如新 (NUS) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the fourth quarter 2011 Nu Skin earnings conference call. My name is Angela and I will be your coordinator for today. (Operator Instructions). Now I'd like to turn the conference over to your host today, Mr. Scott Pond, Director of Investor Relations. Please proceed, sir.

Thanks, Angela, good morning everyone, 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, in 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 statement. We believe these non-GAAP financial numbers assist management and investors in evaluating and comparing period to period results in a more meaningful an consistent manner. With that, I'll turn the time over to Truman.

Thanks, Scott, good morning everyone, we appreciate you joining with us today as always. We're also very pleased to announce today another record quarter and a record year. Thanks to a well-executed product launch and strong business momentum in numerous markets, we were able to exceed both our top line and our earnings guidance for the fourth quarter, as well as for the full year. As our press release indicates, we posted quarterly revenue of $495 million, which is a 23% improvement over the prior year. Our earnings also jumped 31% to $0.76 per share, and based on strong fourth quarter results and given early indicators in January, we're increasing our 2012 guidance.

I'll have Ritch provide the details on guidance in just a moment. Our strong fourth quarter helped us post reported revenue of $1.74 billion for the full year, which is a solid 13% improvement over 2010. Local currency growth for the year was about 8%. Earnings for the full year were $2.38 or excluding the impact of the charges related to the Japan's custom case, earnings were $2.69, which is a 27% improvement for the year.

What's particularly gratifying about our growth is, that it allows us to have an even greater impact on the lives of Nu Skin distributors and consumers throughout the world. During 2011 we reached a record level of distributors, a record level of sales leaders, and a record level of customers who participate in our automatic subscription programs. Our active distributor count jumped 7% and our executive count increased 17%. We paid out a record $750 million in commissions to our sales leaders, and these commissions are certainly making a big difference in the lives of our distributors and their families.

Having just come off the road from participating in several kickoff events in the month of January, I've been reminded that it is truly a remarkable group of people who comprise the Nu Skin family. These are not the cream of crop in the direct selling world, but they are also the cream of the crop in humanity, and it's truly an honor for me to be able to work with them.

We have every anticipation looking forward that 2012 will be another record year. We have great ammunition to continue to grow the business, and we're making better use of our growth initiatives through increasingly effective product launches. You'll recall, that the limited time offer of our two new ageLOC products in the fourth quarter, generated about $100 million of revenue in just a few short days. AgeLOC R2 was the first of these new products.

You will recall, that R2 recharges and renews the body by promoting increased energy levels during the day without the use of stimulants, and then it promotes restoration and purification of the body's cells at night. The second product we introduced in the fall was the ageLOC Galvanic Body Spa and related gels. These products work to target the appearance of cellulite and promote firmer and tighter appearing skin, and in just a few treatments it's really remarkable the results that we're seeing from the use of this product. Our exclusive anti-aging science and ageLOC products continue to appeal to a growing consumer base.

I'm really delighted to announce that the ageLOC brand is now a billion dollar brand. Since we introduced ageLOC in 2008, we've now generated over $1 billion of sales of ageLOC's revolutionary anti-aging products. I truly believe that we remain at the forefront of aging research and continue to believe that we can leverage this position very effectively going forward. As many of the analysts who follow us have noted, we're in a very strong product cycle, which we agree with, and our continued refinement of our product launch process has generated increasingly impressive results.

As I've also indicated previously, I really believe the best of ageLOC is yet to come. I'm confident that the next two product launches to be introduced in 2013, will surpass anything that we've seen so far. Now, to make sure that we remain out front in the race to address aging, we announced the acquisition of our development partner, LifeGen Technologies, in the fourth quarter. This acquisition brings more than 30 years of anti-aging research to our team and also gives us exclusive, unrestricted access to LifeGen's proprietary database. The acquisition will be very positive for our product development team and is also a creative and a good use of our cash.

Let me take just a minute to review the details of our product launch schedule for 2012. In January, we launched R2 in Japan and Korea, and we also introduced in January the body Galvanic Spa in the US, Europe, and in parts of the South Asia Pacific region. Then going forward in the second quarter, we'll introduce R2 into the Greater China region, followed by the R2 launch in the South Asia Pacific region in Q2 and in Q3, depending on which country one happens to live in in that region.

These staggered launches help us to manage our inventory levels and also enable us to marshal our marketing efforts, and focus resources in a fashion that maximizes the impact of these product launches as we roll the products out globally. I'll say that these launches throughout the course of the year, will enable us to continue to post solid growth throughout 2012.

Now, let's take a closer look at some of our geographies specifically. No surprise that the markets that continue to enjoy the best traction are Greater China, South Korea, and the South Asia Pacific region. There has not been a time in my experience with the Company, when we have enjoyed such strong momentum in so many different markets.

In mainland China, we have performed very well and we remain excited about our opportunities there. We generated a 47% increase in executive leaders in the Greater China region during the fourth quarter, and China continues to have enormous upside. This optimism is reflected in our $50 million investment in the state-of-the-art corporate facility. just outside of Shanghai, but this $50 million investment, as we've indicated, is also offset by tax credits offered by the Shanghai Government. We broke ground on the China innovation center in December, and we see no signs of slowing in mainland China and fully expect that the market will become our single largest market in the not too distant future.

In South Asia Pacific, we're generating growth really throughout the region. We became the number one, direct selling company in Singapore in 2011, which again, our success in Chinese communities outside of mainland China just strengthens our enthusiasm for the mainland itself. We do get some questions on the impact of flooding in Thailand, so we will note that Thailand has definitely been impacted by the floods. The market was down slightly in the fourth quarter, as a result of the flooding there, and unfortunately we suspect that that disruption will continue in the short-term. This is a very vibrant market that's been growing at a robust pace so we anticipate that the market will rebound quickly. The past several years have been so strong that South Asia Pacific now has surpassed the Americas region in terms of overall sales, so we're very pleased with what's going on there and continue to believe we have a lot of upside in that region.

Japan finished the year about where we expected it to, following the natural disasters that occurred last March. One thing to note is, the Japanese distributors purchased about $3 million of products at our October convention in the US, which normally would have been orders placed in Japan and would have obviously helped the quarter look a lot better on a standalone basis. As we've indicated, the turnaround there, as a result of the natural disasters has been delayed, but to reiterate our guidance for 2012, we expect Japan to be down about 3% for the full year.

In Europe, we saw a single digit decline in Q4. Which is really primarily reflective of the fact that the market hasn't had a meaningful product introduction for about six quarters, which is primarily the result of the fact that it takes us a longer period of time there to register nutrition products throughout the EU. The decline is also largely a result of softness in a few markets. While other markets such as, France and Germany and Scandinavia, kind of our core European markets, continue to post solid results.

We also launched the ageLoc Body Galvanic Spa in January throughout the European market, and we're very pleased with the response to the product launch. So while it's impossible to predict the extent to which a potentially worsening economic environment in Europe may impact results, we're off to a very good start in 2012 and we're budgeting for growth in the European region this year.

Finally, the US business had a solid quarter, obviously benefiting significantly from the convention in October, and like Europe, US distributors responded very well to the launch of the Body Galvanic Spa in January. So we have reason to have good expectations for this market in 2012.

Overall, we're very pleased with the way our business is developing, and we're also pleased with how our geographic sales mix has shifted over the past several years. We're far less dependent today on any one region and less subject to any one currency, than we've ever been in our past.

Now, we also remain focused on continually improving profitability. During the quarter we made additional improvements in our operating margin. We've now been above 15% for the past several quarters, excluding the Japan customs charge in the first quarter of last year. As we're able to better leverage increased revenue and push incremental dollars to the bottom line. Our team is very focused on our $4 EPS goal, and this is helping us to continue to focus on continued improvement in our operating margin.

Finally, I'm sure that our shareholders appreciate the step-up in our commitment to dividends with today's 25% increase in our quarterly dividend, which, by the way, comes on the heels of a 20% increase in the dividend just six months ago. Our business model is cash flow friendly, and our Board of Directors has demonstrated our desire to return cash to shareholders with an 11-year track record now of continued increases to our dividend payouts. With an increasing level of cash flow, a dividend increase was warranted and obviously speaks to the confidence we have in the future in our commitment to generating shareholder value. Overall, we're very pleased with our quarterly and annual results. With that, I'll turn the time over to Ritch.

Good morning, everyone. Thank you, Truman. We're proud to report another strong year and quarter of improvement in all of our financial metrics. Including our revenue, our profit, and our operating margin. I'm also very encouraged with the way that 2012 has kicked off and have great enthusiasm for a strong response to the rollouts of our new products. This is really what has prompted us to increase our annual guidance, shortly on the heels of giving the guidance just two short months ago. We continue to perform ahead also of our longer term plan that Truman referred to, this $4 per share plan we talked about hitting by 2015. Our latest model has us achieving this goal in the first quarter of 2015 and our management team remains very aligned around this, creating long-term sustainable earnings growth.

We also begin this year with a very strong balance sheet. Our operating margin for the fourth quarter improved to 15.3%, representing a 60 basis point improvement over the prior year period. For 2011, operating margin pushed up to 15.3%, when excluding the Japan's custom charge which exceeded our guidance that we provided during the year, and also finishes 120 basis points higher than the prior year. The improvements came primarily from efficiencies within both the cost of sales line, as well as our general and administrative expense line, on the income statement. These improvements were somewhat offset by an increase in our distributor incentives.

We've made steady improvements in the Company's operating margin, since our transformation and restructuring efforts dating back to 2006, when operating margin was less than 8%. We expect to continue to expand our operating margin, estimating another 30 to 50 basis points in 2012. Our gross margin for the quarter was 83.8%. We've executed on several initiatives in our supply chain, which continue to streamline our logistic's processes. Our inventory turns have reached new heights. We expect to hold our gross margin in the mid 83% level going forward.

Selling expenses for the quarter were 43.3% compared to 42.1% for the fourth quarter of 2010. We have key distributor incentives in place, aimed at driving higher levels of sales growth in many of our emerging markets. We anticipate our selling expenses to remain slightly above historical levels in the 43% to 43.5% range during 2012. General and administrative expenses for the quarter as a percent of revenue were 25.2%, that's a solid 30 basis point improvement over 2010. Particularly in consideration that we paid out an approximately $7 million during the quarter related to our global convention.

On an annual basis, our G&A came in at 25.0%, that's 110 basis point improvement over 2010, and we would anticipate another 20 to 40 basis point improvement in G&A in 2012 compared to 2011. Our tax rate for the quarter was 34.9% compared to 34.3% in the prior year, and we expect our tax rate to be in approximately the 35.5% to 36% range during 2012.

Cash from operations grew to $224 million in 2011, and our cash and short-term investments balance was $291 million at the end of the year. Our debt is now approximately $137 million. Approximately half of that debt denominated in Yen. In addition, we are proud to report improvement in essentially every key financial ratio during 2011, including inventory turns, return on assets, return on invested capital and cash flow return. During the quarter we paid $10 million in dividends. We repurchased $16.1 million of our outstanding shares, both of which we consider good uses of our cash and improving shareholder value.

Given our expectation for continued strong cash flow, we increased our dividend 25% this morning. Our stock repurchase authorization stood at $86 million at the end of 2011. As stated in our release this morning, we raised our 2012 annual guidance from the guidance, which we recently provided at the Investor Day in November. We took our revenue up $10 million, to $1.81 billion to $1.84 billion,and our earnings per share another $0.02, to $2.84 to $2.94 per share.

We continue to model a negative 1% impact from currency fluctuations in our guidance, which was consistent with what we had provided in November. For the first quarter of 2012, we estimate our year-over-year revenue to increase approximately 12% to 13%, and that's at $437 to $447 million, putting earnings per share in the $0.68 to $0.71 range. This quarterly guidance assumes a neutral impact from foreign currency and a carryover of pre-sales from Q4, from our convention product resales of about $16 million to $17 million. With that, we'll go ahead and open up the call now for questions.

Thank you, sir. (Operator Instructions). Your first question will come from the line of Olivia Tong with Bank of America Merrill Lynch. Please proceed.

Thank you very much. Good morning. Clearly you had a strong Q4 and the outlook for Q1 is better than I think what most had expected, but your fiscal year outlook implies just about 3% to 4% [south] in EPS growth for the rest of the year, the Q2 through Q4 portion of the year. I recognize that you have a very difficult comp coming in Q4, and you want to maintain a conservative stance. Can you give what can you give some granularity on what could drive such a significant deceleration in the back half of the year? Thanks so much.

Sure. We continue to always follow the same methodology with guidance that we've done the last several years. We're very consistent in how we apply our forecasting going forward. The areas of conservatism remain in our product launch, as well as, the growth in key markets like China, which can be a little more erratic going forward. So we try to be real conservative in those growth ranges. We are a little bit unsure as to the impact of the big product launch we had in Q4 of last year. Whether we pulled a little bit of our sales from this year back into last year, approximately up to $50 million, so we'll watch that as we go forward.

At this point in time, we continue to feel more and more bullish, particularly in these first few quarters as the product launches get more and more enthusiasm surrounding them. By the time we release our earnings for the first quarter, we will have pre-orders already from many of our distributor leaders for the Greater China and Southeast Asia regions. We'll be able to give more clarity the next quarter. Again, our methodology is to remain conservative as we provide this guidance and yet overall, we expect the year to be up about 7% in local currency, that's our current guidance that we've provided. Assuming that we pulled about $50 million from this year back into last year, it's really on an apples to apples kind of a 10% local currency growth number for the year. We expect that's conservative, as we always do. We give our guidance and we sleep well, and expect our shareholders to feel that same way.

Thanks, that's very helpful. Perhaps if we could talk a little bit about the dividend. Clearly, a sizeable dip in increase after raising it just two quarters ago,do you think now that you're at the right payout ratio or would you expect that to grow to a larger payout over time?

Our board has been very supportive of this and frankly we've got behind a little bit where we wanted to be, that's why we've had two pretty consistent increases, but even on a go forward basis would expect our cash flow each year to increase between 15% plus. I would anticipate we're closer where we need to be today, but we would expect to have very solid increases on a go forward basis, assuming that the business continues to perform well.

Great, thanks, Ritch.

Your next question will come from the line of Bill Schmitz with Deutsche Bank. Please proceed.

Good morning.

Good morning, Bill.

Can you talk about the $16 million, $13 million of US sales that were outside the region? How should we allocate that if we want to proforma some of the other regions?

Yes, the biggest purchases, Bill, came from Japan which was about $3.5 million. We had mainland China, which purchased about $3 million and then Europe was about $1.5 million. Then it kind of just spread from there to other markets that attended. The bigger ones were Japan, China and Europe.

Okay, that's really helpful. Do you have any sense for what the distributor inventory levels are after the convention, sort of like the pace of their sell-through? I'm sure they loaded up at the convention and they're still kind of, depleting that now?

Yes, a lot of that product from the convention sales delivered in November, December, and a little bit here in January. It's probably a little bit early to have a full read on that. However, I would mention that our returns rate for the fourth quarter remained very, very low at about 3.2%, which is really historically. Generally we're in the 3% to 5% range, so it just remains very, very low. We expect there to be good demand going forward and the product seems to be moving through well.

Is there a rule of thumb for how long a distributor holds inventory before they pass it on to their end customer?

Not really. I mean, it just really varies from distributor to distributor, Bill, but our return policy is quite liberal for the first year. They could return the product any time up to a year, but remember, too, in Greater China and Southeast Asia the products won't really won't roll out on a full-time basis until late Q2 and into Q3. They really have the first six months of the year to work through their existing inventory.

Okay, did I miss what percentage of sales were on subscription this quarter?

No, we actually didn't provide it, Bill. It dropped down when we had this $100 million of new product sales because none of that was on subscription order, but in the other two months the subscription orders remained around 56%.

Was that in aggregate for the quarter, if it was 56% for the two quarters?

I think it dropped down to like 51% or something like that because of this big sale that we had, but consistently it's remaining right in the 56% range.

So that's probably a good number for next year then?

Yes.

How does LifeGen impact the P&L going forward?

Basically, we'll be amortizing about $1 million a year associated with the purchase, but we save about 1% royalty charge that we have on any ageLOC nutrition supplement that LifeGen has been involved in, in purchasing. As long as we're selling around $100 million a year, the net impact is essentially flat and likely we'll gain some accretion from that transaction because our sales should be up above $100 million a year.

That is, I imagine the royalties, cost of goods sold and amortizations in G&A, is that right?

That is right. There is a little geography shift in the income statement there.

So could there become some conservatism in the gross margin target of being in that roughly 83% range for the year?

Yes, could be. I kind of built it into the model at around 83.5%, so there may be a little conservatism. There's two reasons I have kind of been conservative. One is the exchange rates, again I do have a head-wind for exchange rates coming into the P&L for the year. Which if we look at where exchange rates are today, that's probably fairly conservative. The dollar has weakened up over the last week or two.

Okay, gotcha. Is there anything magic about the 25% G&A ratio? I know it's come down considerably. I know you said 20 or 30 basis points, but isthere a long-term ratio that's appropriate or will it just really be contingent on what the sales growth does?

I think it's contingent primarily on the sales growth.

Okay, sounds great. Thanks guys, I appreciate it.

Thank you, Bill.

Thank you and your next question will come from the line of Rommel Dionisio with Wedbush Securities. Please proceed.

Good morning, thanks. I realize you only have a few weeks of data from the product roll-ups globally, but is there anything you can glean from the impact on sales of transformation from the launch of the Body Galvanic? In other words, is there -- I guess cannibalization is not the right word, because one's for the body and one's for the face. Could you just maybe touch on how the transformation sales trends are doing in the markets where you launched Body Galvanic?

It's true, Rommel, that when we shine the light on any particular product, we're likely going to see a little bit of a drop in products that are not necessarily in the spotlight. But, Transformation really works very hand in hand with the use of the Galvanic Spa. So we would expect Transformation to remain steady and it has remained steady. Despite the fact that we've really shined the light on the Body Galvanic Spa, the Facial Spa, and obviously R2 and Vitality here in the US over the course of the last year.

Good. Just one follow-up. I think on the last conference, you cited that there was some in the preorder phase, you didn't quite have enough inventory of Body Galvanic to meet that very strong demand. Could you just touch on the level of inventory that you have of Body Galvanic in place now?

The launch of the Body Galvanic now moves into the US and Europe, those are the two primary regions that are selling that product. We've been able to scale up to meet demand and even higher demand in those markets. The Greater China region is considering selling the Body Galvanic in their pre-sale, their second kind of follow on pre-sale event in the second quarter. So we're like likewise scaling up to meet product orders at that time, but we should be -- now we've gotten ahead of that curve and we should be able to meet the demand without any problem at this point.

Great. Thanks very much.

Your next question will come from the line of John Faucher with JPMorgan. Please proceed.

Thanks. Good morning, guys. Ritch, I don't want to denigrate the dividend increases, which is a pretty massive one. As we look at this and look at the incremental capital that it's going to layout, you've still got a lot more cash than debt, that doesn't seem to change. You said you're going to grow your free cash 15% every year. As we look out a little bit longer here, even if you adjust the payout ratio a little bit, you're still going to be generating more cash and your capital structure is still going to be leaning pretty heavily cash. Can you give thoughts maybe longer term about what you could do to rectify that situation, is it special dividends? Is it acquisitions? Is it share repurchase? How should we think about those options longer term?

Truman can answer the questions as to the longer term, but let me just mention our philosophy internally. We basically look at our free cash flow and back out from that CapEx and debt payments, then we try and split 1/3 towards dividend and 2/3 towards other uses. With a few years of higher CapEx, the next year or two based on the innovation center we're putting in as well as the new China facility, our dividend has gone up, but certainly not to where it can go and will go, I think as we go forward. I would anticipate a year to two out as our CapEx goes down, we see our dividend increase faster than what our cash flow is to get back inline with where we ought to be. Then Truman can speak further to the future.

If we allocate 1/3 to dividends and 1/3 share repurchases, that leaves us with 1/3 to invest in business growth initiatives. We still have, John, a number of markets around the world that we really have yet to penetrate and those markets will require some investment in infrastructure. India, for example, a large and rapidly growing direct selling environment that is still on our horizon. We have a lot of ways to invest in business growth. Frankly, would sure much rather have this problem of having cash on the books than not having a enough, so it's a good problem to have.

I just make one more comment if I can, John. Related to the balance of our cash right now, which we've allowed to grow a lot higher generally than it needs to be. The reason primarily for that, is we plan to pay for these two buildings we're putting in with cash and not borrow against them. At this point in time our cash balance has gone up for that specific reason, but normally it doesn't need to run this high.

Got it. Then one sort of housekeeping piece and I apologize if I've missed this. There was a little bit of shift in the balance sheet, and I don't know if you talked about this between sort of prepaid expenses, as well as accrued expenses. That showed up in my balance sheet. Can you just sort of give me a little bit of headline in terms of what happened there?

Primarily a shift in deferred taxes, some payments that we made in foreign markets that will then be credited back here in the US as time goes forward.

So you sort of overpaid taxes in the quarter?

That's right.

Relative on a cash basis or just on an accounting basis?

No, on a cash basis. It didn't impact our rate, but we had to pay out taxes in Japan that will then be credited back in the US, as we go forward.

Got it, great. Thank you.

You bet.

(Operator Instructions). Your next question will come from the line of Scott Van Winkle with Canaccord Genuity . Please

Hi, thanks. First question, is the revenue that's coming in Q1 that was kind of pulled from the Q4 preorder activity, is that mostly happening in Southeast Asia?

It's all in Southeast Asia with about $3 million in Greater China.

Okay. Ritch, you had a 17% growth rate in the executive level distributor number, which is a real good number relative to trend you've had. Even if I add back the $50 million you pulled into Q4 from 2012 and you're up 10%, it's rare to see an executive level number growing at a faster rate than local currency growth for any extended period of time. How do I reconcile that?

That's also a great observation, I think, Scott, and one that we're watching very carefully. I work very closely with Dan Chard and the sales group on this. There's still a bit of a discrepancy between our executive and active number, and we would anticipate that somewhat, based on the new way that we're launching products where people are building their organizations in anticipation of these product launches to qualify for the product launch and participate in it. So we see that executive number come up. The active number should follow, and those two should close. The gap between the two should close. That's part of the reason I've been a little bit conservative anticipating that the active number needs to continue to follow-up in order to support the local currency sales growth that we see coming along.

Okay, and then last question. On the gross margins side you gave a mid 83% number, a little below the Q4 figure. Is there any reason why it won't be at that level? I would think that you would have a very high mix of new products, which I assume have been set with very robust gross margins.

Yes, I think that is a possibility. As you look at our year for 2011, we were tracking right in the 83.2% to 83.5% range through Q2 and Q3. I think the 83.8% push in the fourth quarter came somewhat because of the substantial product launch of very high margin products with less shipping expense, things like. That's why I've been a little bit conservative. It doesn't mean that it's going to come down, but I've built in a little bit of lower gross margin throughout 2012. I think there may be a touch of room, hopefully, there as well.

Great. Thank you very much.

Your next question will come from the line of Anand Vankawala of Avondale Partners. Please proceed.

Thanks. Wondering if you can give us a little bit of granularity on trends in Europe, as well as detail on some of your efforts in eastern Europe?

Yes, Europe is obviously a very big region that includes 17, 18 countries. As we report the European region, we include in that mix our business in Israel and our business in South Africa, which are obviously are detached geographically. Interestingly enough, those are the markets that showed the most weakness in Q4. Israel was soft, South Africa was a bit soft, Hungary was a bit soft, which has been a very good market for us in eastern Europe. Elsewhere in Europe, central Europe, France in particular has become our largest and fastest growing market in the region. Which is really encouraging because it's a large market.

Our business in Scandinavia remains strong, and elsewhere in central Europe, Japan, or Germany remains strong. The situation with Europe, again as we explained, is largely due to the fact that they haven't had a real meaningful product initiative for six quarters. We remedied that in the first quarter with the launch of Body Galvanic Spa, and while we continue to try to monitor on an ongoing basis, is the impact of the economic turmoil there. It's not reasonable for us to think that we can escape that impact entirely, but we're very encouraged with what we saw on the product launch in the month of January.

Perfect. Thank you.

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

Good morning. Ritch, I lost count. I think you've said we're a little conservative, maybe six or seven times on six or seven line items, but give you an opportunity to do it one more time. The tax rate guidance you gave is above the last two years, and I know there was a large discreet item in the 3Q. Why shouldn't we be thinking about the tax rate trending a little lower here with greater investment outside of the US?

That's a great point as well, Tim. The last two years we had two particular items that brought the tax rate down. One was the IRS settlement in 2011 which was about $7 million. Then we had FIN48 reserves that were released, both in 2010 and 2011, and I don't remember the exact amounts, but the impact of the rate. We basically don't have any additional FIN48 reserves that we anticipate rolling off this year, so our tax rate will be adjusted only by the permanent reinvestment of dollars outside of the US.

We've put in a structure that we've now got an agreement, actually with the Singapore Government, as we start to build some regional functions in that area to support our Southeast Asia and other Asian operations. Through doing that, we should be able to bring our tax rate down on a go forward basis. I'm not sure how much will kick in during 2012 and that's the reason why I've got the rate around 35.5% or so. If we're successful getting more structure and so forth going on in that objective that we have, then the rate should be able to come a little bit lower than that. I would anticipate at least in 2013, we should see a percent, at least 1% to 2% coming down in our tax rate from the use of that structure.

Sounds good, but you don't want to say you're conservative for '12 yet?

I was careful in my wording on that.

Then on the Body Spa product, as I recall, I think your capacity constrained there. Is there thought as increasing the production rate of that, given the strong initial reaction?

Yes, that's exactly what we've been doing over the course of the last four months. In connection with these January launches, I was out in the South Asia Pacific region, for example, in connection with the launches in January. They were complaining about not having access to enough inventory, but as time goes by our -- we will not have an inventory constraint with that product.

It's more of a lead time issue than it was an actual infrastructure issue. Just getting the parts in and so forth. It takes a little bit of a lead time with that product.

Okay. Just to circle back on maybe Olivia's question. Given the strong first half performance, you really almost have to model fourth quarter revenues as flat to get close to your revenue guidance. Is that the level of conservatism that you think is appropriate at this point?

Yes. Assuming we brought in about $60 million net from the product launch, and assuming we don't have substantial product launches in the fourth quarter. Which, by the way, may not necessarily be the case because we do have, for example, the Body Galvanic Spa which may go into Japan and Korea in the fourth quarter. That's still being evaluated right now, whether it's in the fourth quarter of this year or first quarter of next year. I have not built that into my fourth quarter number, and likely the headwind from currency is primarily related to the fourth quarter of this year, the back half of this year as well. Those two items are the ones that we'll see as we go forward and continue to have more visibility as we go forward as well.

I'd just mention one other thing. I built into my modeling about $30 million to $35 million of launched volume associated with Greater China and Southeast Asia in Q2 and Q3. Our management teams are certainly building a lot more inventory and a lot more expectations for those launches. We really haven't done this pre-launch event like we did it in the fourth quarter so for that reason, I'm not sure. I've been careful in how I've modeled that out because it's a new thing for us. It's highly likely that those product launches can be significantly more than what we've put into our modeling, but prefer to be conservative.

Thanks so much.

Your next question will come from the line Cory Armand with Rice Voelker. Please proceed.

Good morning. I had a couple of questions about the convention related sales. Can you discuss the impact on the quarter of R2 and Body Spa sales on a per country basis? Just generally. For example, Hong Kong showed a big increase sequentially, can you talk about that?

Yes, that's exactly what it is. We've tried to state our numbers even more a little bit regionally based on a go-forward basis. A lot of these products will be launched regionally, so it really does impact the country by country numbers. Primarily, as Truman has mentioned in the past, the big launch volume followed the markets that are growing the fastest. The bulk of the product launch came from Southeast Asia, from Greater China, and from South Korea, those were the three strongest markets, took the lion's share of the essentially $80 million of the R2 and Body Galvanic sales that were booked in the fourth quarter.

So the Southeast Asia sales were booked into Hong Kong, is that the way it works?

No, they were actually booked into Singapore. The Greater China sales were booked into Hong Kong. By the way, the Southeast Asia sales were high, but only $15 million of those approximately, is pushing into the first quarter, so it wasn't as reflected in the fourth quarter as what we'll see here in the first quarter.

Can you provide any detail on where the revenue was booked in Q4 for the launch of sales of R2 and Body Spa?

It's primary Hong Kong, Singapore and the US.

I'm sorry, I met in segments, Pharmanex versus Nu Skin.

Okay, the R2 product goes into Pharmanex and the Body Galvanic goes into the Nu Skin sales.

Okay, great. Thank you.

You bet.

Your next question will come from the line of Mark Astrachan with Stifel Nicolaus. Please proceed.

Good morning guys.

Hi, mark.

Can you give us a bit of the break down on the ageLOC sales by product, in the fourth quarter?

Yes, let me just pull that up real quick. The R2 product jumps right to the top of the chart and did somewhere around $70 million of sales. The Body Galvanic held in the $55 million range. By the way, LifePak holding very, very solid as well, showing 5% growth year-over-year. We're very encouraged by that. The Transformation set holding very consistently around $40 million, and then the new Body Galvanic Spa selling about $15 million.

Were there Vitality sales in the quarter?

Yes, Vitality, sorry, was around $16 million.

Great. I think you sort of answered this question with a prior question . From a China standpoint, the growth has bounced around there a little bit to this quarter, a bit weaker. Is some of that because you're recording some of the revenue intended for mainland China and Hong Kong, for

Yes, that's exactly right. I think the best thing do there is to look at the executive growth. In mainland China, held I think in the 75% range. So very, very strong numbers. The actual revenue booked in China, I think, showed 49% growth which was a deceleration from Q3. That's all because sales were booked in Hong Kong and not in mainland China.

Great. I know it's early, but any sort of sense about cannibalization or repeat orders of R2 or Galvanic Body in terms of going forward?

It's really too early. We just barely, this was the first month that we actually put it into a couple of our markets, so it's just really a little bit too early to be able to have too much insight on that yet.

I guess maybe putting it a different way. We can obviously do the math on what Transformation added a couple of years ago, on a go-forward basis. Is there any sort of rule of thumb you guys use to say, okay, it's $70 million in sales in the pre-launch quarter, that translates into 70% in the first quarter where it's mostly widely available, and some other percentage next quarter, and so forth and so on?

We're slowly getting better, I think, at our analytics as we go forward. We have got a team that's built out that really manages that. The numbers from the pre-launch were so different, so much larger than what they've been each ongoing product launch has been so much bigger. It's still a little bit difficult to project out the follow-on sales after that.

Then just lastly. From a US standpoint, you sort of back out what happened in the convention. Can you talk about sales in the quarter in terms of thoughts on a go-forward basis to try to help things along in the US a bit?

The US had a decent quarter, even backing out convention impact, and as we mentioned, Mark, earlier in the call, we're really pleased with the way that the year started here. Lots of enthusiasm for the Body Galvanic Spa. The market will enjoy another product launch coming the fall, which should help keep things going. From just a subjective prospective, the energy is good. I personally am really delighted to have our General Manager here, Scott Schwerdt, realigned and focused entirely on the Americas. Whereas previously he had been covering other regions as well, so all of those things add some focus and energy into the market.

Great, thank you.

Your next question will come from the line of John Faucher with JPMorgan. Please proceed.

Hi, thanks. One more question here, which is when you spoke to Bill's question about Japan and the impact. If you normalize Japan, it looks as though the numbers in the quarter were basically down 5% on a local currency basis if you adjust for the convention volume. A; is that right? Then B, as we cycle into the easier comparisons, it seems like there should be maybe a little bit better than 3% out there for next year. Can you talk about was there something in the quarter that sort of increased revenues in the fourth quarter, where the underlying business maybe came in a little bit better than you anticipated? Can you just walk us through about how we should think about Japan from that standpoint?

You bet, the executive base was down 6.5% and the active base was down 8% in the fourth quarter. We did get a little bit of an increase in sales from the launch of the R2 product, the pre-sale of the R2 product in the fourth quarter, which helped a little bit. It was nice to see the business improve off, kind of a 10% to 11% down, in the first two quarters following the tsunami, to go to an 8% level.

We did expect it to pick up a little bit with the launch of the product, even knowing that some of that volume was going to be purchased in the US. Now as we go forward I would expect Q1 to be, you know, we're still kind of comparing up against the pre-tsunami numbers here in the first quarter. So anticipate us being down kind of in the 5% range, then I would expect it to improve as we go throughout the year. By the fourth quarter, just being slightly down, hopefully is the way we would model the year.

Okay, great. Thank you.

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

Hi, just a quick follow-up to Mark's question regarding the two new products and subscription rates. I know it's too early, but can you at least give us a little bit of idea of the typical subscription rate between the Pharmanex and Nu Skin business?

It's certainly better on the Pharmanex side, although we continue to build new products in the Nu Skin division that are, I would say, subscription-friendly, you know, 30-day supply-friendly. I believe we're probably 20 basis points higher, actually 20% higher in the Pharmanex side, as compared to the Nu Skin side as it relates to subscription orders.

Perfect. Thank you.

With that, operator, let me just conclude the call with one thought and that is, that despite Mr. Conservative's financialmodeling here for 2012, we are indeed in a very strong product cycle. We're generating steady growth in our distributor ranks. We continue to post very strong results in emerging markets. We've demonstrated our commitment to improving profitability levels and using our cash in share-holder-friendly fashion. This business is a momentum business, and momentum is working very much in our favor right now. We're very pleased with our results for 2011 and very optimistic for 2012 and for even the more distant future and look forward to talking with you on a one on one basis if you have any further questions. Thanks very much.

Thank you, sir. Ladies and gentlemen, we thank you for your participation in today's conference. This does conclude the presentation and you may now disconnect. Have a wonderful day.