如新 (NUS) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2014 Nu Skin Enterprises earnings conference call. My name is Sara and I will be your operator for today.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Scott Pond, Director of Investor Relations. Please proceed, sir.

Thanks, Sara. Good morning, everybody. We appreciate you being on the call with us. With me in the room today are Truman Hunt, President and Chief Executive Officer; Ritch Wood, Chief Financial Officer; and Dan Chard, President of Global Sales and Operations.

Just a reminder, during the call comments 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. Thank you for joining us on today's call. As you saw in our earnings release this morning, our third-quarter revenue came in at $639 million, the top end of our guidance, and earnings per share were $1.12, which was ahead of our expectations. Overall, I would characterize our third-quarter performance as solid against our expectations.

As you know, we are going up against difficult comparisons in the back half of 2014 as we lap the launch of our TR90 weight management system last year. In the third quarter of last year I would remind you that we generated about $203 million of revenue from the limited time launch of TR90 and in the fourth quarter of last year we generated $350 million of TR90 revenue. We are also facing some currency headwind which cost us about 3% of sales, or about $23 million, versus last year's third-quarter.

Those factors, as well as the disruption of our -- to our China business earlier this year, contributed to the year-over-year revenue decline as well as to the number of active and sales leader accounts that we reported this morning. Given these factors, it makes sense to look at our business on a sequential basis to understand how the business is trending.

While our sights are set squarely on returning to growth in 2015, we guided this morning to fourth-quarter revenue of $590 million to $610 million. This guidance will likely seem conservative to some, so I would like to deconstruct our revenue base just a bit to help you better understand the trends in the business.

As you know, our revenue is impacted by the volume we generate in our product launch process. Our product launches are typically very good business drivers as our salesforce builds enthusiasm and interest among sales organizations as well as consumers. Our revenue line in each quarter of 2014 includes LTO volume, so in the first quarter of 2014 we generated about $33 million of LTO sales, then in the second quarters $76 million in LTO sales, and in the third quarter $81 million of LTO sales.

In the fourth quarter of 2014 there will be only about $10 million to $15 million in LTO sales volume for new products. So while we have a number of typical seasonal promotions in virtually every market around the world in the fourth quarter, there is no significant LTO volume planned to offset the LTO volume generated over the past several quarters.

Consequently, what we will see in the fourth quarter this year is reflective of what we would characterize as our core business level. And if we take out the level of LTO volume from our top line over the first three quarters and then look at Q4 guidance sequentially, what you will see is stabilization of the core revenue level and even slight sequential improvement. This is obviously what we are hoping for and what we are working hard to achieve.

The next two quarters are a transition time for us. We are encouraged with signs of growth in the early sales leader pipeline in China, but we are still ramping up our marketing and promotional activities there. In August, we started to hold larger sales meetings again and we are seeing the number of participants in those sales meetings in China increase on a monthly basis, which is also encouraging to us, obviously.

And while we also remain hopeful about the prospects for direct selling generally in China, the industry continues to grow in size and in influence. After a year with some unforeseen challenges, we are reestablishing trust with regulators and taking this time to train our sales leaders on promoting the business in a healthy, sustainable fashion. Fortunately, nothing we have experienced in China this past year alters our optimism for the potential of China in the future.

Let me make just a few brief comments on other markets as well. The Americas is doing well on a local currency basis with strong growth, particularly in Latin America. This has been a long-term project for us and, frankly, our success there is being driven by a strong group of sales leaders who have reached critical mass in size and who are just making it happen there. Obviously, the devaluation of currency in Venezuela is a big issue for us, as well as anyone else doing business in that market.

South Korea continues to do well. Japan trends improved in the quarter on a sequential basis and we expect Q4 will be stronger sequentially in Japan. And Southeast Asia remains steady with strength in markets like Indonesia and Thailand. The EMEA region has been soft this year, but the decline there is largely related to business dynamics in Eastern Europe.

So looking forward to next year we recently held a global sales leader focus group to review with our top sales leaders our product launch plans for 2015 and 2016. Our Pharmanex and Nu Skin initiatives are meeting with healthy levels of enthusiasm. In both categories we will introduce products that represent the most time and resources we have ever invested in new product initiatives.

On the skincare front, we will introduce a device that makes a skincare regimen as customizable as possible and we think that consumers will like what they see. When we survey consumers to ask what each individual would like in a skincare regimen, our research reveals that skincare marketers would literally have to put hundreds of alternatives on the shelves to satisfy what people want on an individual basis. No skincare company in the world has the ability to meet this need until now.

We believe our ageLOC ME skincare system has the potential to revolutionize the skincare world as consumers will finally be able to select what they are after in a system and have a device that makes compliance with a skincare regimen very simple.

On the nutrition front, our new product, which we have referred to for many years as the mother of all supplements and is now code-named [YouthSpan], incorporates the best science in anti-aging developed over the last 30 years. It will become the core product in our daily nutrition regimen, and as you know, our LifePak product has long been a top seller for us, so we believe the YouthSpan has great potential.

Now Ritch is going to speak to our improving financial profile in a moment, but we were pleased to get our refinancing completed recently. Our new debt structure is long-term in nature and eliminates covenant restrictions that have limited the extent to which we can use capital to repurchase shares. Since June we have been generating positive levels of operating cash flow on a monthly basis, exclusive of a tax payment made during the third quarter, and we expect to see positive transitions in cash and inventory levels going forward.

Overall, we view this quarter and the next as an important transition period for Nu Skin Enterprises. Fundamentally the business is solid and we continue to prepare ourselves for what we believe will be a return to growth in 2015.

Now we have had a couple of questions this morning on a new stories of a potential SEC inquiry, so we want to provide a response to this issue to the extent that we can. As we have previously discussed on many occasions throughout the year, the Company's audit committee initiated a voluntary review of our China business last January in response to media and government inquiries there.

At the SEC's request, we have communicated with the SEC a few times during the course of the year on a voluntary basis to report on the status of this internal review. To our knowledge, the SEC has not opened a formal investigation nor made any request for the production of documents. As always, we are committed to maintaining an open and a transparent dialogue with the SEC and with all regulatory agencies, both here and abroad.

We look forward to sharing our outlook and optimism for the next year at our upcoming annual investor day conference here in Provo on December 12. And with that I will turn the microphone over to Ritch.

Good morning, everyone. Thank you, Truman. The third-quarter, as Truman mentioned, was solid for us. The business performed in line with our guidance and our expectation.

Year-over-year sales for the quarter were down 30% due to the significant LTO in the prior year. However, on a constant currency basis, sales in Q3 were slightly ahead of sales in Q2. We see the core business beginning to improve, although this transition will take some time. The catalyst in 2015 will be our product introductions slated today for the back half of next year.

Our overall operating margin was very strong at 16.4%. Gross margin was 82.9%, that is down 170 basis points from the prior year, which benefited significantly from our LTO in the prior year. Sequentially gross margin was down slightly when excluding the inventory write-off in the previous quarter as a result of some promotional sales and pressure from a stronger dollar. We anticipate gross margin to be in the 82.5% to 83% in the fourth quarter.

Selling expenses for the quarter declined to 41.2% of sales. Selling expenses were positively impacted in the third quarter of 2014 by a reduction in estimates of the number of sales leaders qualifying for incentive trips and other promotional incentives, based on the results through the third quarter. We currently expect selling expenses as a percentage of revenue to return to approximately 43.5% to 44% in the fourth quarter.

General and administrative expenses for the quarter as a percent of revenue were 25.3% compared to 17.9% in the prior-year period. While we have been able to maintain our overhead spend, lower revenue pushed the percentage higher in the current period. We incurred a small gain of $1.1 million in other income expense compared to $0.5 million gain in the prior year.

Our income tax rate for the third quarter was 35.6% compared to 34.3% in the prior year and our tax rate is projected to be 38% in the fourth quarter, slightly higher due to the Venezuela currency adjustment. During the quarter we paid $20.5 million of dividends, we had no stock repurchases, so that continues to leave our remaining authorization at $370 million.

In October we also completed our refinancing of our debt structure. We are pleased with this new structure for several reasons, let me just mention those.

First, the new debt structure includes a five-year revolving line of credit compared to our previous 364-day revolver, in addition to the five-year term loan. Second, we have a group of banks we believe will be great partners for us as we go forward. Third, we have simplified our covenant package which allows us more flexibility in using our cash to benefit shareholders. And, finally, we paid off all the Prudential notes and the outstanding lines of credit at the time of the refinance.

I would also like to provide some color on questions that have been common in the past several weeks here with shareholders. First, cash from operations.

As stated in the earnings release this morning, we generated $33.6 million of cash provided by operations for the quarter. As part of this computation, in August we made a final tax payment relating to 2013 income in the amount of $49.2 million, reducing our cash provided by operations by this amount in the month of August in the quarter. Excluding this payment, cash from operations for the quarter would have been above $80 million.

We generated approximately $25 million of cash provided from operations each month -- June, July, September, and excluding the tax payment, August as well -- and we anticipate positive cash from operations going forward. And we have our balance sheet now working in our favor as opposed to working against us.

Secondly, inventory moved in a positive direction by approximately $20 million in the quarter. We are making headway with our global inventory balances and we anticipate that we will continue to see positive reductions in the inventory balances of approximately $20-or-more-million each quarter in the next several quarters.

Third, we borrowed $300 million at the time of our debt refinance. We used approximately $185 million to retire our outstanding debt and associated fees at the time. The balance will be used according to our stated priorities for uses of cash. First, invest back in the growth of the business and, secondly, drive shareholder value.

Then, finally, relating to our fourth-quarter guidance, we are estimating the dollar will continue to be strong throughout the balance of the quarter and this year. For example, we estimate the yen to be approximately JPY115 to the dollar and the euro remaining about where it is trading today. The strengthening of the dollar has had a significant impact on our guidance as well as our sequential and year-over-year comparisons. Also, we do not have significant LTO plans in the fourth quarter, as Truman mentioned earlier in his remarks.

So as we compare the fourth quarter to our third-quarter sales, we lose about $30 million because of foreign currency fluctuation and about $60 million or so in comparable LTO sales. These two headwinds are offset by what we expect to see as an improving core business in the fourth quarter. Note that our earnings per share guidance also reflects the $0.08 EPS impact from the prepayment fee associated with the refinancing of our debt.

We look forward to sharing our detailed 2015 plans to rekindle growth in our business at our investor day on December 12 and we invite all of you who can make it to come here. Would love to host you here in Provo at our new headquarters. With that we will go ahead and open up this call for questions.

(Operator Instructions) John Faucher, JPMorgan.

Thanks. Two follow-ups on some of the comments you made here. Ritch, first off, can you talk about -- so I understand the payment of the debt. Did you take on additional debt and can you talk about where you are sitting from sort of a cash balance standpoint? And then sort of how you feel about your access to the cash internationally.

Then, following up on the selling expense comment, as you look to regain momentum, does having a lower selling expense mean -- it means you are obviously paying out less in total commission dollars, which makes sense because the revenue is down. But are you going to have problems with recruiting, etc., if your commission rates are actually lower. So if you could talk about sort of actual commission rates versus simply the LTO impact longer term. Thanks.

You bet. Good morning, John. In terms of the payment of our debt and so forth, you will notice at the end of the third quarter we had about $20 million or so in cash above the debt amount. So net cash of about $20 million.

We expect cash from operations in October to be positive and so at the time that we borrowed $300 million we paid off about $185 million. The excess there just goes into our cash balances, so we are currently sitting on ammunition that we can use in a lot of different ways to drive growth in our business and shareholder value.

We don't have significant challenges getting our money from overseas. Venezuela, I would say, is the only real problem in terms of getting cash out of the international market and back to the US.

As it relates to the selling expense, our core selling expense really runs right around 44%. That is core selling expense plus our general amounts that we allocate towards selling incentives such as trips and recognition, promotion events, things like that. As the business grows, as our sales grow that number increases because we have more people who are qualifying for the selling incentives and so forth. And as the business slows a little bit that number comes back down.

So it allows us to really maintain our profit margins as we go up and down in the business, but would expect it to go back towards 44%. That is on the high end of people in our industry. It is a very compelling opportunity for people to come in and earn a good level of income.

I think that would summarize my comments on those questions.

Tim Ramey, Pivotal Research Group.

Thanks, good morning. Ritch, I wanted to press a little harder on the cash question. Is it possible to say -- a lot of moving pieces, the debt paydown. I think you may have paid down the Japanese and Korean notes subsequent to the refinance and so I guess in theory that leaves you with well over $100 million in cash now.

First of all, why did you draw that on 10/10? And, second, am I right that over $100 million in cash effectively from the refinance transaction is correct?

Good questions, Tim. I think generally we like to keep a balance of around $200 million of cash just as it is scattered around the world. That is about one month of sales, so by doing this debt refinance we essentially are sitting on somewhere between $100-plus-million of excess cash that we have right now.

Why did we borrow it on October 10? Just to have flexibility and to be prepared for whatever we need to. I think, in terms of going forward, as we stated we will use that to drive growth in our business and to drive value for shareholders.

Terrific. Just a further elaboration on the inventory picture. I mean it was high at, gosh, over 300 days of inventory. At the end of the 3Q you mentioned that you worked some of that down.

How would you think that would trend out over the next several quarters as we progress and move into some of this more aggressive selling?

Generally I anticipate that it will go down by $20 million to $25 million a quarter, at least through the second quarter of next year. And the third quarter will build inventory a little bit for LTOs that are planned in the back half of the year, but I think you will see real nice progress. And, frankly, we are encouraged with the way things are going.

We believe we have got a good handle. We spent a lot of time ensuring we are doing all we can to move the inventory. The positive here is that, as we mentioned earlier, the balance sheet is working for us now in terms of driving cash and we will have positive cash from operations coming from the inventory balance every quarter here going forward.

We don't anticipate any large write-offs. We believe we have taken the significant amount of the risk that we viewed in the inventory balances back in second quarter when we took that $50 million write-off.

Just a final one on China. I have got you modeled sequentially down for the fourth quarter in mainland China. I think you almost have to do that to get to your sales guidance. Does it strike you -- and I think it will still be down year-over-year in the first quarter. Do those statements sound correct to you?

Yes, I think -- generally I think it will be down slightly, but just a slight amount. We don't see -- and it's primarily due to the fact that we had an LTO in July, so in the fourth quarter we don't have any plans LTOs. Even then, my modeling has us in mainland China only down about maybe 2% or so in the fourth quarter.

So we actually see the business quite stable. We see the pipeline of sales leaders filling. It is lower than we would have hoped I think three months ago when we gave our guidance, but we believe it is steady. As we mentioned in our call, we believe we have a good probability of growing the business in the future here, especially even in 2015. So, yes, we are not disappointed in terms of our potential in China at all.

Terrific, thanks.

Olivia Tong, Merrill Lynch.

Wanted to ask a follow-up question on cash, because while cash flow from operations turned positive this quarter and I know you have got the 2013 tax hit in there. But this is the third quarter now where your cash flow isn't covering your CapEx and dividend. Obviously, your dividend was set when the earnings outlook was quite a bit different than it is today.

Can you talk about your plans with respect to how you return value to shareholders as you referenced in your press release and earlier in your prepared remarks? And more specifically, your commitment to your current dividend?

We certainly have ammunition now, as we talked about in response to Tim's question, in terms of having cash and also flexibility with our covenants. Secondly, would expect our cash from operations to go positive and actually be benefited by our balance sheet going forward. We had to recoup somewhere around $400 million or so of sort of negative working capital throughout the first half of the year.

Those issues are now behind us, so our cash from operations will be positive. Our dividend level is, we believe, in line with where we can be and should be going forward.

And the CapEx number continues to include some sort of finalization of our buildings here in Provo and in China. Most of those are done now, but we do continue to invest back in the business. We think continuing to revamp some stores in China and build new stores is important to our future there, so we will continue to invest there as well as computer systems and so forth to help us with CRM initiatives we have in place.

We are certainly not stopping investment back in the business because we believe there is a lot of opportunity to grow as we go forward. And cash from operations will exceed dividend and CapEx in the fourth quarter and going forward.

Got it. Did you guys give the CapEx number for this quarter?

No, it will probably be between $15 million and $20 million in the fourth quarter.

Okay. I am sorry for Q3, the actual for Q3?

It was $20 million; $21 million, I believe.

Got it, okay. Then on the -- I was just curious on returns levels, have they changed in any way? The returns from the distributors back to you guys.

Actually, they are coming down slightly. It was about 3.5% in the second quarter and 3% in the third quarter so, yes, the trend there is positive.

Got it, okay. Then just lastly; on the comment around local currency sales outlook for 2015, seeing some year-over-year growth in 2015, can you talk about some of the puts and takes that is driving that by region or how much is coming from new products versus base business? Just a little bit more color on how you get to your growth algorithm in 2015. Thank you.

It is largely, Olivia, a function of the fact that we have relatively easy comps in the second half of next year at a moment in time when we have good ammunition to use in our product launch pipeline. So we are optimistic, as we indicated, about both Pharmanex and the Nu Skin product development initiatives that will be in play next year.

First quarter is still a tough comp on a year-over-year basis, but after that the comps become easier. We obviously don't know where currencies are headed, but feel like the business is stabilizing in China to the point where we can potentially generate growth there. And really in every other region around the world our growth outlook is relatively positive for next year.

Bill Schmitz, Deutsche Bank.

Just to make it super simple, can you just tell us how much cash is exactly on the balance sheet right now and what the leverage ratio is and maybe like a range for a cash flow from operations guide for the fourth quarter?

$320,475,204 (laughter). I don't know what it is today. I don't know exactly what it is, but it is over $300 million. We continue to have more cash than we do debt today. And like I said, I think the fourth quarter, the last four months with that one exception in August, we generated between $25 million and $28 million of cash from operations every single month. That will be consistent going forward as well.

So let's assume we generate $70 million to $80 million of cash from operations. We will probably use somewhere around $40 million to pay our dividend and to invest back in capital expenses, so we will add somewhere between $30 million and $40 million to our cash balance. That can be used to generate shareholder value. We can use that to buy back shares.

We have both flexibility as well as ammunition and generally support from our Board. We will just analyze the best way to use that, as we always have, as we manage this business. We have tried to be prudent and at the same time use our balance sheet to benefit shareholders in the long-term. We are not as focused on the one quarter as we are looking out and watching where we think the business is going. We are very optimistic about that.

Okay. And then this might be like too granular, but can we kind of deconstruct the inventory a little bit? Starting with $369 million, how much of that is still TR90? How much is Galvanic Spa and then how much is more like the normalized, I think it is like $200 million to $250 million, you need to run the business?

There is three primary products that have caused our inventory balance to be higher. It is the TR90 product and you know earlier that we took a write-off against that, so we have probably somewhere between $30 million and $40 million remaining globally in our TR90 inventory.

We also have TFEU, which is the product that we just did an LTO with in China, as well as South Korea, and Japan is coming up this quarter. So a brand-new product, a good product. We probably have somewhere around $30 million to $40 million of that product as well. Then, finally -- that have been all built up for these LTOs that we are doing.

Finally, the Galvanic Spa which has a long lead time and is our top-selling product around the world as well. But we had a lot of PO's in place trying to keep up with the growth of the business last year. Those have pretty much played through today, but we have a high balance, probably a little over $70 million, of inventory in the Galvanic Spas.

Fortunately, that product doesn't have a shelf life on it. We use it; it is our top-selling product. As we have scaled down the supply now we are making headway on that balance as well.

But generally those three products bring us down below that sort of $250 million level that you mentioned, Bill, and those are the three products that we will see as we roll them out and continue to sell them continue to come down. But it is moving in the right direction. I'm actually very positive about where our inventory balances are going.

Okay, great. Then have you taken a stab at how much the Hong Kong protests impacted sales, both in mainland China and Hong Kong? Because I know there are a lot of visa restrictions for people traveling from China to Hong Kong, to come across the border during that period.

We haven't heard from our team there, Bill, that the protests have had a material impact on sales.

Okay, great. Then just lastly -- and this has always been sort of a concern of mine -- at some point I hope we can focus on the fundamentals instead of all of this extracurricular stuff. I'm still just curious where all these lost executive distributors have gone and why they haven't come back. Are they frustrated? Did they lose money?

I know you can kind of fast-track them, but they are not coming back as fast as I would have hoped. Can you just talk a little bit more about that? And then maybe just the credibility of the guidance you are getting from the Chinese management team. Because as I look at the fourth-quarter guide -- tell me if I am wrong -- but even in local currency it is a little bit lighter than what you guys talked about in the third-quarter.

Yes, so let me just phrase it a different way that I think might get to your question, Bill, because I have asked our team, too, the question of whether what we have gone through in the course of this last year with the regulatory scrutiny, the media scrutiny, and whatnot has damaged our brand to the point where we can't recover? Or has the scrutiny that the industry has been under there somehow negatively damaged the environment to the point where direct selling generally will suffer?

And we don't think that that is the case. What we are hearing from our team is that our brand is vibrant. We were able to quickly resolve the media and government inquiries, that direct selling continues to do very well. We note that many of our competitors are doing even much better than we have done over the course of the last few years.

So we are not -- we don't believe that anything that has happened there has negatively impacted China's prospects and our view that it will become the world's largest market for direct selling in the not-too-distant future.

We are as anxious as anyone to recoup the executives and the active accounts that we have lost. It is really just a question, we think, of stabilizing our core leadership base, which our numbers are showing to a great degree, as you look sequentially from -- as you wash out LTO volume and look sequentially at the revenue line from Q2 to Q3 and now into Q4. And getting them renewed reason to believe, based on prospects of healthy business initiatives coming down the pike next year and in 2016.

So we are hopeful that the tide is turning and that as we ramp up our ability to promote the business and hold meetings. Let me also just mention that we actually didn't -- we actually weren't able to let sales leaders conduct their own promotional meetings in scale until August of this year. So into the third quarter. And August, September, October we saw nice upticks in numbers of meetings and numbers of participants in those meetings.

So as that continues to blossom and as our sales leaders do what they do, we expect to see some recovery in the active number and in the sales leader number as well.

Okay, great. Just the question about the local currency guidance for the fourth quarter, has that changed markedly? Because it seems it is a little bit lower than you guys last kind of talked about it.

Basically, it is a reduction of about $60 million from where we were just a little -- three, four months ago. It is $30 million of that is currency and the other $30 million is really a reduction in our Greater China expectations for the fourth quarter. Just the fact of the matter is it has taken us longer to see that business turn than what we had anticipated earlier.

And just to add a little more color to that, Bill, I would also say that we have been a little bit surprised that the disruption in China has been disruptive in Hong Kong and Taiwan as well. I mean we had thought that those businesses were perhaps less linked than they ended up being and so the disruption in China has ended up being disruptive in Hong Kong and Taiwan as well. And that accounts for a little bit of the softness there in Q4 as well.

Great, thanks. And I know I'm being that guy, but one last one. How much stock can you buy a day based on the restrictions in place? Do you know?

The restrictions are 25% essentially of your trading volume over -- there is a look-back period. So, based on our volumes, that is a lot of stock you can buy every day.

And when does the window open to buy back?

That is really dependent on a lot of things, but generally after all the information is disseminated into the market.

Okay, great. Thank you, guys. Sorry for all the lengthy questions.

Frank Camma, Sidoti.

Good morning. Thanks for taking my question. Just wondering if you would let us in on what you have learned from the TR90 experience here. Obviously, it was a really well-accepted product by your sales team and it's kind of obviously not had good sell-through this year. Just wondering what you learned there and perhaps that helps you going forward, or how you can reposition that product.

We have learned a lot, Frank, not only with respect to the product category, but with respect to the way we launched it. TR90 is going to be a product that we anticipate will do north of $200 million a year in sales going forward and hopefully even grow from that level. So it is difficult to call it a miss, because it is going to be a meaningful contributor to our results.

But we have learned some things. It is a category that requires a high level of handholding with consumers and our salesforce probably didn't expect that to some degree, and so some markets have done better with it than others. The US, for example, is a market where TR90 has become very much a part of the product story and is very well adopted into the way the distributors are doing business.

But our product message is a little bit different than what consumers are used to hearing, too. Really the benchmark for weight loss product tends to be the bathroom scale and our message is that it is not about weight loss, but it is about fat loss.

Sometimes people have to age a bit, and when you cross the 50 threshold and realize that muscle evaporates overnight the retention of muscle becomes a lot more meaningful than perhaps when you are in your 20s. Our product message is a little bit more complicated than just maximize weight loss, but that message is now getting through to our salesforce as well as to consumers. We are not pessimistic about the product.

With respect to launch process, you will recall that we launched it in a three-month package. The price point was relatively high and, if we had to do it over again, we would probably break that down into a one-month package because people like to have the opportunity to try it before making a three-month commitment.

There are lots of takeaways from the TR90 launch this year and we will be better because of it. We will actually be a lot better, both in terms of how we communicate products and how we launch them.

Okay, great. The other question is just on guidance here. So the guidance you are giving, Ritch, includes the impact of $0.08, so we can normalize for that and add that back if we were to look -- for example?

Yes, that will just be a one-time deal.

One-time charge. Then if I run it through a model I'm coming up with an operating margin somewhere -- to get to our numbers, somewhere in the mid-13%, call it, to high 13%. And that is obviously pretty well below where you have been for quite some time.

Is that just -- obviously some of that is currency affect, but is that also kind of the impact of the lower sales on the G&A line, the negative operating leverage there?

Yes, a little bit. There is also -- we have a couple conventions this fourth quarter in Japan and then in the US that adds a little bit to our G&A number. But, yes, you are generally right on where I have my model.

Okay, great. That is all I had. Thanks.

Scott Van Winkle, Canaccord Genuity.

Thanks. A question on the LTO, the $80 million you referred to in Q3 and then coming down in Q4 and kind of seeing what the business looks like in kind of a normal course. Would that $80 million in Q3 -- can you give us a breakout of where that was, China and Korea, I believe, but kind of how much in each market?

China and Korea is exactly right; $60 million in Greater China and $20 million approximately in Korea.

And the Q4 LTO is in Japan?

Correct.

So if I pull $60 million out of mainland China in Q3, for you to be down sequentially I mean, ex-LTO, it sounds like you think China is going to be up sequentially if we exclude the LTO?

Yes, it will be.

That is the point, Scott. If you look at the core business, Q2 to Q3 to Q4 the picture is decent.

Okay. That doesn't really correlate with the executive level sales leaders. What is the difference? Have you gotten down to kind of the productive salesforce at this point or more productive salesforce?

I am wondering how we see the -- I have been watching the executive level numbers, the real key indicator for China to turn positive on a sequential basis, but it would sound like it is going to happen on revenue without the distributor number.

You are exactly right in staying focused on our executives as the key number, executives and actives. The leading indicator would generally be those new people who are qualifying to become sales leaders. They then become sales leaders; they are the ones who build your active base.

And so we are looking at the same things you are. We are encouraged, as Truman mentioned in his script, about the pipeline that is filling. You will remember that we only started accepting applications in the month of May this year after being shut down for four months. And so that pipeline takes a little while to fill, because it is a four- to six-month period of time before people qualify to become a sales leader in China.

It takes a little while to fill that pipeline and turn that number back going into a positive direction, but that will be the key to the business turning in China.

Great. Truman, you talked about being surprised how Hong Kong and Taiwan were kind of linked to mainland China. Why is that the case? I would assume that they were just very separate; obviously the compensation plan is different etc., etc. Why is there connection? Is there crossover of Hong Kong and Taiwan leaders that kind of built the mainline China business?

Well, there is some of that but I would characterize it as more as just enthusiasm in the Greater China community for the prospect of growth in mainland China.

The businesses really do operate distinctly. Our compensation model is different in Hong Kong and Taiwan, obviously, than it is in the mainland, but those communities are relatively tight knit in many ways. We think it was just the prospect and the optimism for the prospect of developing business in mainland China that took a little bit of the air out of the bubble in Hong Kong and Taiwan.

Thanks. And then, Ritch, the Galvanic Spa inventory of $70 million, can you give us a reference? What would that have been a year ago?

Probably half that. I don't have a number right off, but it grew a lot towards the end of the year and then particularly this year. Those PO's that we had in place, generally there is a fairly long lead time, so we had quite a bit of spa inventory continuing to come in through the first half of the year.

It was really just in the second part of the third quarter where our supply and demand went the other direction and we actually -- our demand now is ahead of where our supply -- we have been able to bring our supply down. So it is moving in the right direction. You will actually see improvements even better here as we go into the fourth quarter.

Great, thank you.

Listen, we appreciate everyone joining us on the call this morning. As we mentioned a couple of times already, we are looking forward to our annual investor day on December 12. We are eagerly awaiting as many of you as possible to come out and letting us show you our new facility which houses our R&D efforts and our scientist team.

At that meeting on the 12th we are going to go into some detail on our product launch plans for 2015 and 2016 and give you an update on the rollout of these initiatives over the course of the next couple of years, which we are optimistic about. We hope you will all find excuses to come to Utah and ski that weekend and join us for our December 12 investor day meeting. Thanks for joining us today.

Ladies and gentlemen, that concludes today's presentation. You can disconnect and have a great day.