如新 (NUS) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter two 2012 Nu Skin Enterprises conference call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would like to now hand the call over to Mr. Scott Pond, Director of Investor Relations.

Good afternoon, everybody. We appreciate you listening in today. With us in the room are Truman Hunt, President and Chief Executive Officer, Ritch Wood, Chief Financial Officer, and Joe Chang, Chief Scientific Officer.

Just a reminder, during the call today that comments may be made that include forward-looking statements. These statements involve risks and uncertainties and actual results may differ 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 the call, certain financial numbers may be discussed that differ from comparable numbers appearing 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 and consistent manner.

With that, I'll turn the time over to Truman.

Thanks, Scott. Good morning, everyone. We appreciate you joining us today, and we're delighted to share with you the results of another record quarter.

We generated revenue of $593 million in the quarter, which represents growth of 40%, exceeding guidance by more than $50 million. I think you will agree with us that these results are reflective of very strong business momentum. It wasn't too long ago when we first generated revenue of $1 billion for a full year, and this year we have accomplished that just the first six months.

Our earnings also came in well ahead of guidance with a record high quarterly EPS of $0.94, a very healthy 45% increase over last year. These results were generated by a record level of active sales representatives and executive distributors. The number of executive distributors, who are those who are actively working to build a successful Nu Skin business and sales representatives in China, are a key indicator for our business direction, and the number of these sales leaders climbed to a record level of 54,000 at the end of the second quarter. We are very pleased with the progress of our business and we remain confident that we will continue to generate healthy growth levels.

I want to highlight five factors today that work to support our level of confidence. First, as today's release demonstrates, we continue to improve the execution of what we call our opportunity renewal process. Effective product launches are a key component of our ability to continually renew the vibrancy of the business opportunity we offer. In the second quarter we generated nearly $165 million of revenue from the launch of our two new ageLOC products in the south Asia, Pacific and greater China regions. We reported $140 million of these product sales during the quarter, with the remaining $25 million to be shipped in the third quarter.

You will recall that last fall we generated about $100 million in sales of these same products when we introduced them at our global distributor convention. And as we roll out new products around the world, we're refining our approach to deliver increasingly impressive results. This approach is based on the notion of utilizing global and local limited time offers prior to a product going on-line on a full-time basis, and it's just working extremely well. We used this same approach in the second half of the year with LTL launches in Europe of R-squared and the Body Spa in Japan and South Korea.

So the momentum we're generating with the new regional new product launches is a result of record level distributors and preferred customers, nearly 900,000 at the end of the quarter. With each product launch, we're improving our overall trial and penetration rates, and our sales leaders are also becoming more familiar with the process. And frankly they become believers when they see the success of the launch process reflected in their commission checks.

The second headline I want to cite for the quarter is that while we've been very successful with our ageLOC product platform, the best of ageLOC is still yet to come. AgeLOC products in the market today consist of the facial and body spas, the ageLOC skin care transformation system, vitality and R-squared, which are both energy products. But the larger categories are yet to come.

Weight management in 2013, next year is going to be big. And then we will ageLOC a core nutrition products, which will also be subsequent and in a subsequent product launch. Both of these have more revenue impact than anything we've done so far. As we further refine our launch process to reach deeper into a growing consumer and sales leader base, we have great ammunition to sustain growth for the foreseeable future.

Of course, we're going to run into occasional quarters where comps are difficult because the timing of our launches may not always align on exact annual anniversaries, but overall we are very confident we have a very sound pipeline for growth for the next several years. At our investor day in November, we're going to take a closer look at what's coming down the pike for ageLOC. And we want to introduce you to at least one additional menu of products that we have yet to discuss with our shareholder base and that we're also very excited about.

So third, I would point out how quickly emerging markets are becoming a larger component of our revenue mix. The greater China region obviously knocked the cover off the ball with 150% growth in the second quarter. And we just returned this last weekend from a convention in Singapore for the south Asia Pacific region, and we're just delighted with our developments there. This region has been our most steady grower for the past five years, and now represents about 15% of our revenue.

Virtually every country in the south Asia Pacific region is enjoying very robust growth, and next month we'll add to that by opening the Vietnam market for our distributors, which is a small market, but a market that we think has good potential. Russia and other eastern European markets also provide great upside for us, and Latin America is small, but it's growing rapidly. So we have great momentum in emerging markets, and we have a lot of room to run.

Fourth highlight for the quarter is that our established markets are also performing well. We see trend improvement in Japan, and although the environment is still difficult there, we're forecasting a return to growth in Japan by the fourth quarter.

South Korea, which posted a slight decline in Q2, has been a stellar market for us for over a decade. The first half of 2012 has been tough for two reasons. First of all, we had a tough comp against significant product launches last year, and secondly, you may recall that local regulations there have always required us and other direct selling companies to keep our commission payouts below 35% of sales. So we had to reduce our commission payout in Q4 of last year in order to manage this issue, and, as you can imagine, that's always tough on the sales force. We're working through this issue, and we see excitement building for the lawn of body Galvanic spa, scheduled for the fourth quarter. So based on what we're seeing today, we also expect Korea to show growth in the second half of the year.

We're also pleased with 16% growth in the US, and 20% local currency growth in Europe. The Euro obviously isn't doing us any favors, but even in the face of economic turbulence in Europe, we're seeing really healthy levels of business activity, and expect local currency growth to continue at a robust rate in the second half of the year in Europe.

And finally the fifth headline that I would cite for the quarter is -- would be reflected in our commitment to you is our financial strength to benefit our shareholders. We repurchased about 4% of our shares in the second quarter. And with our operating margin at an all time high of 16.5%, we enjoy a strong enough business model to enable us to continual to use our financial strength to repurchase shares and still be able to continue to invest in the future and continue to pay a healthy dividend, which we've now increased annually, since we started paying dividends over 11 years ago.

All in all, the news is extremely positive for Nu Skin Enterprises. We're very pleased with the second quarter. We remain on track to deliver another record year. We're confident that 2013 will be yet another record year, and that we have great ammunition to sustain growth for as far as any of us can see.

So with that, I'll turn the time over to Ritch.

Thank you, Truman, and thank you to each of you for joining us on today's call.

This morning we raised our annual revenue guidance by $115 million from our last guidance increase, which was done on May 8. This now puts our estimated revenue for 2012 between $2 billion and $2.03 billion. And we also raised our EPS guidance to a range now of $3.16 to $3.24, or an $0.18 increase over our previous guidance.

Growth in the business is being generated in nearly every market we operate. We are raising guidance on the back half of the year for several reasons, including strong momentum continuing to build around our product innovations and launches. The South Korea launch of the Body Spa now planned in Q4 of this year, and very strong executive growth, which correlates, as you know, closely with the growth of the business. We experienced a high level of incremental sales from the product launches in the second quarter, with product returns remaining very low. And we're picking up earnings per share of about 5% -- sorry, about $0.05 in the second half of the year, from the share repurchases executed in the second quarter.

The Company's operating margin for the second quarter improved to 16.5%. That's a 90 basis point improvement over the prior year period, and the highest level of operating margin that we've ever reported. Although our selling expenses were high due to the product launch, and our general and administrative expenses included nearly $10 million associated with second quarter conventions, the growth in revenue more than offset these items in driving increased operating margin. Our second quarter results put us well on track to exceed our stated profitability objectives for the year, and we now expect our annual 2012 operating margin to be approximately 16%.

During the quarter, we crossed an important $3 per share benchmark when adding the past four quarters of earning. This is another important step in our performance based management incentive where we have targeted to achieve $4 per share prior to the end of 2015. We are well ahead of this target, and will provide further update on our projected timeline to reach $4 per share in our annual shareholder and analyst meeting to be held in November. I would simply highlight the fact that we have a very focused and engaged management team all around the Nu Skin world.

Our gross margin for the quarter was 83.9%. That's a 70 basis point improvement over the prior year, and consistent sequentially, and selling expenses for the quarter were 45.1%, compared to 43.2% in the prior year. The launch of the ageLOC R-squared and the ageLOC Body Spa during the quarter drove the selling expenses higher by approximately $8 million, or 1.3% of sales in specific incentives associated with this product launch. The payout of 45.1% was higher than we initially guided, due to the size of the launch in excess of our earlier forecast. Also, the overall compensation plan paid out at a higher level, as many sales leaders benefited from the higher volume of sales with these product launches.

Fortunately, our model works in a way that the increase in our selling expense generated from accelerated revenue growth, is offset by the leverage we pick up on the overhead base, protecting our overall profit margin. We would estimate, however, that selling expenses will retract in Q3 to around a 44% or slightly below that level.

General and administrative expenses, which included the previously mentioned $10 million in convention related expenses, improved 210 basis points over the prior year to 22.3% of sales. Our tax rate for the quarter was 36.1%, compared against 36.7% in the prior year, and would expect the tax rate to track in the 36% to 36.5% range for the balance of this year.

We borrowed $100 million of debt denominated in Yen during the quarter. The primary purpose of that was to strengthen our hedge position in Japan, and we were able to borrow this at a 1.65% interest rate on a note that will be paid back over 10 years.

During the quarter, we paid $12.3 million of dividends, and repurchased $108 million of our outstanding shares. Our Board of Directors, you'll recall, authorized an increase in share repurchase of $250 million during the quarter. And at the end of June, we had approximately $220 million remaining in our Board authorized repurchase program. Based simply on share repurchases during Q2, our outstanding share count for Q3 will drop by approximately 1.5 million shares from the level that we reported in the second quarter.

For the third quarter of 2012, we project year-over-year revenue to increase approximately 16% to 18% in local currency terms, with an estimated negative impact from currency fluctuations of approximately 6%. This modeling puts our revenue guidance at $465 million to $480 million of revenue, and that's earnings per share in the $0.71 to $0.75 range. Also would note that for the fourth quarter, we're now forecasting revenue to be up about 1% to 3% in local currency, or flat on a US dollar basis, when considering an estimated 3% currency headwind in the quarter. We feel very positive about this, as we are comparing against a $100 million product launch and a growth rate of 23% reported if the fourth quarter of 2011.

So with that overview, I will now open the call up for questions.

(Operator Instructions) Bill Schmitz, Deutsche Bank.

Is there any way you can give us a sneak peek into what the weight management product is going to be like next year?

You mean in terms of the product composition itself?

Yes, the composition, the launch plan. It was sort of esoteric in your materials, just said 2013, so the timing of the launch and what the product might look like?

You're going to get a sneak peek of the product offering itself at our November Investor Day Conference, but remember that the ageLOC platform is all about the formulation of products to maximize the right kind of genetic expression. That is the unique angle of this weight management product, is essentially we're going to reset gene clusters that have to do with weight loss. The product suite itself is going to bear some resemblance to other weight management systems, it's just that we're coming at it from a very unique angle. And there is just no question, but what the launch of this weight management system in Q4 is going to be big. With a rising base line of both consumers and sales leaders, with a more effective launch process, with our sales leaders really believing in the launch process, fourth quarter is going to be big in 2013, and then as we roll out the system globally, as we have this year, with the products that we launched at last fall's convention, the revenue impact is going to be enormous.

Will it be a supplement, or a meal replacement product.

There will be components of both.

Ritch, a house keeping question. How come the share count in the quarter was flat year-over-year?

We ended up buying about 2.4 million shares during the quarter, but the average date for when they were purchased was the end of May, so most of the benefit will play out in the next quarter. On a year-over-year basis, there was actually some dilution of options that were coming into the money, so those two factors made it so it's equal year-over-year, but Q3 should be around 62.7 million, 62.8 million shares on a diluted basis going forward.

Since you're kind of ahead of plan to that $4 EPS number, is there anything we should keep in mind as we model it to reflect maybe some more aggressive accruals for getting there early?

No, we've accelerated our estimated timeline for accrual purposes, so we're already bringing that into our overhead number, and actually the achievement of the $3 per share number in the second quarter accelerated a couple of million dollars of expense into overhead. So we're bringing that in as we continue to bring the date closer and closer to when we expect to hit $4 per share.

South Korea, the macro environment has been tougher about a year now. Are there any signs that the broader macro environment is improving there?

We're not hearing from our management team there that the broad macro environment is negatively impacting results. It is possible that they may be, but they are not using that as an excuse, and we aren't either, and as we indicated in our remarks, we expect return of growth in the second half there.

Olivia Tong, Merrill Lynch.

Just wanted to ask a couple questions about this weight management product, which you are planning to launch in 2013. There have been weight management launches that you've done in the past. Can you give examples of the lift that you've seen to sales from the past launches and how this is going to be different under the ageLOC umbrella?

We have taken stabs at weight management from time to time in the past, and actually weight management today even is a meaningful category for us, particularly in Southeast Asia, Hong Kong and Taiwan, where our TRA weight management program is doing very well. Our plan here, Olivia, is actually to build on the successes that we're seeing in the Asian markets by adding to the story that they're already telling out there, and telling quite effectively. We've also learned from them, frankly, how to execute a weight management program most effectively. They're the markets that have done it the best. We're going to be using their best practices elsewhere around the world.

But I think what -- the factor that gives us the most optimism for the category, Olivia, is that we all know that many markets around the world are facing obesity epidemics. We know the market is warm to the category, and it's not going anywhere but up in terms of potential, and our sales force is just so enthusiastic about the ageLOC platform, and about the product launch mechanisms that there's going to be an awful lot of energy focused really -- it's actually beginning now. We're even seeing the sales force starting to talk about optimism for ageLOC weight management now, but beginning really the first of next year, we're going to see a lot of sales focus on this category, and that's really what gives us optimism for the category.

Clearly for a couple of years now, you've been growing well ahead of your own expectations. What are your thoughts about long term top line growth, particularly given that this year is going to be a difficult comp. You have new product launching, but at what point do distributors -- is it too much for distributors, and what are your expectations for long-term top line growth?

By long-term, are you talking three to five years? Are you talking beyond that?

Three to five, so medium term, three to five years.

When we look at our product pipeline, weight management, what we've been working on for years, and what we call our alpha project, which is applying ageLOC science to a core nutrition product, and recall that LifePak is still one of our largest selling SKUs globally, and that is what we are talking about is the creation of a new core nutrition product under the ageLOC brand.

In addition to other concepts that we'll expose you to in November, when we look at what's in the pipeline, when we look at how well we've done already on the ageLOC platform, when we look at how effectively our markets are refining the launch process. When we look at how we get great pops out of global LTOs, and regional LTOs, and then full time rollouts in markets, it's tough for us, Olivia, not to be very, very positive about the next five years. Our management team is focused on a $5 billion revenue goal, which we originally set for 2020. We will review with you a longer term plan in November, but today we believe that we can move that up by years.

To add one other thought to that, Olivia, is that the key to our longer term growth rates is growth in our sales force, and we're terrifically encouraged about the growth we're seeing in our executive base right now, and that is going to be a key driver as we go forward. It's not that we're maxing out the sales force. We continue to grow that sales force, which propels growth longer term in the business.

First on share repurchase, what are your thoughts in the second half for incremental share repurchase? You do still have quite a bit on your share reauthorization, and then housekeeping question. The accrued expenses on the balance sheet went up about $50 million. Was that related to the ageLOC sales that haven't shipped yet, or is there something else that we should be thinking about?

Yes, on the share repurchase, we have $220 million remaining on the authorization, and continue to have cash on our balance sheet, and we'll just continue to evaluate as we go forward the most effective use of that cash in driving shareholder value. That's always our consideration. But we do have ammunition there. As it relates to the accrued expenses, you're exactly right. It's accrued commission payout, as well as deferred revenue, that we'll roll through in the third quarter.

Mark Astrachan, Stifel Nicolaus.

Could you help us, from a housekeeping standpoint, go through some of the segment results in terms of brand by brand, please?

We really don't talk about that quite as much as we used to, so -- I've got it here. Looks like our revenue for the Nu Skin line was about $295 million, and for Pharmanex was $296 million. Very equal, about 50%, 50%, both showing very strong growth over the prior year.

Then R2, Body Galvanic and LifePak and others as well. Could you give us some of that please?

Obviously the R2 product with the launch was the largest seller in the quarter, about $130 million in revenue. We had LifePak at $66 million, just holding very, very consistent. The majority of that on subscription order, and just remains very, very solid. The Galvanic facial unit, $63 million, transformation, $37 million. The body Galvanic Spa, the body spa, was about $53 million. Overall, about $280 million, $290 million of ageLOC sales in the quarter.

Any Vitality sales?

Yes, about $11 million of Vitally sales. Most of those are offset now with the R2 product.

Then given the pretty unbelievable growth in China, similar question to what I asked last quarter, any sort of granularity you can give on how you track inventories, or where the product is going, how return rates may look, that sort of thing, just to -- obviously such a huge amount.

Return rates are the easiest thing to track, obviously, because we have total visibility on that issue. We obviously have a harder time tracking product once it's in the hands of our sales force, but return rates are still surprisingly low, frankly, despite these big product launches. Return rates have not spiked. So we're very happy about that.

The LTO -- people buy it because the product is not going to be available for several months down the road. They're anxious to get their products on -- their hands on the product so they can use that to continue to build their business as they go forward, but return rates are at an all-time low, frankly, and we're very encouraged with that.

And that's an overall comment, that's China?

Correct. China included.

Anything that you can give in terms of what you've seen in product that you've sold into China in terms of what's going on from a sales person's standpoint?

I would just highlight the growth in our sales representative base there, our employee sales force growth, very, very significant. We had the greater China convention, and there's just a lot of energy right now. As we kind of forecast out and look at our business, it's highly likely that China surpasses Korea next year as the second largest business in our world, and by 2015, could likely be the largest market in the Nu Skin world.

When you look at your business, how do you think about the percent of your products that you sell to the distributors versus to retail customers? And give some more granularity on that from a US standpoint. Anything more you can give overall?

I'm not sure what you're getting at there, Mark. What's the question?

Basically just trying to figure out how you're selling into call it the distributor side versus how you're selling into individual people, maybe is another way to put it.

We still have a significant percentage of our sales that go from us directly to consumers, both at the retail level, as well as at preferred pricing levels through our preferred customer program. We're very confident -- I think your question is going to the issue that has resurfaced over the course of the last quarter with respect to internal consumption versus consumption outside the sales network. We're very comfortable that, as we have stated multiple times in the past quarter, that more than 70% of our sales are easily going into those who are just consumers, and who do not receive multi-level compensation and do not participate in multi-level compensation plan. We're very comfortable that ours is a business that is based on real consumption, and not on problematic indicators that would be of concern to regulators.

Maybe a couple of other stats that support that, too, Mark, about 15% of those who sign up with our business eventually try to go down the path of the sales network. The majority of those who join our business are buying it just to buy the products. 56% of our sales on a monthly basis go to directly through our subscription program, and today we ship over 540,000 orders a month on subscription orders. We just have a huge base of subscribers out there, as well. We continue see that base of subscription customers continue to grow every single month. We're encouraged at that growing base of overall business.

Let me just add to that, Mark, because this is actually a point of some frustration for me, I think, given the fact that I come from a legal background, but it's really irritating to even have people ask this question in the way they do, because the FTC has clearly stated that internal consumption is not the definition of a pyramid scheme. This is not the issue. The issue is whether there is real consumption, or whether people are purchasing product just for the right to participate in the money-making venture. That's the issue, not how much of your sales is being consumed by the sales force. Operator next question please. Hello? Operator are you there? We seem to have lost our operator here on the call, who is obviously controlling the queue for questions. I'm not sure exactly how that happens, it's never happened before, and we see that there are still a few analysts in the queue with questions, that we would be happy to answer. We're going to pause here for just 30 seconds, and see if we can't get the operator on the phone by a separate number, and if not, we may have to take your questions one-on-one. Stand by here for a moment. Mark, are you still on the line? We're hearing something noise, and I'm not sure where it's coming from, but it's not coming from us.

Tim Ramey, D.A. Davidson.

Well the call survives. (laughter)The sales in greater China were stunning, and I know some of that is sell-in, but I would be interested to hear how you would characterize what you think the run rate of sales might be now versus your goal of getting to $1 billion, we are certainly a lot closer to that goal than we thought. One of the thesis that we've been working on is that as your sales in China and Southeast Asia accelerate, number one, you seem to get margin accretion, and, number two, you're likely to deploy more manufacturing capital in Southeast Asia. We didn't really see the margin accretion. Maybe that's because the product that was sold into Hong Kong isn't manufactured in China, so let me stop there and let you talk.

Subjectively, first, Tim, it truly is stunning, actually, to attend our greater China convention in Hong Kong a few weeks ago, and just witness the stream of Chinese leaders coming across the stage. The market is enormous, the potential is enormous. The people are hungry for opportunity. They work their tails off, and our management time is bullish. They believe that, that $1 billion goal is realistic. We've looked at it as perhaps more aspirational, but it's hard not to start becoming a believer when you see the numbers that they are putting up and when you see the people walking across the stage and realize that these are very, very capable folks. I would have liked to have had all of our analysts, frankly, sitting that's greater China convention, because you would have a hard time coming away without being believers in the region. Want to talk about the run rate, Ritch?

When this goal was stated by our management team in China, and our greater China region, we were at about $270 million. That it was in 2010, 2011, $342 million, and this year we will be over $500 million in the region, and it's, frankly, right on track with the forecast that we were provided by them a few years back. As much as $1 billion seems unrealistic to some of us, our management team over there has a high level of confidence that they're executing on plans, and, frankly, there is so much opportunity in these markets that it's not out of the realm of possibility that we deliver on that target.

In terms of the margin issue, note that we had about -- we probably lost 20 to 30 basis points just in the FX headwind that we were dealing with globally, so that impacted us somewhat, and then the product, you're right, was not all manufactured in China. This product was sold out of Hong Kong. So we didn't get quite the margin accretion that sometimes we will in the future, as we build our own product in China. This product was sold out of Hong Kong, so we didn't get quite the margin accretion that sometimes we will in the future as we build our own product in China.

To follow up on Southeast Asia, similar comments on that, Ritch, and the likelihood of building a production facility there?

Bringing manufacturing in house doesn't seem to be the best use of our management resources right now. So we continue to look for areas where we can stream line the supply chain, and actually do pieces of the supply chain in Southeast Asia. So right now we have an objective where we're doing a lot of our packaging and so forth in that region, so that we save on shipping expense and other things. And we're moving down that path of increasing efficiencies, but to actually build our own facilities and manufacture at this point in time isn't the highest priority on our list.

Scott Van Winkle, Canaccord Genuity.

First on the weight management, I understand you're doing a test in the US, or something in that regard. Is that the complete new product that's being used in the test, and can you give us any quantification, or at least qualification of how it's performing?

It's actually not the product at all, Scott, it's basically a promotional campaign by the US management team to warm up our sales leaders to the category in preparations for next year's launch. The product is completely different, but the category is the same, and the program is doing very well. We're definitely seeing response to the sales force on the category, but it's not a test of next year's ageLOC weight management system.

Following up on the question about returns, you gave us some indication that they were low level. Can you quantify as a percentage of sales what returns were like?

About 2.65% in the quarter and that includes our experience ratio, what's actually coming back, as well as what we would anticipate coming back in future months, and we tried to be very conservative in that area. Very impressive on that area, and it's really a global phenomenon where returns are just staying very low.

In Korea, we talk about having to reset the compensation payout, does it simply creep higher as a higher percentage of distributors reach the executive level and you have to reset it down a little bit?

As the market matures, and as the sales leaders reach deeper into the compensation plan, the local payout creeps up. We're working with the management team to figure out how to navigate this issue. It's a regulatory reality. So it's not a surprise to our sales leaders, but you can imagine that it's not a happy thing when we end up reducing commissions by 5%, and so we're looking at other ways to reward our sales force there by investing in the market, and making sure they realize that we're not trying to build profitability by reducing their commission levels.

One other quick comment to that too, Scott, is that our active base remains very, very solid, and we see continuing good strength in sponsoring. We were impacted a little bit on the executive number, but we see that strengthening up as we go forward. We anticipate the business to be slightly positive in Q3, and then with a solid launch in Q4. It looks like a short-term issue that we can work through. Clearly those are difficult things to do. And hopefully the market, at its maturity level now, we shouldn't have to continue to make adjustments going forward, we should hopefully be very stable going forward.

The executive level distributive figure for the second quarter was obviously robust, to say the least, with the big launch in Asia. What does it look like in Q3? I assume that retrenches a little bit, not having the big launch in convention to drive it high.

Yes, that's exactly right, Scott. It's reflective of the enthusiastic response to the opportunity that we provide people, and people pushing for are recognition at our convention events, and we expect that number to retract a little bit in Q3.

And probably somewhat in line with our revenue base. We're projects about 18% return growth in the third quarter, so somewhat in line with that. Obviously, if it's stronger, then our revenue is going to be stronger.

Around the launches in Japan and South Korea in the fourth quarter, are there any events occurring at the same time that the launches will occur with?

There's a Japan convention in -- is it November? In October. In connection with the launch of that by Galvanic Spa. I don't think there's a Korean convention, I think it's just Japan.

Tim Ramey, D.A. Davidson

She's got me twice now but I really only had that one question. Nice to talk to you again. (laughter)

John Faucher, JPMorgan.

First off, in terms of looking at your Q3 guidance, given the fact that the share count is down year-over-year due to the repurchase, it would look as though you guys would need to have margins actually down in the quarter in order to get to even the high end of your guidance range. Can you talk a little bit about what you expect from a margin standpoint in the third quarter?

Looking at the executive distributor growth in China, just so we understand how this should play out going forward, when we looked at the US convention in Q4 of last year, we saw a little bit of slippage coming out, because people qualified to be an executive distributor, and then maybe didn't stay at that level after the convention. Should expect any give back on the greater China executive distributor number? What's the best way to sort of map that out going forward?

The margin question, we do anticipate that it will retract a little bit from Q2. If you look sequentially, kind of track it as we've gone along through Q1, we are at 15.5%. I estimate it to be 15.6%, 15.7% in the third quarter, and then a little bit around 16% or a little bit above in the fourth quarter.

So more flat. I was thinking more year-over-year as opposed to sequentially, but more flat year-over-year than in the quarter.

On the executive count, we would expect, as Ritch just indicated, the growth in executives to mirror a little closer revenue growth, which we're projecting at 18%. So you will see a little con traction in the greater China number, we would think, but they're surprising us on the upside on an almost quarterly basis, so we'll just have to see how it plays out.

One other China related question. In looking at the country-specific data, since this was a Hong Kong convention, you booked the revenue through Hong Kong, if we wanted to take that revenue and match it up more closely in terms of what was the mainland, what was Hong Kong, is there a number you could give us on that?

Yes, we don't actually break that out, but the growth rate in China would have been well in excess of a 100%.

In terms of the mainland growth rate alone?

Mainland growth rate would have been over 100% year-over-year.

Frank Camma, Sidoti.

Congratulations on a good quarter. How should we think about -- I think, Ritch, you gave some guidance on this on what a normalized selling expense rate would be when you strip out the promotions. Could you just go over that real quick?

Yes, it's going to go back into the 43.5% range most likely. It was pushed up by specific incentives related to the launch, and that was about 1.3% of sales, and the rest of the increase came from a higher sort of payout based on higher levels of volume per executive. I think the average as we go forward on a normal growth rate of, let's say, 10% to 15% revenue growth is going to be in the 43.5% range. Q3 will be a little higher than that probably, because we have some commission associated with that product sale, which we will book as we record our revenue in the third quarter. Then we would anticipate, on a normalized basis, that it's more in the 43.5% range.

Could you just give us an update on the CapEx spend during the quarter, and where you're at with the build-out there? I know you're spending about $100 million this year.

We are about $30 million through Q2, for the first half of the year, and expect to be about $70 million in the back half of the year. $100 million total for the year.

When you launch the weight loss products next year, 2013, are they staged like you did your products previously, or how do you anticipate launching that?

We're going to do a global LTO in the fourth quarter. And then regional LTOs in the subsequent few quarters of 2014, and then full time launches following that. So, again, having seen what we've done with R2, the body Galvanic Spa in the course of last year, it's going to be a really great period of time for us.

Great that's all I had.

And it looks like we're through the queue list, so we just want to thank you again for joining us. Again, it's been a great quarter for us. We're very optimistic about the future. On a personal note, when I sit in our conventions and when I see the level of energy and enthusiasm, I sit there and wonder how in the world anyone could short Nu Skin, and our job here at corporate headquarters is to make those people really nervous, and that's what we're going to do. Thanks for joining us today.

This concludes today's conference. You may now disconnect, and have a great day.