如新 (NUS) 2011 Q3 法說會逐字稿

Good day, Ladies and Gentlemen. And welcome to the third quarter 2011 Nu Skin Enterprises, Incorporated, earnings conference call. My name is Stacy, and I'll be your conference moderator for today. (Operator Instructions). I would now like to turn the presentation over to your host for today, to Mr. Scott Pond, Director of Investor Relations. Please proceed.

Thanks, Stacy, good morning, everybody. We appreciate you joining us on today's call. With us in the room 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 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. And with that, I'll turn the time over to Truman.

Thanks, Scott, good morning, everyone. We appreciate you taking the time to join us today. We're very pleased to announce today our largest quarterly results in our Company's history. As our Press Release indicates we generated revenue of $428 million, which is a 12% improvement over the third quarter of last year and in constant currency terms revenue increased 4%. Our third quarter earnings came in at $0.72 a share, which is a 31% improvement over the prior year quarter.

So we're pleased with continued -- with these results and with continued improvements in profitability as well. In the third quarter our operating margin improved nearly 200 basis points to 15.7%. Improving sales and profitability are also reflected in our balance sheet with a strong cash balance and we'll be putting this to good use in the upcoming months as we expand the corporate headquarters here in Provo as well as our greater China regional facilities in Shanghai. Based on these strong results as well as orders already received for the products we are introducing at this week's global distributor convention, we're also increasing our guidance for the remainder of 2011 and will touch on the details of guidance in just a moment.

So first let me provide some color on where we see the growth and why we're optimistic about continued growth into the future. First, we're seeing continued steady growth in our sales force. In the third quarter, our executive distributor count increased 14%, and our active distributor count jumped 6%. We're just seeing more people join the business, especially in many of our emerging markets, in particular, mainland China, where our executive count increased 75%. And all throughout the south Asia region where we saw a 27% improvement.

Seeing this type of growth in our distributer numbers speaks to the continued appetite for opportunity around the world and the ability we have to provide a compelling income opportunity for people. Now another factor contributing to our growth is the continued strength of our product line. Our ageLOC anti-aging continues to be a key sales driver and we look forward to introducing two new products to the ageLOC family of products this week. You may recall that we introduced our first ageLOC products in 2009, and now, two years later, ageLOC represents over $500 million in annual sales.

This week, we'll introduce, for global distribution the first ageLOC nutritional supplement that we call R2. R2 recharges and renews the body and promotes increased energy levels during the day, without the use of stimulants, and then restores and purifies the body cells at night, this product will be a key focus for our Asian markets, in particular, in 2012. And I would add, by the way, that R2 orders represent about 80% of the $100 million in convention product orders that we've received so far. Our new ageLOC Galvanic Body Spa and accompanying gel and lotion work as a companion to our best selling facial Galvanic Spa and focuses on improving the appearance of cellulite and promoting firmer and tighter appearing skin on the body. As you know our facial Galvanic Spa has been a phenomenal success generating sales over the past three years of about $750 million. Over this period of time we noticed that consumers were using the facial spa to address trouble spots on the body, so the new spa will be a very welcome addition to our Galvanic Spa product line and I would add on this product, that when we opened the order lines at the beginning of October, we very quickly sold out of the 36,000 units we had available on this fourth quarter limited time offer. As stated in our release, then, we began taking orders for these products on an LTO basis during the first week of October, as we have refined our product launch strategy over the past couple of years, we have used this LTO approach in various markets, but this is the first time we've opened up sales of new products on a global LTO basis. And in addition to past practices, we're also allowing distributors who are unable to attend this week's convention, the opportunity to order the products, and then pickup their order in their home markets in the upcoming few weeks. As a result of this enhancement to our product launch strategy, the orders have just been remarkable.

Over the course of a few short weeks we've received over $100 million in orders, and this sales level far exceeds our previous launch volume in connection with prior product launches at distributor conventions. You'll recall that in 2009, we had a phenomenal response to the introduction of ageLOC Transformation where we generated about $17 million of sales on site and then another $9 million or so during the course of the fourth quarter. So on an apples-to-apples basis we would compare this month's $100 million product launch to about $28 million or so two years ago. So, a very nice validation of our product launch strategy. And some important learnings that we'll definitely leverage going forward.

As we move into next year, we'll begin our market-to-market product rollout, beginning in the first quarter of 2012 with the United States, launching the Body Galvanic Spa and Japan and South Korea rolling out the R2 product. Greater China will then introduce R2 in the second quarter of 2012 and then southeast Asia will introduce R2 in the third quarter. We'll then begin the rollout schedule for the Body Galvanic Spa in markets other than the US and would expect to begin rolling out the Body Spa to the Asian markets beginning in the fourth quarter of 2012. So we have a very nice pipeline of product rollouts scheduled globally, working through the next year-and-a-half or so and working up towards our next global convention in 2013. So needless to say, we're very delighted with the response to this year's product launches. Now, while we're pleased with the tremendous response to our ageLOC products, we're also encouraged by continued strong sales within our entire product mix.

For example, sales of LifePak, which as you know, is our number one selling nutritional supplement grew about 9% in the quarter to represent about $70 million in sales. The facial Galvanic Spa system and ageLOC Tranformation skin care sales remained very steady, with annualized sales of over $150 million in each of those products. And our product subscription orders continue to climb and ticked up to 56% of orders in the third quarter being placed on subscription. So we're pleased with continued stability in our subscription base.

You may be interested to know that in the first nine months of the year, our sales are weighted about 45% to the nutrition category and 55% to the personal care and skin care categories. This balance that we enjoy in the two most important anti aging product categories is quite unique in the direct selling channel, and in fact, gives us what we feel is a very compelling competitive advantage as we enjoy real product substance and brand substance in both of these categories. Now, before I turn the time over to Ritch to go over some financial results let me just talk about a few key geographies.

First, nearly 70% revenue growth in Mainland China is making China a much more relevant factor in our overall results. Our business there is obviously trending very strongly. The third quarter was a slight tick down in growth rates sequentially, but you'll recall that in the second quarter of 2010, we held a distributor convention in Hong Kong, which shifted sales from Mainland China to Hong Kong and inflated the growth rate in Mainland China during the second quarter of this year. So we continue to believe that China is enjoying very healthy momentum and has a real likelihood to becoming our largest market within a fairly short period of time. We're also enjoying continued strong momentum in South Korea and all throughout the south Asia region. These markets have demonstrated that weight management can and should be a larger component of our business globally as our TRA weight management system there has become highly successful in all of those markets.

And so, as we, now, infuse ageLOC science into the weight management category in the upcoming few years, we anticipate a very strong response in the weight management category. The US, in Q3, was up against a difficult comp due to the launch of the ageLOC Vitality product last year so we anticipate the product launches in the US, this quarter and going into 2012, will be a catalyst for growth. And last, but not least, Japan is tracking exactly in line with our expectations. Following the March natural disasters. Japan, you'll recall, was also up against a tough comp with the launch of ageLOC Vitality last year, so Japan is just exactly on track with where we saw it, in March, and we are starting to see signs of stabilization and we're optimistic that the fourth quarter launch there will strengthen fourth quarter results and improve our sales trends.

So overall, we're satisfied with third quarter results. And of course, we're very pleased with the response to the new ageLOC products, which will make for a very strong fourth quarter and another record year for Nu Skin Enterprises. So with that let me turn the time over to Ritch.

Thank you, Truman. Good morning, everyone, thanks to each of you for joining us today. Overall, the business performed very consistent with our expectations in Q3. We're seeing positive signs that point to steady growth as we move into the future. As Truman mentioned our key drivers continue to be strong sales growth, product innovation, and emerging market opportunities.

We achieved another record sales level for the quarter of $428.4 million. Although foreign currency bounced around especially right at the end of the quarter, we reported about a 7.5% foreign currency benefit to revenue for the quarter, while local-currency revenues grew by 4.2%. We reported operating margin of 15.7%, that's a 190 basis points improvement over the prior year as we continue to perform well ahead of the guidance that we provided at the beginning of this year.

And the improvements came in the cost of sales line, as well as our general and administrative expense line with a small offset due to an increase in our distributor incentive payout. Gross margin for the quarter improved nicely up to 83.5%, that's up from 82.1% in the prior year. We continue to make good progress in driving our supply chain efficiencies, which are resulting in higher inventory turns, lower freight cost and reduced product obsolescence cost. These supply chain efficiencies include improved inventory forecasting processes as well as some recently launched regional supply chain functions.

We're also benefiting from growth in China where we have a slightly higher gross margin due to the vertical integration of our manufacturer operations in this key market. Also, we continue to benefit from foreign currency movements which accounted for about 60 basis points of the improvements during the quarter. Our selling expenses for the quarter increased 43.0% up from 42.3% last year. This uptick in this expense reflects a higher than usual number of distributors who are qualifying for various incentive trip and promotions. And this is actually a good sign in our business as the sales force continues to develop and progress. The increase comes, primarily, from markets where we're seeing growth rates ahead of our expectations.

Longer term we expect the selling expenses to remain in the 43% to 43.5% range with the exception of this fourth quarter this year. Because of the magnitude of the new product sales in the quarter we expect to see our commission expense jump higher; probably around the 44% level. As many of our distributor leaders will maximize the commission plan by achieving higher sales volumes. General and administrative expenses for the quarter were 24.8%, that's an improvement of 110 basis points over the prior year. And reflects our continued focus to drive efficiency in all aspects of our business.

In our other income and expense line item of the income statement, we reported a loss of, approximately, $6.9 million. Foreign currency losses of $6.2 million or $0.06 per share, about 90% of which were unrealized at September 30, 2011 related to month-end swings in some currencies against the US dollar. In particular, we incurred unrealized losses related to the euro, the Japanese yen, the Korean won and the Canadian dollar. As we translate our inner Company receivables and payables into US dollars for our financial reports at the end of the quarter

In the past couple of weeks, foreign currencies have made a significantly, fairly significant step back to where they were prior to the creation of the loss, therefore a good portion of the unrealized loss may come back as a gain in the fourth quarter. Our tax rate for the quarter was 22%, the lower rate is primarily attributable to a one-time tax benefit associated with the effective settlement of an IRS tax audit for the years 2005-2008. It relates, particularly, and specifically, to a credit for products exported from the United States. The impact from this settlement is $7.7 million, or approximately $0.12 per share for the quarter and will result in a cash refund.

We continue to see strong cash from operations. We returned this cash to shareholders during the quarter by paying $10 million in dividends and repurchasing $17.2 million of our outstanding shares. And at September 30, the remaining share repurchase authorization stands at, approximately, $100 million. As Truman mentioned earlier, and as we reported in our earning release this morning pre orders for the convention products have reached approximately $100 million. As sales from this launch have exceeded any prior product launch by a wide margin, we're carefully analyzing, its overall benefit and incremental impact to our current and future results.

As we provide our future guidance for revenue and earnings we're somewhat cautious in our estimation of the net impact of these product orders on our current sales, and will finalize the exact shipment schedule as we go forward. We expect about 80% to 90% of the products to be filled in the fourth quarter and the balance will be filled the first part of January of 2012. We will have continued increase visibility by our shareholder day on November 16 and we'll be able to provide more color on this product launch at that time.

For the fourth quarter, we're raising our revenue projection to $465 million to $475 million. This revenue guidance implies a neutral foreign currency impact for the quarter. We expect earnings per share to be in the $0.66 to $0.70 range. We will incur as a reminder the cost of our global convention happening this week, and that is anticipated to be $7 million. Again, we expect our commission rate to be, approximately, 44% for the quarter. And that's due to this large product sales launch and then, a tax rate of around 37% for the quarter.

I have not modeled into this guidance any net foreign currency loss or gain associated with the translation of our intercompany balances. And then for 2011, we forecast revenue to be $1.714 billion to $1.724 billion and earnings per share in the $2.27 to $2.31 range or $2.59 to $2.63 when we exclude the Japan charges that were taken in the first quarter.

And today we also introduced our 2012 guidance, first of all, we are forecasting foreign currency to negatively impact revenue by, approximately, 1% next year. That may be somewhat conservative, based on what most banks are forecasting next year but given the fluctuations in the recent few weeks we elect to be careful on that number. Based upon our early read, we are guiding our revenue to be in the $1.79 billion to $1.82 billion range and earnings per share in the $2.80 to $2.90 range.

And we look forward to sharing our modeling detail with our shareholders during our Investor Day on November 16, as it relates to our 2012 guidance. So with that, we'll now open the call up for questions.

(Operator Instructions). Your first question comes from the line of Olivia Tong, with BofA Merrill Lynch. Please

Thanks, good morning. I wanted to see if you could give a little bit more detail, some color, on that $100 million of sales. Can you talk about which markets those pre orders primarily came from?

Good morning, Olivia.

Good morning.

Well as you might expect, the weighting of the products by market bears some resemblance to the markets that are growing the fastest. So big ups in China, Korea, south Asia is reflective of the strength of the business there and they definitely showed up in the pre orders as well. So the allocation of that $100 million really skews to the markets that are growing the fastest.

Got it. And if we think about fiscal '12 and the sales trajectory there, would you expect those regions to perform at a lower rate going forward? Not notwithstanding Q4 given the fact there is so much buy-in in Q4.

Well, you know, the -- one of the key purposes for this product launch strategy and the LTO structure that we've developed over the past couple of years, is to not only maximize revenue in connection with the product launch, but to also minimalize cannibalization and kind of collateral effect to the rest of the business. So, we're optimistic that as these products roll out in 2012 we really haven't overly, negatively influenced the business with this LTO launch here in Q4.

Okay. And then, on Q4, maybe could we go a little bit more into detail why the selling expense is going to go up fairly significantly? Typically -- and I understand that people are qualifying for greater incentives, but typically you sell quite a bit in terms of non commissionable revenue in Q4 related to -- when you have convention, so maybe if we go into that a little bit more. Thanks.

Yes. There may be a slight offset by the non commissionable products, sales aids that we sell at commission but that shouldn't be a very big number. The big issue, really, is that we're taking close to $100 million of product sales and pushing it through our existing distributor force. So many of our sales leaders will reach very high sales volumes and kind of maximize the compensation plan. There's a higher payout, based on their monthly volume achievement. So, as we push that level of product sales through, we anticipate that it is going to increase our commission expense, which is a great thing, by the way. Real positive thing for distributors as well as something we love to see and it happens only when our growth rate jumps up. We forecasted our growth rate in the fourth quarter to be somewhere around 18% over the prior year in constant currency terms. When you get a jump like that, it will push commission expenses up a little bit.

Great, thanks a bunch.

You bet.

Your next question comes from the line of Per Ostlund, with Jefferies & Company. Please proceed.

Thanks, good morning. Congratulations, everyone.

Good morning, thanks.

Kind of want to follow-up to a little bit of your prepared commentary as well as Olivia's question as well. If the eye-popping number here for the presale activity in the fourth quarter, if we sort of assume that kind of 80% to 90% of that ships in the fourth quarter, then that would kind of assume that, maybe, the rest of the business was down a little bit. Is that the right way to think about it? Is that kind of how you would expect it, given the enthusiasm around the launch?

You know, Per, here's a very simple way to look at it if you take the $100 million and assume 20% ships next year, that takes it to $80 million. There's likely another 10% or so that we've kind of looked at that could possibly be returns or we don't end up finalizing the orders, since they all haven't been paid for and so forth at this point in time. And then we've estimated about 20% of this $100 million actually to cannibalize volume that would be from other products. So essentially it would come to about a net $50 million increase. That's probably conservative and we're going to know a lot more, Per, as get through the end of this month, and we see how distributors push to get their final volumes in as well as the beginning part of November. So by the time we come to November 16, I think we're going to have, certainly, a better understanding of the cannibalization factor as well as our shipment schedule. So we can nail those numbers down a little bit more precisely at that time.

Okay. That's very, very helpful. On the break down of the $100 million, I guess it struck me and I don't know if it struck anybody else, it struck me that R2 was 80% of it. Not so much on that product, but maybe just the fact that I know that there was a lot of enthusiasm around the quick sale out on the Body Galvanic side. How capacity-constrained are you on that product at this point in time? Could you have had more available at the time of the presale? Or is this kind of an intentional scarcity kind of buzz-creating event there?

Yes. The Body Galvanic Spa was about 20% of the $100 million because it's all we could manufacture in time to ship here in Q4. So, remember that the Body Galvanic Spa will rollout initially in Q1 in the United States. So we will have next year to really build up our inventory manufacturing capacity before it rolls out on a full time basis on other markets. It is just easier. There's a longer lead time, obviously, on an electrical instrument like the spa versus dietary supplements which are just easier to manufacture on a shorter timeline. As we mentioned, when we opened the order lines for the Galvanic Spa all 36,000 units that we had available sold out in just a couple of hours. So, there's big demand for it. As we roll it out globally we expect to see a similar kind of response in each market.

Okay. Great. Maybe one last, quick question. Just on the idea of the 2012 guidance at this point, I think that largely in line, I think, with where all of us on the line are. So no real surprise there. I think I was maybe more surprised it was given at this point rather than held until November. Was the thinking there more kind of that the volatility of the dollar, maybe compelled you a little bit? Or was it more that the outsize response on the new products and kind of the need to sort of frame the discussion around that?

Yes. I think primarily our goal is to try and set some boundaries on where we're going. We don't know exactly how the product launch, the big product launch here in the fourth quarter is going to impact sales next year. But we're careful to have numbers run too much before we really get our model out in front of everybody. So, I think that was our primary goal. You know, two weeks ago, as I prepared guidance before we actually had the product launch, an 8% to 9% local currency growth rate seemed fairly doable, and also, fairly conservative. It's hard to say now with the product launch. But we will continue to give visibility on what is happening. And show that to you particularly on November 16th.

Sounds good. Thank you.

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

Good morning, and add my congratulations, please.

Thank you, Tim.

I, too, was struck by the sales mix of the Body Spa versus the R2. And I guess I was just curious, is there any -- I mean, the convention hasn't even started yet. I assume you're going to write some orders when people actually show up, or has the window closed in some way that I'm not aware of.

Yes. At the convention itself, we will actually not be taking new orders for these new products. We will be selling other products at the convention, but the window to order the new products essentially has closed for the quarter.

So the $100 million is going to be the number?

Yes. Roughly. Then we'll book a few extra million from other product sales at convention on site.

Got you. And, you know, the 70% growth in Mainland China is stunning, but seems to correlate with some of your earlier statements about the internal goals for China hitting, I think you said, there was an internal goal of $1 billion by, is it 2015? Can you talk a little bit about how that market is developing and what you need to do to kind of continue to feed that growth? Because it really is going to shape the growth for the entire Company, it seems.

Yes. It is, obviously, hard to ignore. Keep in mind, Tim, that $1 billion internal sales goal is for the Greater China region and not just the Mainland itself.

Yes.

But, no, we, obviously, have caught a gear in Mainland China and the enthusiasm of our sales force is just through the roof. Our Management Team there has done a phenomenal job of earning the trust of the sales leaders and we'll have about 1,000 Mainland Chinese here this week for convention. And they are just -- they happen to be sitting on the biggest direct selling opportunity in the history of the world. There just aren't any other markets like it, with direct selling being as robust as it within the Chinese communities globally and they recognize that and our competitors are also doing well in China. We're not the only one who is enjoying good, robust growth. It just happens to be a phenomenal market in terms of size and scale.

Sounds good. And then just on Japan, tracking expectations, but now that will be an easy comp for 2012. Are you in a position where you think you'll forecast growth for Japan? Or is that too early to say?

Well, I'm going to toot the horn of Ritch here, because he has uncanny ability to forecast the business. And before we even really started receiving management reports from Japan, shortly after the earthquake and tsunami, Ritch had already modeled the year. In the third quarter, his model was only $50,000 off of where we actually landed. So he's really got a good feel for the dynamics of the business globally as well as in that market. You're right, obviously, as we lap the impact of the natural disasters, we do have easier quarters. But that said, Japan is still in turn around mode and we still have work to do there. It is not the easiest of markets right now, but we have high confidence in our Management Team and we have high confidence in the strategies that they're putting in place. They're doing the right things to make the business grow in a healthy fashion. And we'll add a little more color specifically to 2012 guidance for Japan in November.

Thanks, Truman.

Yes.

Your next question comes from the line of Scott Van Winkle, Canaccord Genuity. Please proceed.

Hi, thanks. Good quarter from here as well. So I guess I'm looking at following up on a couple questions about the mix of that $100 million. Maybe you said it and I missed I apologize but what percentage of that is expected to be "at" convention?

There will only be about $12 million or so that will actually be picked up at convention. So those are our US and European folks, obviously; and, then, a few orders that our Asians who will be here have elected to pickup as opposed to have delivered in their home market.

Okay. So it is the same as forecasting we are just mixing it across the other high growth markets?

Yes, that's right.

And then I understand certainly wondering how this big preorder affects 2012. What do your key distributors tell you about what happens after a launch where an initial delivery is given in November or December of 2011 and maybe the subsequent full launch of that product happening in Q3 of 2012? What do they say about the six month period in between and has that lead into expectations of how next year will play off?

Well, the sales leaders who are most aligned with this strategy really, actually, leverage the period of time between the LTO and full-time launch because they can go out and tell a story about incredible demand for this product and you need to get on board and get ramped up for the official launch that's occurring in six months. So they really leverage this period of time to build the business globally and to attract new people to the business. This is really -- Korea has been doing this, now, for over 10 years and they've perfected it. And what you're seeing now is the impact of us leveraging this strategy outside of just Korea and it's working. And it's working best in the markets that are growing the fastest because the leaders are aligned with the strategy and they really -- they enjoy it from a business-building perspective.

Could it be a scenario, where sponsorship actually exceeds revenue growth in markets that are kind of building up for a launch, coming a quarter or two down the road?

Yes. The ideal model is just that, that there's a nice pop in volume as a result of the LTO, but then in the subsequent months we see recruiting pickup and see volume hold because -- and even continue to grow -- because new people are coming into the business and they obviously have volume requirements to hit. Even before the new product is formally launched on a full time basis.

Okay. And then Ritch, you guided for 2012 right in line with consensus expectations on revenue and earnings, you know, yet there's -- seems like, maybe, a 50 basis point higher expectation for selling expense next year. If that's what the 43% to 43.5% was. Is that offset by stronger margins on new products or incremental leverage because of the high volume growth?

Yes. And we'll walk through this, Scott, as we have a little more time on the 16th. So I can kind of show you how we model next year. We will continue, we believe, to pick up efficiencies as we leverage our revenue growth and expect our gross margin to stay high. We forecasted about a 1% foreign currency headwind next year, so that won't have a big impact on our margins. But gross margins should stay real strong as China continues to grow. And we continue to tap into some of these efficiencies that we're finding. So all of those things kind of lead to a continued improvement in our operating margin.

Great. And then one other point on the Q3 results, could you give us an idea of what percentage of that gross margin growth year-over-year was driven by the favorable foreign currency?

60 basis points of 140 basis points came from FX.

Thank you very much.

Your next question comes from the line of Rommel Dionisio, with Wedbush Securities. Please proceed.

Thank you, good morning.

Good morning.

Truman, I wonder if you could give us a little additional color in some of your other markets, like Latin America and Europe, I realize some of those markets are a little smaller but growing. And maybe you could just give us a little more granularity in terms of what could really be some meaningful contributors there in 2012 and beyond?

Okay, well sure. Let's take Europe first, since it is the more of the material of those two regions. As you know, Rommel, we've enjoyed very nice growth in Europe over the past several years and Europe is now a much more relevant part of our overall mix. We continue to enjoy good momentum in most of the markets and in the major markets. A little bit of a slowdown in Q3 is primarily a result of declines in a couple of markets in particular, namely, Israel and South Africa, which are, obviously, separate from the continent itself but included in Europe regional results. So we continue to see good dynamics throughout the region. We continue to believe that Eastern Europe, in particular, has huge potential. We have only just begun to tap, for example, a market like Russia, which has enormous direct selling potential and sales volume.

Elsewhere, through the continent, we're seeing good, strong results. France has become one of the top growers in the region, which is encouraging; Germany continues to be strong; Norway, we are the number one direct selling company; Denmark is also a very strong market. So, no, we're not really signaling trouble, really, in Europe, because we continue to believe we can continue to grow there.

Latin America, Argentina, has been a little bit of an upside surprise for us. We're enjoying sales volume there above our expectations since we opened the market a few months ago. Latin America, overall for us, has been a troublesome environment our model has been less successful there than it has in other regions of the world. We continue to tweak it to find what the right approach really is for the region. We are not currently modeling a huge business in Latin America, in connection with our Nu Skin (inaudible) vision which is to get to $5 billion by 2020. In that model, I think we only have about $50 million built in for the entire Latin American region. So, it is an issue of business model, product mix, product price points, and, fortunately for us, our business model is working so phenomenally well in most of the world that we have the luxury of not worrying too much about Latin America.

Okay. Thanks, Truman, looking forward to seeing you later this week as well.

Thank you.

(Operator Instructions). Your next question comes from the line of Bill Schmitz, with Deutsche Bank. Please proceed.

Okay. Can you hear me?

Hi, Bill.

Good. I thought I got cutoff. Did you give us any color on what you expect the US and Japan to grow organically in the fourth quarter? I know the comps get much easier.

Yeah, it is a little bit funny, particularly the US, because of global convention here and so forth. But I think organically would expect somewhere around 5% to 7% growth. Japan has been tracking about 10% down since the tsunami hit, would expect that to be down 5% to 6% in the fourth quarter. Again, that improvement coming from the new product launch there.

Okay. And then what did you say you thought the US was going to do?

Plus 5% to 7%.

Okay. That's great. That's better than I thought. Is there going to be an increase in G&A expenses because of the convention? Did I miss that in the prepared comments?

No, that's right. It will be a $7 million addition to kind of our baseline G&A number. That's 100% associated with the convention.

Okay. Got you. Should we be troubled at all about some of the productivities? If you looked at local currency productivity for executive distributors, it seems like it has been a little soft, actually been down the last couple of quarters. Is that just the timing of new product launches? Or, is that something to kind of put on our radar screens?

It is primarily the product launch comparisons. You'll remember that last year we had a big product launch of the ageLOC Transformation in greater China likewise big product launch in Korea, so as we compare against those numbers, any time we have a new product launch, and then here in the fourth quarter, obviously, you're going to see our productivity jump up again because of the product launch this year, without a real product launch in the prior year to compare against. It is primarily related to product launch activity.

Okay. That's really helpful. And then, did you ever say what percentage of G&A costs are fixed? I.E., like how much of it grows with sales and how much of it will be leveraged as sales growth expands?

Yes, we haven't broken that down. That's probably a good thing that we could do at the investor day as well to give a little bit more color.

Okay. Can you think of a ratio that's probably appropriate going forward? I'm just trying to bridge the gap between the current earnings number and the sort of $4.00 target for 2015?

Yes. It's probably somewhere around 50% fixed; and 50% variable. And, again, I'll take that as a good question to provide a little more detail at our investor day.

One last one, and I promise I'll stop. Was there any currency impact on either the selling expenses or the G&A? So like what was the total, sort of EBIT impact from currency in the quarter?

Well, the revenue benefit of 8% is going to flow down through EBIT. So we probably picked up at least an 8% to 10% benefit from that. And then, obviously, below the line we took the big hit for the FX translation loss.

Okay. But there is no transaction offsets either way?

Correct.

Okay. All right. Thanks that is very helpful.

Your next question comes from the line of Anand Vankawala, with Avondale Partners. Please proceed.

Good morning.

Good morning.

Great quarter, guys. Just had a couple quick questions. As far as geographic distribution of your manufacturing facilities that you use, just trying to get a feel for how -- where those manufacturing facilities lie. Are they all in the US or are they overseas?

Well, primarily in the US; all of Mainland China is manufactured in China, obviously. The rest there, we have small components of the product mix that are manufactured locally in Taiwan and in Japan. But, the Galvanic Spa is manufactured in Singapore. And the rest of the personal care and nutritional base manufactured in the US currently.

Perfect. And then just trying to fill in a couple of gaps here. What was the return rate for the 2009 ageLOC launch? I know you said you are expecting 10% could be returns on the $100 million in sales that you had in October, but what was it in 2009?

You know, Anand, I don't have that number exactly. I'm guessing it was probably around 5%.

Okay. All right. And I guess, lastly, just looking at Thailand, do you have commentary as far as disruptions in Thailand due to flooding?

Yes. Unfortunately, we're getting feedback from field leaders that have had to cancel their trips to convention, for example, because of what's going on in and around Bangkok and elsewhere in the country. We haven't modeled the impact of the flooding, but we're now hearing from our Management Team and sales leaders that they're definitely seeing disruption.

Perfect. I guess the last question, just, trying to understand the US a little bit better. Looking at the executive distributor growth we continue to see that tick negative I know you are expecting 5% to 7% organic sales growth in S next quarter, should we expect to see executive distributer growth follow the same trend?

It should pick up a little bit, we would anticipate and, frankly, that will be the real key as to how the next year is going to develop. So, we'll keep a close eye on that as well. We're impressed with the active number. We have seen sponsoring a little bit stronger here recently. And sometimes that can be a precursor to some growth in the executive number as well. So, we'll keep a close eye on it. But, it does need to improve, obviously, if we're going to have growth throughout next year.

Perfect. Thank you. Appreciate it.

You bet.

The next question comes from the line of John Faucher, with J.P. Morgan, please proceed.

Thanks. Just wanted to ask a quick question, logistically about the volume coming out of the convention, which is if you have the convention volume and then it is not available for sale in these markets, so how does the subscription model work in the meantime? And looking at that, when do you think we'll get a good handle on the subscription level on these new products so we can figure out sort of a longer term run rate? Thanks.

Well, the subscription model will, obviously, apply to non convention products until the products launch on the full time basis, market-to-market. So, someone may be the recipient of the convention products. But as they join the business, and build their own distributorship or work to become executives their subscription order will be based on other products until the new products are available. The Galvanic Spa itself has two accompanying gels that will be available on a subscription basis, just as the facial Galvanic Spa has gels that are also available for subscription and we've done very, very well with those gels, by the way, and so we expect a similar response with the body spa. R2 obviously is ideal for the product subscription model because it comes in one-month supply. So these products both will have subscription components that will and sales of them will model the overall subscription rate is. Do you have anything to add to that Ritch?

No, I think the great thing about subscription is that it keeps the balance of our product sales really steady during a time when we have a big uptick like this. Yes, we won't really have good visibility in terms of how much subscription the new products are generating until probably a few months after we actually launch them and get a chance for people to sign up and get the subscription going.

Okay. So the way to think about it is, there will be a little bit of subscription volume from people who bought it at the convention for the next couple of months, but the big kick is after you launch it in the individual markets?

Yes. But the subscription volume after the LTO is for other products, and not the convention products.

Okay. So -- okay. So in other words --

There's really no access to the new convention products until we formally launch them inside the markets. They just get this preorder, they can pick it up at this time, and then there is no access to the product until it officially launches.

Okay. Great.

Thanks, John.

Yes.

Your next question comes from the line of Mark Astrachan, with Stifel Nicolaus.

Good morning, everybody.

Hey, Mark.

Can you talk a bit about distributor growth in the quarter, how much was in anticipation of new product launches and how do you think about the potential sustainability of the acceleration given, obviously, the correlation to overall sales growth? I mean any sort of initial read through on what productivity rates could look like?

Yes, that is a good point. 14% up in executives, and 6% in actives. We typically do see a little bit of a run-up as we approach conventions, whether globally or local. So, in Q3 I think it is fair to assume that those numbers picked up a bit. As distributors pushed to be recognized as executives or at different pin levels within the executive ranks. Do you want to add to that, Ritch?

No, I think that's exactly right. We'll watch that carefully as well as we go forward Mark, to watch how the numbers are tracking. But really nice uptick. Even in Japan, for example, where we only reported a 2% down executive number. But some of that definitely will be because of convention, because people are trying to qualify. So we'll watch carefully as we go into the next few months and that will give us a pretty good indication of how the year of 2012 is going to develop.

In terms of $100 million, any way to figure out how many of those were existing distributors versus incremental?

We'll provide that detail on November 16th. And actually have Dan Chard -- we really do a lot of modeling and dissecting of the numbers now and he'll be able to provide more color on who participated in the launch and what means to us.

Okay. Great. And then from an operating margin standpoint, it seems like we're going to be pretty close to 16% next year. I know you've talked about that from a longer-term standpoint, but in terms of thinking about what can lead to higher growth going forward, gross margins, fixed G&A costs, how should we think about that on a longer term basis? Particularly given what seems like more sustainability from a top line standpoint from the success of these new launches?

Yes, we continue to kind of speed past the targets we have put out there as our revenue growth comes in stronger than what we've expected. Again, we'll try and update a longer term model on November 16. But certainly, the 16% that we talked by 2015, which was part of our $4.00 per share model is certainly easier to get to now and we'll be closer to that each year as we go forward. So we'll update that as well on November 16th.

All right. One final question, long-term tax rate, to China, Singapore manufacturing, is there any update there in terms of what the number should be for next year and going forward as well?

We think we'll start to see some benefits next year, probably not a lot as the structure just barely kind of gets into place. But we could see a full 1% benefit next year and then continued improvements in the out years.

So like 35 to 36 in 2012 with some benefit beyond that?

That's how I would look at it, yes.

Great, thank you.

Yes.

Thanks, Mark. And thanks to everyone for joining us on the call this morning, we're going to jump back into our day jobs here, because we are in convention mode and there's just an awful lot of energy building as 13,000 people descend on the building here in the next day to participate in this week's convention. So as you can tell from our remarks here this morning, we remain very optimistic about the future for Nu Skin. We're very focused and fortunately ahead of schedule in moving towards our $4.00 EPS goal by 2015, and we look forward to providing a deeper dive into 2012 and then in the subsequent years and providing additional detail on our long-term strategy at our investor day coming up on November 16th. So we look forward to seeing you at convention this week for those of you who can come. In any event, we hope to see you on November 16 in New York City.

We thank you for your participation in today's conference. This does conclude the presentation. You may now disconnect and have a great day.