from the Japan subsidies, but could you give an impact on what the promotion did as well?

Well we always have a certain amount of promotion that is built into that number. What pushed it up a little bit in the second quarter and will probably continue for a quarter or 2 are various incentive trips that we just more people qualifying to achieve, incentive trips and other incentives. And that's primarily in our greater China and South Asia region where we see some accelerated growth rates in our revenue.

So, it's really more than paid for by increasing revenue and they are fairly short term, a lot of these are shorter-term incentives. But, I expect those to kind of remain fairly consistent in the next couple of quarters and so I would expect our overall expense to be around 43%.

I've got it, thank you. And then just lastly, historically, the total Executive count and organic sales were pretty tight as far as pretty similar growth rates. But that has diverged a bit this year. Is that just because of ageLOC? And if so, would you expect that to match up a little bit more after you comp the bulk of the ageLOC gains?

Yes, that's a good observation, Olivia. We were really delighted to see 8% growth in our Executive count and 5% growth in our Active count in the quarter; and in the long term those numbers will trend closely in line to our revenue growth.

But, we love to see our Executive number grow because, as you know, Executives have to maintain certain levels of sales requirements. And so, to have 8% growth in the quarter, with a lower level of local currency growth, actually bodes well for the future as those Executives will strive to maintain their qualification requirements.

A lot of times when we launch a product during a quarter, we will see the productivity of our sales force go up because of the initial buying that happens. And so, the Executive number, as Truman mentioned, really is a reflection on what is going on in the core business.

I think, if you are to just look at the second quarter and parse out the $25 million or approximately 6% of our sales in the prior year that came from the ageLOC launch, you would notice that the Executive number would track very, very closely with the core growth in the business.

Got it. Thanks a bunch.

Tim Ramey, DA Davidson.

Congratulations on a wonderful quarter. Ritch, I'm sorry, I didn't have the time to calculate it, but relative to your comments on FX impact on the 4Q, is that just the effect of year-over-year movements in the exchange rate, up in the 4Q of 2010? Or, is that conservatism on your part? I should have calculated that, but --

No, it's no problem. Just in my modeling, last year by the way, the fourth quarter exchange rates did strengthen quite a bit. I should say foreign currency strengthened against the US dollar. So, the comparison is a little different, but in my model I've got a yen of 83, I've got the Korean won at 1,100, I've got the euro at 0.72.

So it's probably reflective of some conservatism as things stand today and a difficulty in trying to project out what is going to happen with the dollar over these next couple months. So, it probably is somewhat conservative and hopefully there is some room there.

Good. And then, I am curious about the impact of the change in your new product introduction strategy around convention. How do you think that -- you said it would be substantially more than the $17 million last year. Will that kind of borrow from sales a bit in 1Q of 2012? Because, there isn't this kind of staged rollout or how should we think about that?

I think what we will see, Tim, is that these convention products, inasmuch as they will be available on a limited time basis only, will give us a good pop in the month of October because distributors around the world will be buying them and putting them in inventory to use over the ensuing few months. And this is the first time we have made convention products available on a local basis. So, the $17 million in ageLOC sales in Q4 2009 will be surpassed by a wide margin. I think Ritch has about $25 million in sales in his model but there could be some upside to that number as well.

And then I would just say, as your question relates to the first quarter of next year, we have a number of products that we will be launching, well, a number of markets that we will be actually launching the products beginning in the first quarter on a full-time basis. So, yes, I think you -- Q1 and throughout, especially the first half of 2012 should be really strong with the launch of these products on a full-time basis.

Thanks so much.

John Faucher, JPMorgan.

I want to talk a little bit about uses of cash. You guys continue to drive strong cash flow and it is building a little bit on the balance sheet. And then, I know you have taken up the dividend, but the buyback still remains a little bit low. Can you talk a little bit about what your priorities are for uses of cash and can we see a more aggressive buyback program as we look out over the next 12 months or so? Thanks.

Yes, a great question, John. An area that we continue to focus on with our Board. We did take a step in raising the dividend but, don't feel like we've been overly aggressive, even with what we've done there. So, I think that leaves us additional room for more significant increases as we go forward with the dividend.

Stock repurchase remains a priority; we try and use our cash effectively. We have built our cash a little bit based on the fact that we have 2 buildings that we are planning to build and at this point in time we haven't planned to borrow any money for those buildings. So, we have allowed our cash to build a little bit.

But at the same time, as we look at our 5-year plan, as we look to going to $4 per share, which our initial guidance at our Investor Day was by 2015, now looks more like possibly the end of 2014. We believe stock repurchase remains a very good, solid way to put the cash back into shareholders' hands. So yes, we will continue to look at where we are trading, but we believe stock repurchase remains a great use of cash and I think we would be more aggressive going forward.

Great. Then one follow-up on that, I think you guys have said in the past that the $4 number does not include share repurchase; is that correct? That is sort of additive to that?

It is limited in terms of how much share repurchase we can actually utilize when we are computing the $4 per share. So, that is correct. I think we can buy back up to a net approximately of 1 million shares per year, approximately, and have that be included in our computation. But, anything above and beyond that certainly benefits shareholders but would not be allowed in the computation.

Okay. Thanks.

Per Ostlund, Jefferies & Company.

I want to ask about China; the growth there was a stellar, here once again. Is there anything -- how much of that maybe is due to just the addressable population being larger, given some of the expanded provincial licenses and how much of that is just good old-fashioned business momentum?

Yes, I would say, Per, that 98% of it is good old-fashioned business momentum. And, we're just enjoying just really healthy growth. And in a direct selling business, when checks are going up, the story builds, the momentum builds; and that is what's happening in China.

Okay. Thinking ahead to the Galvanic Body edition and I understand it might be a little bit early to too qualitatively talk about it, but I am sure that you are talking about the product with the leaders in the field. And when you are talking to them, do you hear that it's -- are they thinking of it as truly additive to the existing installed base for that franchise? Is it looking like it will pick up new users in addition to kind of the core Galvanic devotees? Really, any thoughts on that are appreciated.

Let me give a little more color on that because, the Galvanic Spa, as currently offered is a top-selling product for us globally. In fact, it rivals LifePak in terms of dollar volume, representing in any given quarter between $60 million and $70 million of sales, which -- and we've been selling it at that pace for the past few years. So, we have a relatively sizable installed base of Galvanic Spa users.

And many of them are already trying to use the Galvanic Spa elsewhere on the body. It's just not very convenient to do so because the conductor head is relatively small on the facial unit. So, we think that the Spa will be very well received by our installed user base.

But, we really, specifically and intentionally try to position these product launches now to attract new people. And so, our strategy is not just to go back to our installed user base and make sure that everyone who has purchased one now purchases a Body Spa, we want to bring new people into the business with these new products. And so, we are really trying to do both.

Okay, that makes sense. And maybe just one last one. With the realization that the key product launch for this year was on the nutritional side, has there been anything surprising on the year-to-date performance of the Nu Skin brand?

It was down about 5% in the quarter and 2% or 3% in the first quarter. Is that just the normal oscillation that comes with excitement behind new product launches on the other side of the house? Or is there anything else going on there?

Yes, I think most of that is relatively normal oscillation in the business as we shine the light on various products. But I will say that what has been pleasantly surprising has been the fact that in Southeast Asia, and including even somewhat in greater China, in Taiwan and now in South Korea -- the Pharmanex side of the business has gotten a really significant bump from our weight management products that have been very successful out in various Asian markets.

And, this is one of the reasons why, in the midterm, we remain very optimistic about our ageLOC platform, is that we have yet to apply ageLOC science in the weight management category, which is becoming an increasingly large percentage of our overall business. So, we are very optimistic down the road about the application of ageLOC in that particular category, given our success that is building in weight management already.

Great. Thank you very much.

Mark Astrachan, Stifel.

Hi everybody, congrats on the results. I wanted to get into the US a little bit more and understand some of the puts and takes going forward. So, fourth quarter, you get a benefit from the global convention in the US. How should we think about the growth in that business on a normalized basis? It looks like it got a little bit better in the quarter, but just trying to understand your views there a bit better.

Then sort of related to that, are you still -- or am I mistaken in thinking that the R2 product is going to be rolled out in the US later than it will be in some of the other markets? So, curious about if that's the case, what that says about your confidence in the business in terms of the growth and opportunities there?

Okay, so let me comment a little bit on the product launch scheduled for the US. And, you're right, Mark, the US obviously will benefit from a nice convention pop in Q4. But in 2012, the market management team has decided to focus first on the Body Galvanic Spa for a couple of reasons. Number one, because the Facial Galvanic Spa has been so highly successful here, and our sales leaders are very enthusiastic about the Body Galvanic Spa. Secondly, the Vitality product, the ageLOC Vitality product which launched in Q3 of last year, is also very successful in the United States.

And so, we are pushing the R2 launch in the United States back to the fourth quarter of 2012. So that the US, in 2012, will benefit from a launch of the Body Galvanic Spa in Q1, and the launch of R2 in Q4 which gives us two really decent pieces of ammunition to use in this market next year.

We obviously haven't put out a specific target for 2012 yet. We likely won't do that until our November Investor Day meetings, but I think we have some good ammunition to use in the market in the short-term.

Great. And then, just housekeeping, could you give us the breakout between the Galvanic Spa, the ageLOC Transformation and skin care products, and then Vitality in the quarter too, please?

Overall we were at about $125 million of sales for our ageLOC products. Galvanic Spa, around $62 million, Transformation around $42 million, and Vitality around $21 million.

Great. And then, just finally, I know you touched on it a little bit, but if you could give a bit more detail on some of the confidence you have in the rollout of R2 in the fourth quarter in terms of just how some of these distributors are going to position it around Vitality in some of the markets where you've seen success with that product, it'd be helpful too. Thank you.

Well, remember that Vitality is primarily a US and Japan product right now. And so, other markets around the world aren't benefiting from Vitality as much as those two environments specifically.

And, I'll confess that I have been surprised how strong the forecasts have come back from the sales team around the world in connection with the R2 launch. But I think it is a reflection of the fact that we are just getting better at maximizing the impact of product launches and the limited time offering structure, which is relatively new to many of our markets in the past year or so, is just designed to lead to significant impact when we do these LTOs. And that's why we're optimistic and bullish about this statement that this will be our largest product launch ever.

Yes, in the process of actually trying to forecast this out, we have a lot more interaction with our leaders then we did previously, I believe, and so they are involved in how we forecast those numbers out and build up our global forecast.

But I think one important thing for all of us to remember is the key to a successful product launch will be the expansion of our sales force. We can certainly get a pop out of an initial sale, but the real success of this product launch will be our ability to drive growth into our sales force. And so we will be watching both of those metrics, not just the first-time sale in Q4 but clearly keeping a close eye on what is happening with the distributor numbers in our business.

Great. Thanks, guys.

Scott Van Winkle, Canaccord Genuity.

Congratulations guys on the trends. A couple of questions, to stick with all the conference questions. Two years ago, the end of 2009 you had a global convention, you launched I think ageLOC, the skin care products, if I remember that was the timing. What did your projections say about convention sales and the follow-through? I'm wondering, kind of how it trended relative to what you thought internally then so we can kind of see how you are building your expectations this time around?

Yes, you will recall, Scott, that at our last global convention we had under-forecasted demand at the event itself. And consequently, our product showcase and pickup center became a little bit of a mob scene as people started to fight for product. But we are trying not to make that mistake again.

We obviously don't want to build more inventory than we need but, I think that as Ritch indicated, our process has become more sophisticated. We have a better feel for what demand will be. But the bigger issue is just the fact that we are making the convention products available on an LTO basis not only at the convention but in the markets. That's what will be -- have the most significant impact to Q4 results.

And, it does that availability, which is different in the past obviously -- how do you consider that? Because I think of visions of distributors carrying back tons of product for other distributors who couldn't make it out to convention. How did that change in the new environment?

Yes, well that's where we're just trying to build our forecast from the ground up and, as Ritch indicated, making sure that we are in good communication with our sales leaders, get a good feel for what demand will be. We really had similar input two years ago, too. Our sales leaders were telling us that we were going to blow out what we were projecting in terms of ageLOC sales at the event. In fact, they were right.

And we are just taking lessons from that and taking lessons from all of our convention launches around the world in the past couple of years to make sure that we are well prepared this time around.

And, with the limited time offering away from convention, is there any difference in how you do product registrations? Is it the same as normal, so these products are all registered and ready to go even though you'd be pulling them back out and bringing them back out again maybe as much as a year later?

Yes, we have to fight those same battles. And, we obviously cannot make product available in market unless we can do so from a regulatory perspective.

Yes, it just requires us to be a lot further out in our planning process so that we can start registration of a product well in advance of an actual product launch. So, that is why we have tried to be even more longer-term looking in what our 5-year product forecasts are, so we can start to be able to deliver on initiatives like this.

And, Ritch, the operating margin improvement, which is obviously excellent, but I am wondering; being off of your forecast going into the year, what's the big difference? Is it currency on the gross margin? Is that the primary difference that you didn't have forecasted? Or, is there more SG&A leverage? What is driving the variance even though it is a good variance?

Those are the two primary things. Our gross margin is higher than we anticipated and our overhead is a little bit lower. And, we are 50 basis points ahead of where we were and that's probably split about 50-50 on coming from gross margin and overhead containment.

And, any time we exceed our budget, our budgeted revenues, a nice percentage of that additional income is going to drop to the bottom line because of the way our model is structured. We are pretty good at containing our overhead cost, so we cover our cost of sales and distributor incentives; and a chunk of the rest is going to fall to the bottom line. So, any time we are able to exceed the guidance we provide to the Street in terms of revenue, a portion of that is going to fall into our operating margin benefit.

And, just a quick follow-up if I could. There was a question earlier about the shift in mix towards Pharmanex away from the Nu Skin brand at least to a small extent. I did not catch your answer on that. I'd love to hear your thoughts again.

Then second, my thought would be that you've kind of run through the initial trial on the ageLOC skin care side, and they are kind of preparing for the next wave of launch. Is that a way to think of it?

Yes, the Pharmanex to Nu Skin shift, Scott, correlates highly to year-over-year comps related to product launches. And so, in the second quarter of last year, in the first half of last year, we had huge Transformation launches in greater China and Korea -- obviously on the Nu Skin side of the business -- that were not matched in the first half of this year. While, as I indicated in response to a previous question, we have had some upside surprise to the growth and the strength of the Pharmanex weight management business in Southeast Asia and now in the second quarter in South Korea.

Great. Thank you.

Anand Vankawala, Avondale Partners.

I just had a question on emerging markets. What was the contribution in the quarter? How was that compared to last year? And just with the strength you're seeing in weight management in Southeast Asia, where you see that trending in the next year?

Yes, the emerging markets provided about 25% of our overall sales in the quarter. And as far as the weight management program this has been a real pleasant surprise I think for us as we've seen distributors find a lot of success with it in Southeast Asia and then that carry into Taiwan and now carry into the launch of the product in Korea. So, we have high expectations that we can continue to see good growth.

It is now the number 4 volume product in our list of top product sales. Somewhere around over $30 million for the quarter. And, so, we are encouraged with that. And it will be in one of our upcoming ageLOC launches here in the coming years; we will focus more attention around that product. So, we think weight management can become more and more important to our overall business as we go forward.

Okay, and then, I guess just wrapping up around the convention launch. Is the limited time availability globally going to affect the speed of rollouts for full-time availability? I mean, I understand that you are shifting how you're doing the US. But for the other regions are you going to be shifting how you are going to be making product available full-time because there will be some inventory out there already?

Well, not so much as a result of the LTO, Anand. The full-time rollout of both the R2 product as well as the Galvanic Spa will really just be strategic based on the needs of that market and our desire to maximize impact from both of these launches. So, the LTO mechanism itself really won't have much to do with the subsequent rollout of the products.

Perfect. Thank you.

Tim Ramey.

Ritch, when we were out a month or so ago, you talked about the substantial margin contribution in China, I think you were saying something like 87.5% gross margin and just maybe want to circle back on that as you see these extreme levels of revenue growth. Is your margin performance kind of bifurcating around the world where you are seeing these strong sales growth rates? And maybe you could comment a little bit further on that.

Yes, our overall margin, operating margin, market to market, is fairly consistent now, particularly where we've gotten pretty good traction in a region. The difference in China is the fact that we do our own manufacturing there, so we can get a little bit more benefit on the gross margin line, which is offset, somewhat, by having a little bit more in-depth infrastructure as we have to have stores throughout the region. As we continue to grow, China will just become more and more profitable.

But, I think as we look and take learning from that, going forward, trying to get inventory as close as we can to the markets, things like that are ways that we feel like we continue to become more efficient and effective as we grow forward. All that being said, we are conscientious that we have to continue to invest in the business going forward. So, opening new markets, keeping our eye on making sure we are investing in innovation, things like that is a balance and an offset that we really try and manage going forward.

So, we certainly believe there is opportunity to continue to see our operating margin grow over time, but know that we are very conscientious at investing back in the future of the business, making sure our top line growth rate can continue to stay very strong and investing in that side of the business.

Thank you.

And operator, with that, Ritch and I are going to jump back into a global management meeting that we have going on today. But we do appreciate all of you joining us on the call.

And let me just conclude by reiterating that in a world that is filled with an unfortunate level of continued economic turmoil, these continue to be the best of times for Nu Skin Enterprises. We as a management team are laser focused on our $4 earning per share goal and are determined and motivated to get there.

For those of you who would be interested, we would invite you to attend our global distributor convention, which is coming up on October 28 and 29. This would give you the opportunity to get a first-hand look at what an incredible world the Nu Skin family is, not only here domestically but globally. So thanks for joining us on the call.

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