如新 (NUS) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2013 Nu Skin Enterprises earnings conference call. My name is Erica, and I will be your operator for today. (Operator Instructions). I would now like to turn the call over to Scott Pond, Investor Relations. Please proceed.

Thanks, Erika, and good morning, everybody. We appreciate you joining us. In the room with me today are Truman Hunt, President and Chief Executive Officer; Ritch Wood, Chief Financial Officer; Dr. Joe Chang, Chief Scientific Officer; and Dan Chard, Vice President of Sales and Operations.

Just a reminder, during the call comments can and will 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. And with that, I will turn the time over to Truman.

Thanks, Scott, and good morning, everyone. We appreciate you joining us today. As you know, this is a big week at Nu Skin. We are hosting more than 15,000 people from over 50 countries to our global sales convention in Salt Lake City this week. And we will officially began that event with the ribbon cutting of our new innovation center at our corporate headquarters in Provo tomorrow morning. This is an absolutely beautiful, state-of-the-art facility that will be the home of our anti-aging research and development center.

This facility really reflects our commitment to continually innovate in our product line as well as within our direct-selling channel. We would invite any of you who happen to visit Utah in the upcoming weeks and months to stop by and see the new facility firsthand.

We're also very pleased with our first-quarter results. We posted record revenue of $928 million, an impressive 76% improvement over the prior year, and even more impressive when you consider that our largest revenue quarter prior to this was $683 million. Additionally, our earnings grew by 107%, reaching $1.80 per share. And as strong a quarter as this was, we remain optimistic about what lies ahead as reflected in the significant increase in our guidance for the year. Ritch is going to touch on the details of the increased guidance in a few minutes.

Of course, the highlight for the third quarter was the very strong start we had with the global LTO of our new weight management system, which we call ageLOC TR90. Beginning in September, we made TR90 available in portions of Greater China and the South Asia/Pacific regions, with sales totaling about $205 million. We're continuing the LTO in the remainder of our regions in the fourth quarter. And based on what we've seen so far this month, we would expect the LTO to generate revenue in the range of $550 million or so.

As you may remember, we will follow this fall's global LTO with regional sales windows throughout the year in 2014. In the past, our regional launches have generated sales levels considerably higher than our global LTO, which we expect to remain the case next year.

These significant sales events not only drive revenue growth, but they also give us a healthy lift in the number of actives and in our sales leader count. We now have more than 360,000 more consumers and sales leaders than we did at the same time last year.

Geographically, we were politically pleased with the strong growth in the Greater China and South Asia/Pacific regions as well as in South Korea and in the Americas. We remain optimistic about the potential of mainland China, which continues to be a growing market for the direct-selling industry as a whole. We are still a relatively small player in the market, and we think that the market's potential justifies the investment to continue to sustain growth in a market that one really cannot afford to ignore. We've spoken previously about our plans to accelerate the buildout of our business in China and look forward to sharing an update and more details of this plan in November at our analyst day.

I would also note that the other markets in the Greater China region also performed extremely well this quarter with a 79% improvement in Taiwan and a 68% improvement in Hong Kong.

Some of you will remember that about three years ago we put in place an incentive for Greater China to reach $1 billion in sales by the end of 2014, which is our 30th anniversary year. That objective, when we initiated it, seemed quite aspirational at the time, but we will announce this week at our convention that Greater China actually achieved that sales objective for the year earlier in the month of October. So we're really pleased with what is happening there, and that achievement is a tribute to our management team and our sales leaders were working really hard to execute in a high-growth environment.

North Asia also had a strong quarter on the continued growth of South Korea in particular, which is a long-term, all-star market for us and which posted a 71% gain in the quarter in local currency.

Japan slipped a bit in local currency in the quarter, but we expect it to be flat to slightly modest growth for the year as we introduced TR90 and continue to execute our plans there.

From an operating standpoint, our operating margin reached its highest level ever in the third quarter at just over 18%. This speaks to the power of the business model as we leverage G&A on strong product sales. At our analyst day in November, we will talk about where we expect operating margin to be as we continue to grow. Our business model puts us in the enviable position of being able to invest in growth initiatives and still maintain healthy operating margins.

Overall, we hope that our shareholders will recognize that good things are happening at Nu Skin Enterprises. We have, I think, a rare opportunity to grow at rates that few companies in the consumer products world do. We're really pleased with our product pipeline, and we can see a powerful and steady stream of products continuing to fuel our growth going forward. Fourth quarter will be our first-ever billion-dollar quarter, at least we expect it to be so. And we also expect regional sales of TR90 to surpass our global LTO sales this year. And looking forward, even another year, we believe that our next global launch in 2015 will be a very significant launch, perhaps even our first-ever billion-dollar product launch.

We are likely to give shareholders a glimpse of the products in the pipeline for 2015 at our Analysts' Day in November. So we have some lofty goals here at Nu Skin, and we have confidence in our sales force and in our management team. They are a talented and motivated group of leaders who are truly passionate about Nu Skin and about what they are doing.

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

Thank you, Truman, and good morning, everyone. I'll begin my comments highlighting what I see as the most encouraging data point coming out of this quarter. And this is the highlight of the growth we experienced in our sales leaders, combined with strong year-over-year growth as well as sequential growth in our active base. Typically, we see very little to no growth in our sales leaders and active base on a sequential basis from Q2 to Q3. So the growth we experienced this past quarter is a positive sign that the strength we're seeing in the business is an early indication of the solid execution surrounding our latest product launch. And frankly, it gives me confidence that allows us to take our numbers higher for the fourth quarter and believe 2014 will also be a very strong year.

As we mentioned, overall sales grew 76%, which included a 3% negative currency impact. Revenue in the quarter benefited from $205 million approximately of LTO sales, which was approximately $15 million ahead of our estimate of $190 million. In the prior-year quarter, we had about $50 million of LTO sales in greater China and Southeast Asia.

Our gross margin for the quarter was 84.9%, and that was well ahead of our expectation and up about 140 basis points compared to the prior year 83.5% rate. The lift in gross margin was primarily attributed to the LTO sales of TR90 products, which on a consolidated basis have very good gross margins in Asia, which is where the LTO took place.

Selling expenses for the quarter increased to 49.3%, well above the 44.8% from the same period of the prior year. The selling expense increase was the result of accelerated sales growth generated by solid execution from our LTO offer of TR90 as well as strong increases in the number of our sales leaders. We have significantly more sales leaders qualifying for promotional sales incentives, pushing this expense somewhat higher. We expect selling expenses to remain high in the fourth quarter at a similar level as we experienced in the third quarter as we continue the product LTO and anticipate very strong growth rates in revenue throughout the rest of the year.

Our G&A expenses for the quarter as a percentage of revenue were 17.5%, compared to 23.1% in the prior-year period. Our model worked in such a way that the strong sales growth increases our sales compensation expense, but we generate an offsetting benefit in our G&A expense line as a percentage of revenue since a good portion of our overhead costs are fixed. Hence, the strong revenue growth from the large amount of LTO sales was primarily responsible for the 560 basis point improvement we experienced in our G&A expense ratio in the third quarter.

Our tax rate for the quarter was 34.3%, slightly lower than 35.2% in the prior year. And during the quarter we paid $17.8 million of dividends. We repurchased $76 million of our outstanding shares, and that leaves the remaining authorization at $445 million as of the end of the quarter.

For the fourth quarter, we are projecting revenue of $1.02 billion to $1.05 billion, and that includes a negative currency impact estimated to be approximately 6%. Most of our regions have now executed on their LTO initiatives here in the fourth quarter. And, with what we have experienced so far and what we're anticipating, we now project fourth-quarter LTO sales to be approximately $350 million for the quarter.

We have the global convention this week and will spend approximately $11 million to $12 million on this initiative, which will add to the fourth-quarter G&A expenses. We estimate gross margin to be slightly above 84%; selling expense to be somewhere in the 49% to 49.5% range; with an overall margin for the quarter of approximately 17%, which puts our earnings per share in the range of $1.85 to $1.90 -- is our projection for the quarter.

Our updated projections put full-year 2013 revenue at $3.18 billion to $3.21 billion, including a 4% negative impact from foreign currency fluctuations, with earnings per share of $5.77 to $5.82. We anticipate operating margin for the full year to be around 17%.

So with that background, we will now open the call up for questions.

(Operator Instructions) John Faucher, JPMorgan.

Just wanted to take a look, while the TR90 stuff was impressive, it is the strength in the underlying business that is driving most of the upside. So I guess it's -- I know it's still too early for 2014 guidance, but can you talk a little bit about the sustainability of some of that improvement? How much of that improvement do you think is due to people trying to be an executive in front of the TR90 launch on a global basis? So how should we think about the sustainability of the underlying business trends heading into 2014? Thanks.

Let me comment on that, John, and then Ritch will undoubtedly have some additional comments.

There is no question that, building up to our convention this week, we have seen a lot of activity of people reaching to qualify for executive status or for higher pin levels within our sales leader ranks. We would typically see some consolidation of that post-convention as that target and timeline -- you know, people take a little bit of a breather after a convention.

But, as we indicated in our remarks, our regional rollout of TR90 next year, we really have pretty high expectations for and would expect sales levels and sales activity and leadership growth to continue at a good pace throughout next year.

Ritch, do you want to add to that?

Yes, I think that is right on, John. And I would just mention that you're looking at the same things we are. And that is the growth in the sales force and the growth in the active base and how that continues to hold. We obviously expect some consolidation after a global convention and an LTO, and we've certainly factored that into our guidance in the fourth quarter. As -- by the time we come to our November Analysts' Day, we will have a pretty good idea of how many of those sales leaders have been able to hold an extra month. And that will help us give good guidance for next year. Right now, we're very encouraged with the way we saw those numbers uptick. It just gives us a lot of confidence in the future and our ability to sustain the base growth that we're seeing today.

Great. Thanks. And then one unrelated follow-up here, Ritch, I would be remiss if I didn't push you a little bit on the net debt position or, rather, the net cash position. Obviously continues to look better, with the numbers continuing to move up here. Any sort of updated thoughts in terms of how we should think about you guys returning some of that cash to shareholders?

Yes, thanks, John. We continue to look at it as well and the opportunity to use that cash to benefit shareholders through our priorities that we have stated in the past -- first of all, to invest back in the business; secondly, to pay a good dividend; and then, thirdly, to repurchase stock.

And we look at the use of cash and the value that creates to shareholders, not based on what we did yesterday but what the future looks like to us and based on our anticipation for the good future. We continue to believe that stock repurchase is a good use of cash when we can; and when we can, we are generally in the market. So we will continue to be good stewards of that balance sheet going forward.

Okay. Thank you.

You bet.

Bill Schmitz, Deutsche Bank.

Could you just remind us like what historically has been the sales lift a year two after a regional LTO, from the other big launches you've done over the last five years?

Yes, you know, we are not -- we are probably, what, in our third or fourth cycle here where we do a global LTO and then we follow it with a regional LTO. And the regional LTOs have always been stronger than our global LTO because we have people who have actually tried the product as well as more time to train and ready the sales force that will launch the product. So we expect it to be strong.

We'll have a little bit more data, especially by the time we come to the Analysts' Day, on what our trial, our penetration, those sort of statistics look like, which will help us give a better forecast for next year. But, so far, it looks really good. Every year it continues to increase. And so we have confidence that we are getting better and better at the execution of this launch cycle that our sales and operation team continues to execute on.

Great. Thanks, Ritch. And can you just remind us of the calendar going forward so I know -- you did the US LTO already, but what is left to do? And then next year, what the timing is for the various different launches?

You bet. Most of the markets have actually done their LTOs here in the fourth quarter in the beginning part of October with the exception of greater China, which split their LTO into four months, so there's -- or five months, actually. So there's still a smaller amount of LTO that will be available in November, December, and a little bit in January for greater China. There are two Southeast Asia markets also that will go in November. So the majority of it is actually done.

As we look to next year, the regional rollouts will start in the first quarter -- a minimal amount in the first quarter, with the bulk coming in the second and third quarters. And, again, at the Analysts' Day, we will be able to give a little bit more updates. There's still some decisions being made on that for next year, but we will be able to give an update better on November 21.

Got you. And the global LTO for the customizable skin care, is that in the fourth quarter of 2014, or does that go into 2015? I can't remember.

Yes, that goes into 2015, Bill.

Okay, got you. Great. Thanks.

And then just on the P&L, it seems like year to date, the general and administrative expenses, while there has been great leverage because of growth, they are up like $75 million, I think, in aggregate. What is the primary driver of that increase?

We have spent quite a bit more on some investments that we think will support the growth going forward. So mainland China is obviously growing their base and infrastructure as we go forward; Southeast Asia, likewise. We're doing a number of initiatives we believe will continue to sustain the growth as we go forward. And then there are some variable expenses. Some of our labor, specifically those who work with our salespeople, with the salespeople number a lot higher. Those who work to pick and pack and ship the products out, those expenses do go up with the increased sales. So there's certainly leverage we have been able to pick up, but at the same time, we have to invest back to support the growth in the business.

Got you. And then just one last one. How do you guys feel about looking at splitting the stock? Because obviously it is over $100 now and it's had a good run.

Yes, that is a good question, Bill, and something that we will obviously talk to our Board about here going forward. It's nice to be able to ask that question.

It's a good problem to have. All right, thanks so much, guys.

Thanks, Bill.

Frank Camma, Sidoti.

Just wanted to follow up on one question. I know you went into some detail on this already, but in the past, I thought when you launch a new product, you would at least expect some kind of cannibalization of sales, or at least you will take the spotlight from your products and focus in on one. Is there something like a general reason you think that really hasn't happened here? And you're obviously not -- you are seeing organic growth exclusive of the product, over 30%, so is there a reason for that that we -- that you can point to?

To some extent, Frank, it continues to happen. We still see some cannibalization whenever we shine the spotlight on any particular product. But you are correct in perceiving that it is happening to a lesser degree than it has in the past. And the primary reason why is really what I think is one of the most innovative developments in our industry that Dan Chard, our President of Sales, developed over the course of the last decade, really, working with our geographic managers with this LTO product launch process. And they have managed to now work with our field leaders on an increasingly effective and aligned basis so that sales leaders understand the approach and are organizing their activities now around the same LTO launch mechanism. And it has just become a very effective way for us to introduce products and minimalize the extent of cannibalization as we capture new consumers for those products who are interested in, for example, this year, losing weight toward or changing body composition. And then hopefully retaining those consumers as we move into the next cycle.

And the more time goes by, the better we are getting at it, the better our field leaders understand it. And it's just magnified severalfold now since we really started this process five, six years ago.

And then maybe add one other thought, Frank, our subscription orders are now up to about 60% of our sales. So the subscription orders continue to be there every single month regardless of LTOs. So it provides a really stable base that is not impacted, so to speak, by the LTO volume.

Sure. That's important. And just a related question, I guess. Obviously it is going to be skewed this quarter because you did a lot of weight management product, but if you look at the rest of the business, is the mix still roughly 50% personal care, 50% nutritionals? Or does that skew somewhat because of what is going on?

Well, it is certainly going to skew a little bit based on the LTO, which this time happens to be Pharmanex products. But I just say that overall the strength of our personal care business has been very, very strong over the last year or two as we rolled out the Body Spa. And so the personal care side of the business continues to be larger at this point in time, although with the launches of weight management is going to catch up a little bit.

Just one data point there, Frank. We did over $200 million in the quarter in TR90, but Galvanic Spa and associated gels did nearly $100 million in volume in the quarter. So the personal care side of the business continues to be very strong.

Okay. And just the final question is just on the -- I know it's really hard to look at on a quarter-by-quarter basis because we've got the LTOs in there, but why in general -- you know, consistently the numbers out of Asia, your average associate is more productive, if you look at it, than the rest of the world? Is there -- I mean, is it just the appeal of the product, basically, or is there a general -- do you find them more efficient? I'm just kind of curious about that.

And I'm just taking the gross number, by the way, divided by the revenue stream in that region.

Well, I guess we could fall into the trap of casting some ethnic slurs here, but what we're finding really throughout the Asian markets is that these are hard-working, entrepreneurial, very dedicated, very focused folks. And really, all direct selling companies have a personality and tend to find their own vein. And, for whatever reason, one of Nu Skin's strengths is the fact that really almost since the time we started international expansion back in the early 1990s, we struck a record in Chinese ethnic communities in Taiwan, in Hong Kong, in Singapore, and really all throughout Asia.

And so we just have real strength in particular in the Chinese community. But obviously, Japan and Korea not far behind.

All right. Okay, great. Thanks.

Tim Ramey, D.A. Davidson.

Congrats on a great quarter. The $1 billion goal in China had an associated accrual with it. Is -- since you hit it early in the 1Q, were you fully accrued in the third quarter? Does that impact SG&A spending in the 4Q at all?

You know, Tim, we accrued that based on our progress, obviously, towards the $1 billion. We achieved that $1 billion here in October. So most of it was accrued through the third quarter, with just a little bit remaining as we anticipated that we would hit that target here in October. So there will be some accrual in the fourth quarter, just primarily for October.

Okay. And, you know, I guess my surprise in the quarter was the broad-based success, which was way more than just the TR90 launch. You mentioned -- I think you said Galvanic Spa did $100 million of sales in the quarter, or was that the spa gels?

Spas and gels.

Spa and gels. Can you give us a couple of other data points so that we can feel little bit better that this was not just about the LTO? Some of the other products?

In terms of actual data, and then Truman can speak to the vision here, but the data points would really point I think generally to the growth we are seeing in our active base, together with growth in the sales force. And we will show some additional detail, I think, at the investor day to help understand that the base of the business continues to grow. And if we execute the LTO right, that becomes an incremental sort of business on top of our base. And so we have, for example, our (multiple speakers) --

One interesting data point, Tim, to me always in the face of all of this attention frankly on ageLOC products and our TR90 this year is the fact that LifePak, which has been our core dietary supplement product now for probably 20 years and hasn't had really major modifications to it for, what, five, six, seven years, continues to be our number three selling product. So in the quarter, $77 million in sales, which also speaks to the 60% subscription rate that Ritch cited earlier.

Yes, and then R2 is kind of $50 million for the quarter; Transformation is close to $50 million; the Body Spa and the products we launched with that a year ago is about $70 million. So we just have these base of very consistent products that find really where they fit in. And then they just slowly continue to grow year-to-year with a very long tail on them. So yes, the overall business is just very, very solid right now. And that is why we are optimistic about what stands out in the future.

Okay. And then just on the TR90, do you plan to track the efficacy or success of the product? I assume it will be kind of an interesting litmus test to have people take down a three-month supply, and then if you had to wait to track weight loss or report back on success, then that would add validation to the regional launches in 2014.

Yes, I think what we are already seeing in this product category that weight loss is way more social in nature than probably any of our other products, which has some good things about it and also some real challenges because we have work to do to make sure that our sales force doesn't get out ahead of where they really need to be from a product claims standpoint. But we will monitor that carefully.

As you know, Tim, TR90 has a unique position in the marketplace in that it isn't necessarily developed to maximize pounds lost but to maximize body composition and maintain muscle mass while losing fat, while losing weight. And that is really the deceiving trick that many weight loss programs play is that you may be losing lots of pounds, but a lot of it, maybe even as much as 50% of it, is coming from weight you don't want to lose -- muscle.

And so that is the positioning. Is not about just raw pounds lost. It's about having as healthy a body composition as possible. And this is a very social program; working in groups and getting support from your peers is an important part of what is happening here.

So I think, probably more than any other product we have, this product is going to be very visible on Facebook and everywhere else where our sales leaders and consumers are using it.

Thanks so much.

Thanks, Tim.

Olivia Tong, Bank of America.

Just a quick question, first on the dividend. How do you think about it long term? Are you targeting a certain payout, or are you planning to grow it in line with earnings or a certain yield? So how do you think about that?

You know, that is a decision that our Board really makes. We communicate them at length about this. It's a balance, isn't it, between trying to share the cash that we are generating with shareholders but at the same time looking for the absolute best use of our cash to generate shareholder value. And at the time when we believe the future looks extremely bright, there is certainly reason to put that cash to stock repurchase as well. So it's a discussion that we have with our Board, generally towards the end of the year. And we are committed to increasing the dividend every year. That is a commitment that we made a number of years ago. But, generally, we try and weigh the decision of increasing dividend against what we ought to be doing with stock repurchase.

Got it. Thanks. And then, I know I am nitpicking here a little bit, but can you talk a little bit about growth rates in the US and Japan? Obviously, it's still okay, but just not anywhere near some of your other geographies. So what's going on in those markets? Is there something specific to those markets that is holding them back a little bit more?

Yes, let me tackle the US first. The US actually feels better than it looked in Q3. I mean, the psychology of sales leaders is positive. The response to the TR90 LTO is very positive; by far the best LTO execution we've ever had in the US, and sales leaders were fired up about that. I think the market suffered a little bit, it's fair to say, with us having to take the Galvanic Spa off the market for most of this year. I think that is really probably the biggest factor that negatively impacted US results. So our US sales leaders are obviously very pleased that, in 2014, we will be able to put the facial spa back on the market. They will be very excited about that. So we feel good about the US.

Japan continues to be a tough market. The direct-selling industry is in secular decline there, really, since 1998. We grew the business last year there. We still feel like we will hopefully see some modest growth this year, although Japan has a real difficult comp in Q4 because they are going up against the launch of the body Galvanic Spa last year, which is not an easy comp.

But we're doing some innovative things in Japan and seeing some positive results. And one of those has to do with the television campaign that we are in test mode on in Japan just right now. And if things go well with the test, we may well expose you all to exactly what it entails at our Analysts' Day, because I like it a lot. It is innovative for our channel. It basically entails the sale in kind of a mini infomercial of sorts on a Galvanic Spa that is customized for sale into the mass market. That is -- we're hopeful we'll really create more consumer awareness of the Nu Skin brand; a positive perception of the Nu Skin brand. And we will see how that plays out. But I think our management team there is doing good things. We continue to think the psychology of our sales leaders is good there. And we are certainly not giving up hope that Japan can be a growth market.

Got it. And then just following up on that infomercial. Historically, I think, you know in terms of direct sellers, you don't see a lot of promotion, advertising, what have you, or TV activity per se. So why do you think that Japan is going to be different than other markets?

Well, as I said, it is an innovative approach to brand building, and Japan is a very, very brand-conscious market. And we think that by building brand credibility through TV channels, that, you are correct, other direct sellers typically don't use, it will help build image and create a positive awareness of who we are and what we're doing there. And with a product in the Galvanic Spa that is highly effective and very desirable from a consumer perspective.

So the product makes the difference. Consumers love it. It comes with a subscription on the gels, as you know, on an ongoing basis. So the jury is still out because we are in test mode on this, and we haven't said a lot -- talked a lot about it. But it is the kind of thing that we can afford to do and that I think we need to do in a market where direct selling has really suffered for now over 15 years.

Got it. Thanks, Truman.

Scott Van Winkle, Canaccord Genuity.

Congratulations. First on Korea, just to make sure I had this correct, there were no LTO sales in Korea, so the pop you saw in Korea was heading into the launch in October?

Yes, that is exactly right. The launch happened the first part of October.

And then Ritch, you mentioned that the mainland China rollout, what happened over five months, were there other markets like that -- so the Southeast Asian markets that got the product in September -- should we assume they are not going to get it again in October? I mean, all those sales were kind of captive in the month of September?

Yes, that is correct. China was the only market to spread it out. The two markets that didn't get it in Southeast Asia have a longer registration time. Those two markets will get it in November -- it is the Philippines and Indonesia. Everybody else in Southeast Asia completed their LTO in the month of September.

And is best --

And Scott, if I can just chime in on this point, we're doing something different in mainland China than the LTO product launch process typically entails by spreading it out over a period of several months. And we're going to learn some things from it, for sure. But one of the realities is that the logistics of the size of the launches that we're talking about in China are so significant that it just isn't feasible to do it anymore over a shorter period time. And so this is an interesting experiment this time around that we will learn from and I think will impact the future product rollout mechanism in China, in particular.

Got you. And if you look at your history of these global LTOs, is this the first time that the product was made available prior to convention?

Yes, it is. And it's also the first time that we have truly been able to do a global product LTO. The lead times on product registrations are very lengthy in certain markets, and to be able to pull off an LTO on this -- on essentially a global scale simultaneously within just a few months' period of time is no small undertaking.

So just from the standpoint of looking at the numbers by market, if you look at past examples, the Americas revenue, which has massively jumped because you have domestic and international visitors buying at convention, is that -- are we not going to see that same phenomenon this time around?

Yes, you're not going to see the same convention sales in the Americas that we've seen in past conventions because those LTO -- the LTO sales volume is, for the most part, recognized in market.

Got you. And then lastly, when we think about whether it's a sales leader or an [active] -- I assume mostly sales leaders participating in an LTO, what does the average person do? Are they buying one three-month supply? How'd does it kind of -- what does the average sales leader doing in this event?

It varies a bit market to market, but given the data that we've seen so far, what we see is sales leaders purchasing anywhere from 2, 3, 4, 5, maybe up to 6 kits that they then resell into their groups or to consumers. But, for the most part, given the demand that we had for the product globally, we really had to put purchase limitations on our sales leaders almost everywhere. And so I think the highest numbers we're seeing in some of our markets are somewhere in the area of perhaps as many as 6 kits to a sales leader.

Would you dare to estimate your fill rate on this LTO relative to what real demand would have been if there were no limitations?

Yes, that's really -- that's tough. But no, if there had been no limitations, demand would have been significantly higher.

Ritch, is that $550 million of LTO sales between Q3 and Q4, does that kind of max out your inventory?

Yes, pretty close. I mean, we had a little over $600 million of available product. Some of that, obviously, has pushed towards January because of the way we did the Greater China launch. So we're going to come pretty close to selling through what we had planned. And, frankly, we feel like it has been a very healthy LTO. Our forecasting is getting better. Trying to estimate the demand market by market and understand how the sales leaders, what their participation rate is going to be and so forth, we're getting better.

And I think Dan Chard, who oversees this whole process, can give more that detail at our Investor Day to help shareholders understand how we look at the success of an LTO and how we start to forecast out what it means in 2014 as well.

Great. And then last question, if I could. When we look at the sales leader growth in mainland China, at this point are you still employing all of those sales leaders or is a portion of those independent?

Yes, I'd say it is a division of the two. I am actually not sure how many of them would formally be employed right now. Do you know, Ritch?

Yes, most of the model today is still using the employee business model. We are looking to add on, as we announced some time ago, I think it's almost a year ago, that we would add an additional position that we call an independent business owner to that mix. And we're still in the process of finalizing that. But probably sometime in 2014 there will be an additional opportunity for people who have their own selling license to sell products. But, generally, it is mostly the employee model today.

Great. Thank you much.

Yes.

Mark Astrachan, Stifel Nicolaus.

Curious what products and regions are driving the Nu Skin business, given the growth rate in that segment was up 3X that of the Pharmanex business. What our new distributors actually purchasing there?

Well, I think Mark, the primary push is going to be with the latest products that we have launched in the Nu Skin division or category. So that is the Galvanic Spa, the Transformation set, and then the Body Spa and the associated products with that. So those are the primary ones. But we can go back to products that we launched in the early 90s and mid-80s that also continue to see solid growth. So I think we have these key products where people, the customer who joins our business will initially purchase some of these newer products. But then generally we see that rising tide of new people come in, lift sales of all of our other products as well if they decide they want to get shampoo or soap or whatever other add-on products they would add to their core regimen that they are buying.

Is the subscription rate higher on the Nu Skin side or the Pharmanex side?

On the Pharmanex side, it is higher. And that has always been the case, although we're seeing those two close the gap, close between them a little bit as we focused on building personal care products that actually our monthly supply products. But yes, continues to be a little higher on the Pharmanex side, where all of our products are generally 30-day supply products.

Got you. And then just broadly, how do you guys think about the future opportunity in China in terms of how you all think about it? Do you compare it -- the Nu Skin business on a market share basis to the direct-selling category? Do you compare it to the personal care category? Do you look at category growth? Just sort of broad framework here to think about how far this can go.

Well, all of that, Mark. I mean, we really think about market share in all of those terms. And, interestingly enough, there was a piece that came out in the last couple of months that is now in the skin care space. People are really starting to realize that home-use devices are a big category. And in China in particular, I think our market share for home-use devices for something north of 25%, which is obviously a very impressive number due to the Galvanic Spa.

But, generally, I personally look at the size of our competitors, and our benchmark, really, for many years has been the largest direct-selling company out there, the Amway organization. Highly, highly successful in Asia and, really, globally. They do $5 billion in China. They grew and have grown at rates similar to what we are experiencing. And in many markets, including Taiwan and Hong Kong, we were neck-and-neck with them in size.

So that's one of the reasons why we look at our current business there and think we still have lots of room to run. And, frankly, I think with the growth that we're seeing in the market generally, you're going to see that benchmark even go up quite significantly from where it is today.

Great. Thank you.

Thank you, Mark.

We really appreciate everyone joining us today. I wanted to conclude with just one thought in addition to inviting you to attend our Analyst Day on November 21. I think the question on everyone's mind is really going to be the sustainability of our growth. We've obviously had tremendous success over the past few years. And, as I met yesterday with our global management team, I find myself feeling quite comfortable that very good growth lies ahead. It's going to be virtually impossible to sustain 80% growth rates forever, but I think the next few years can be very special years for Nu Skin Enterprises.

Our $5 billion sales target that we set back in 2009 is now in sight. And so Thursday, at our global sales convention, you're going to hear me initiate a new sales goal, that we will label the Nu Skin 3.0 target. And the Nu Skin 3.0 target will take us from $5 billion a year in sales to $10 billion a year in sales, doubling again the size of our Company. That will be our new target. And our timeframe for the fact that we're going to challenge our sales force to is 2020.

So once again, it seems like an aspirational target, but all of the targets that we have set, really, over the past couple of years have seemed that way. We think, again, that this is doable and continue to believe that Nu Skin is truly enjoying the best of times right now.

So thanks for joining us, everyone. We look forward to answering further questions at our Analysts' Day.

Thank you for your participation in today's conference. This concludes the presentation. Everyone may now disconnect, and have a great day.