Nu Skin Enterprises, Inc. (NYSE:NUS)
Analyst Day Call
November 14, 2012 9:00 am ET
Scott Pond - Director, Investor Relations
Steven Lund - Vice Chairman of the Board
Truman Hunt - President, Chief Executive Officer, Director
Joseph Chang - Executive Vice President - Product Development, Chief Scientific Officer
Daniel Chard - President - Global Sales and Operations
Ritch Wood - Chief Financial Officer
Olivia Tong - BofA Merrill Lynch
Scott Van Winkle - Canaccord Genuity
Good morning and thank you for joining us. We appreciate you spending a little time with us here at our annual investor analyst day. I appreciate you taking time out of your busy schedule. So we look forward to today.
It’s a great day for Nu Skin Enterprises and I will remind you that today's presentation will contain forward-looking statements that involve risk and uncertainty and would recommend that you review our SEC filings for a full discussion of those risks. We also put in our presentation some non-GAAP numbers which we believe helps us in comparability measures and so we have tables to reconcile those but to make you aware of that as well.
Here is our presentation outline for today. We will follow these steps. We will, first of all, talk about the foundation upon which we believe we can continue to sustain growth as we go forward. As always we will do a reconciliation of what we told you we would do in 2012, last year at our investor day. We will do an accountability of that. Talk about 2013. We are projecting another record year, as you will notice with our guidance that we provided this morning. We will talk about a product pipeline. Our next five-year plans with the product pipeline, as well as our ability to improve our channel and continue to grow our sales force.
So I will pause for just a second. This month actually marks my tenth year as the CFO at this company and man, as I look back, it seems like a lot longer than 10 years. We have been through a lot, obviously, including coming through the most difficult, probably economic period, this country has seen. Yet, our business has continued to be very consistent and perform well. For these reasons I feel more confident than ever today that the future will be better than anything we have seen in the past. The best dates for Nu Skin Enterprises are in the future.
I base that on a few fundamental principles here. First of all, ageLOC. This brand has bridged now, provided an umbrella between our personal care and our nutrition brands, continues to get better and better traction. Our product pipeline, which Joe is going to talk to you about in a few minutes here, is participating in bigger categories than anything we have done in the last five years but it is not just the product pipeline, it’s the process which we are using to launch products that are driving these launches to be more and more incremental and more and more powerful at growing our sales channel.
We are seeing growth today in every single region that we operate. We are investing in our channel. We will see continued channel innovation. We will have new R&D that we are moving into, new data centers, new expansion in various markets. So we continue to innovate in this area.
We have a strong balance sheet and strong cash flow, both of which play very well in terms of our ability to create shareholder value and the management unit has been in place for a number of years, together with an experienced sales force that make a great combination for our ability to grow the business in the future.
Let me just highlight a couple of our board members who are here today. I recognized them. We have back at this table, Neil Offen. If you can stand, Neil. Appreciate Neil being here. Andy Lipman, as well. Thanks, Andy, for joining us. We have got two more, who I believe will show. I don’t see them here. Tom Pisano and Patricia Negrón, who will also join us today.
Then Steve Lund, who is the chairman of our board and has been one of the founders of the company. He has seen this company grow from, basically zero to where we sit today at around $2.1 billion. We will turn the mic over to him for a few minutes to give a quick part of his presentation and then he has actually got to run and catch a plane. So we will dismiss him once he is done but great to have him here with us today. We will turn it over to Steve.
Thank you very much and thank you all for taking an interest in our company and being here today. I have been around since the beginning of the company. So we thought, I might just take a few minutes and walk you through the history of the company and give you an historical context for what it is that were about.
The company started in 1984 just after I got out of college. I was a young lawyer practicing law and a friend of mine, one of my college friends approached me about doing some free legal work in exchange for some worthless stalk in his little start up company. He told me the story about having developed a product line around a list. A list that had been developed by his sister and her friend who were skin care buffs, who were reading through the popular press about interesting innovative ingredients that were making their way from pharmaceutical science in to cosmetic science, as these ingredients were appearing on generally regarded as safe lists.
So they would read about these powerful anti-aging humectants and so forth and then go down to the local department store and look for those ingredients by reading ingredient panels and were frustrated to find that if they could find any of those ingredients, there might be one in this product and one in that product but there wasn’t anybody that was really trying to incorporate the latest and most innovative ingredients that were coming on to the marketplace. At the same time that they found some of those ingredients, they would find along with them ingredients that they have were reading about that were actually bad for the skin, fragrances and coloring agents, preservative systems that they gave the product long shelf life, emollients that might give the product a wonderful glide at that point-of-purchase tester that would sell the product but actually had properties that bowtie allergic response rates or that were harmful to the skin.
So they ended up with this list of good things and bad things and approached Blake, who was a recent graduate in business finance with the notion of building a product line around that list with all the good stuff and none of the bad stuff. If he created a product like that, they urged, we would want to use it and they were sure other people would want use it too. He found a manufacturer and started a product around that simple notion of all of the good, none of the bad which became our little slogan for many years in our product development and still informs our product development process to some extent as we try to ensure that a product labels contain the best that science and technology have the offer.
During those early years, of course we learned that we are in a heavily regulated industry and we learn to navigate those waters. Well, we hope that you take some comfort in that fact that we have been down the road and have developed a lot of expertise in dealing with regulatory issues. If we think about the company in terms of its growth phases, perhaps we can that phase one.
The second phase of the company would be from about 1991 to 1996. This was a period of rapid international expansion. Expansion that was fueled by an innovation. We invested heavily in the technology that didn’t exist at that point in time but we were able to create that allowed our distributor force to be paid commissions on their sales activities not only in their home market, but in all of the Nu Skin markets as we opened them around the world. So somebody from Topeka could go to Tokyo to Sydney follow their most promising leads around the world and develop marketing organizations and then be paid commissions across borders and across currencies and then even across languages and Kanji characters as things evolved and be paid in one consolidated commission check back in the home market.
That innovation was something like a free trade agreement within the Nu Skin world that that energized our distributor force. When we went into new markets, we went with the full weight of our distributor force behind us as they went and followed their family and business contacts in to those markets. So it allowed us to undertake rapid growth.
During this period of time, we got in to the dietary supplement business. We found that we were running in to many men who are interested in our business model, interested in the business opportunity but who could never in the world see themselves selling lotion and shampoo for a living but who were interested in health and nutrition and so by adding an additional category, we were able to enlarge our distributor force to be more inclusive of men and that has paid off through the years, as we have a pretty balanced force today. We also saw during this period of time a robust growth in our international markets as we continued that global seamless compensation plan fueling our growth.
The third phase of the business is perhaps 1996 to 2003 where we elected to become a public company. We initially took our Asia Pacific units public to test the waters. That was our best story at the time. We also acquired Pharmanex, which is a research and development company. This is a group of pharmaceutical scientists who were, at the time that we bought them, developing products, herbal products for the retail market. They had significant research and development assets here in the United States and also in China where the R&D work could be done at a much more economically favorable rate. That was very important to us because we saw that we were moving into an increasingly complex regulatory world. Trying to satisfy the regulatory requirements of multiple countries around the world would mean that we would need high levels of expertise to customize our products to local food and drug regulatory requirements and at the same time have a research and development pipeline throwing new interesting innovative products in to the marketplace that would find traction in each of these markets around the world. Pharmanex proved to be the answer to those difficult questions.
During this time we also consolidated our global operations under the public umbrella. The IPO had gone well and we found that there was great advantage in our industry in the transparency that being a public company lent. Our distributors no longer had to convince people that this was a reliable company that had staying power. They are going to come in and invest their time and money. You were answering that question for them as analysts and public reporting and so forth, the audited financial statements and so forth answered all those questions. So our whole global operation was then brought under that public company under the brand of Nu Skin Enterprises, as we exist today. We also during this period of time continued to expand internationally.
Phase four would be 2003 to about 2008. We had done a pretty good job by this point in time of growing our top line. So we were able to turn our full attention towards building efficiencies within the business. We transferred control of the company by eliminating the super voting stock that was held by the original founders and with that elimination gave public control of the business. We also underwent some significant G&A restructuring, lowering our headcount by about 30% which allowed us to expend resources in those places where we would be able to create the most value. We also built a global business strategy aligning our markets so they were all working on similar product launches and similar product ideas, similar initiatives all the way around the world. So this global distributor force, as they moved around could talk more intelligently about what was happening from market to market rather than having to go relearn what the state of the business was. That realignment has been very material to our current successes. This is also the period when we first entered China setting the table for the benefits that we are now seeing and we will talk about it later in the morning.
The phase five, our present phase began perhaps in 2008 when we announced an initiative that we call Nu Skin 2.0. This initiative is built around some goals of growing the company to $5 billion by the year 2020. Now frankly that seemed like a pretty audacious goal back in 2008, 2009 when were doing about $1.2 billion or $1.3 billion a year in sales, but as we have gotten down the road and as our planning has been executed over the past several years, our optimism that we are going to be able to reach those goals is very, very high. We are ahead of schedule. The foundation that this management group is been able to lay clearly has the capacity to grow through those numbers.
We are proud of our research and development engine that’s produced a brand, the anti-aging products around the ageLOC product brand. This involves technologies that are proprietary to us that will continue to fuel a sequence of product launches that we can see well-off through the short and medium term, going forward.
Our board has done considerable work in order to create some performance-based management incentives so that our management options vest when we meet our EPS targets from quarter-to-quarter. So that alignment of creating shareholder value, as we create management incentive payments, has been very, very helpful to us in growing the company and ensuring that our growth is always focused around growth that benefits shareholders.
So our 28 year history graph looks something like this where we have seen strong and consistent revenue growth throughout this period of time. You can see that there are some trends there, some ups and downs. We face those trends like every other business does but we are proud of this graphic as this shows that even when we have seen changing marketplaces that have caused us to lose a little traction from time to time we have always been able to find responses and re-energize our distributor force around appropriate initiatives that have allowed us to consistently grow revenue.
We are a corporate responsible enterprise. We were corporately responsible before it was popular to be that. That’s partly altruism, but it is largely just a recognition that sales is a very difficult business and that the salespeople have hard days and that sales people and all people will sometimes do more for a cause than they are willing to do just for a paycheck. So by aligning ourselves with causes that are bigger than ourselves and that are very aspirational and that are actually making a material difference in the world, our distributor force and our employees take great pride in being involved in this enterprise and that pride allows them to push through the difficult sales cycle from time to time and stay engaged because they believe in the good things that we are doing.
Some of those things involve great progress in finding remedies for an orphan disease, EB, through our relationships with Stanford University. Through our social enterprise activities, we have the provided over 280 million meals to children around the world, primarily in Malawi, who are a little country of 12 million people, suffers with a burden of about 2 million AIDS orphans. So by focusing the charitable intent and the goodwill nearly a million salespeople and aggregating that goodwill and focusing it on some specific charitable activities we have been able to make a very material difference in the world.
Now the street is never going to fully appreciate this element of our business but we can't overestimate or over express how important it is o our business. It really is the glue that holds us together. That is one of the reasons why our retention rates are better than most and certainly our corporate employee retention rates are very, very attractive. Our management team has been with us for a long time because they believe in what we do, both on our business side and in our force for good side. I think this management team is arguably the brightest and best in our space. They have been down the road for many years. They are not learning the task on the job but have had enough experience that their decision-making gets better and better as we go along. So we are proud of this company. I am proud of our management team.
With that introduction, Truman, let me turn the time over to you. Truman Hunt is our President and Chief Executive Officer. Thank you very much.
Good morning everyone. Very nice to see you here and I know that many of you are still dealing with the aftermath of the storm. So thanks for going out of your way to be here this morning, I want to start by giving a little bit of a framework for what it is that we, as a management team love about this business. And I am going to do it in the context of a little psychological framework here to explain how I, and I think all of us who are here today, have really come to be addicted to this business and to our company in particular.
So I am going to refer to, what is commonly known as Maslow's hierarchy of needs here, and give you a little analogy for what it is that we love about this business and why we think strategically direct selling has a very bright future.
At the bottom of Maslow's hierarchy of needs, he talks about physiological needs, just basic human needs that all of us have to have met and when I think of brands that are associated with those basic human needs, these are the three that come to mind, Wal-Mart or General Mills or Nokia.
As we work up the framework here, we also all have a need of feeling safe and secure. We need to feel a sense of reliability and trust. When I think of brands who are associated with that human need, perhaps Procter & Gamble or Ford come to mind.
As we continue to move up the scale, all humans need to feel friendship and connectivity in the sense of family and belonging. The brands that I would put with that need might include Facebook or Disney or eBay.
We all want to feel a sense of pride and a sense of self-esteem and respect and prestige in our activities. So we might put (inaudible) or Mercedes but the highest of all human needs is the need to be engaged in something that enables us to be all that we can be to make a difference in the world, to have our lives stand for something that is good and not just have our lives stand for something as trivial as perhaps the size of our bank account.
To me, this is where direct selling lies. The thing that becomes so addictive about this business model is the fact that we have the opportunity to partner with thousands and thousands of incredible human beings all around the world who are working diligently and striving their hardest to become all that they can be. We as a corporation partner with these good honest hard-working men and women who are doing their best to provide for their families and provide them the quality of life that they seek and that really is what makes this such a different such a compelling business from a personal standpoint.
Now we continue to believe that direct selling is the lowest cost, lowest risk vehicle that an entrepreneur can use to improve his or her life. The fact of the matter is there just aren’t any other opportunities out there that are as low cost and as low risk as direct selling is. We are not going to spend a lot of time this morning talking about market trends because every time I pick up the newspaper, I am reading about trends daily that favor what we do in our channel. I just want to highlight a couple, however.
One is that the number of people involved in direct selling continues to grow globally. The most recent year we have data on this is 2010 and 19% growth rate, year-over-year, almost 100 million people around the world involved in some form of a direct selling business. It is a big number. Sales continue to grow in our industry. The long-term CAGR at about 8% with our shortest term CAGR for 2011 reflecting 8% growth of retail sales generated in our channel of over 22 countries generating north of $1 billion a year in sales. So the transfer direct selling continues to look very, very good.
I want to just spend one second on how Nu Skin distinguishes itself man amidst the myriad direct selling companies that are out there. From a consumer standpoint, we are one of the few direct selling companies whose revenue is roughly equally balanced between the two major anti-aging categories, beauty and nutrition. Most direct selling companies are 98% one or 98% the other. We are one of the few that has managed to build viable businesses on both sides of this equation. We offer premium product offering, a high quality offering where our products are really based on sound science and product innovation. We are focused on the anti-aging space, whereas other direct selling companies might be cosmetic based or fragrance based or perhaps not even involved in personal care. But Nu Skin enjoys a very unique space in the anti-aging world.
From an opportunity standpoint, as Steve mentioned, we were really the first direct selling company to enable our sales leaders to do business globally from their home market to be paid in one check on sales volume that they generate anywhere in the world. Ours is also a significant income opportunity. The philosophy of Blake and Stephen, our founders, was always that we wanted to attract the best and the brightest in the direct selling world and in order to do that we had to provide them with a compelling income opportunity.
We also, as Steve mentioned, operate on a foundation of this very strong culture of all of us wanting to be a force for good but as I talk with other executives in the direct selling world, what distinguishes Nu Skin from, I think, any other company out there, from their perspective is that we have a track record now, a 28 year track record, of continually refreshing the vibrancy of the opportunity that we offer to salespeople. I really believe that that truly is the distinguishing feature of what we do and is largely why we have enjoyed the growth rate that we have over the past decade is that we are becoming better and better at continually refreshing the appeal of our business opportunity. We will talk a little bit more about that as time goes by here this morning. So our vision is to become the world's leading direct selling company not in terms revenue but in terms of generating more commissions for our sales force than any other company generates for theirs. We embodied that vision in the acronym Nu Skin 2.0, which requires that we generate $5 billion in sales in order to pay out to our sales leaders $2 billion in commissions. That is our goal.
Now we are three years into that project, Nu Skin 2.0 vision. So we want to give you a three-year update on how we are coming with respect to it. Our guidance at this event last year was 5% to 7% revenue growth and as you all know we came in significantly ahead of that. From a top line perspective, 2012 has been a phenomenal year and we are very pleased to have grown the business north of 20%. So I think you would agree with me that we have been very successful in that regard. That success is reflected in virtually all of our geographic regions around the world. All showing growth and several, most showing very robust rates of growth but that is 3.6% in constant currency increase in North Asia is not insignificant for us as that reflects the stabilization of the business in Japan, our largest market and now in the second half of the year our ability to grow that market.
From a longer-term perspective, I really think it is quite remarkable to see that in the midst of what really has been the most troublesome of all economic environments over the past five year period of time, we have been able to sustain very robust rates of growth 9% over a 10-year period, but accelerating to 17% over the last three years. So we are very pleased with our growth rate in the long-term.
Now, from an operating margin perspective, last year we guided 15.4% to 15.9%. We are coming in at about 15.7%, a 40 basis point improvement, which we are very pleased with. We would have preferred to come in a little higher than what we had projected, but our selling expense line is taking a little bit of room out of our operating margin and Ritch will be talking about that more in a minute but as we have thought about it, we are happy to compromise a little bit on operating margin in order to drive a higher rate of growth which is what we have seen in the course of the year.
From an EPS perspective, we obviously are well ahead of what we project this time last year. 25% growth in EPS is acceptable to us and we think to all of our shareholders as well. As reflected to, in a longer-term perspective on EPS growth was 34% CAGR over the course of the last six years. And of course that is also reflected in an increasing level of cash flow. An aspect of our business model that I know our shareholders appreciate it as it puts us in a very enviable position with respect to shared purchases and dividends and enabling us to have the ability to continue to invest in the growth of the business as well.
From a longer-term perspective then if we look at our 2020 target, as was indicated we want to get $5 billion level. The reason why I put this slide up is because you will see that, from a growth rate perspective, we can actually slow our rate of growth in the upcoming seven years versus what our rate of growth has been in the course of the last five years and still hit our $5 billion target. So we are operating ahead of plan and, as Steve indicated, feel that what was once an aspirational target of $5 billion is no longer just aspirational. It is even realistic.
With respect to 2013 as you have already seen this morning, we have encouraged the market to model about 8% to 10% revenue growth for next year with a 1% to 2% currency hit on that growth rate. At 10 basis points to 30 basis point improvement in operating margin which pushes it above 16% and 10% to 15% EPS growth rate. These are, as has been consistent with our track record over the past many years, conservative growth projections and you know, Ritch really is a conservative kind of guy when models our finances and we appreciate that and I appreciate that and I know that you do too. So we will continue to do what we have done the last several years in 2013.
There are two ways to grow our business primarily and to sustain growth. One is through continued product innovation, the other is through channel management. I want to invite to the microphone, Joe Chang. He is our Chief Scientist, who is going to walk you through our product pipeline in the upcoming several years.
Good morning. Just again, I would just like to echo Truman's comments on the hurricane here. Some of you I have spoken to before the meeting started. You had a couple of days of power out each and hopefully lights won't go out today.
As Truman mentioned, that science drives our product innovation at Nu Skin and I just want to take you a little bit through the process that we undertake at Nu Skin because it is a process that we adopt to make sure that our product innovation continuous and to ensure that our pipeline is full for the next for the next five to seven years.
So, briefly when you look at our product strategy, it is fundamentally focused on this leading edge science and that I believe over the last couple of years, we mentioned to you about gene expression science and how we use the understanding of genes to drive our anti-aging product strategy. But really the process is much more than that and if you look at our process it can be broadly categorized into two toolkits if you will. These are scientific toolkits, obviously.
The first toolkit is primarily focused on discovery science and the second toolkit is really on how we use the understanding to then throw it into the developmental toolkit to then crop and make sure that the product emanates or comes out from the other end and is soundly substantiated with scientific evidence and so on for our claims when we launch the product.
So when you look at these toolkits then, the first toolkit here that we have regarding discovery science consists of a variety of tools that we have adopted and we have also licensed and created among the R&D scientists we have and fundamentally these are tools and you can imagine it is a comprehensive toolkit insofar as we use a variety of scientific disciplines to apply these tools to have a much better understanding of the aging process and as you see on the right there, one of the tools is much related to gene expression science and is really to understand how genes affect the aging process and since gene is the final product when you somewhat tickle the gene, is the synthesis of a protein and these are the proteins that drive the aging process, we have found some avenues and some strategies to influence or to at least influence the expression of these genes to make sure that they remain at a youthful state.
So most importantly then, the desired outcome of the discovery toolkit is to make sure that we have a big idea than science. When you have a big idea, then our scientists are able to then work upon and leverage this big idea to see whatsoever the next generation of innovative anti-aging products that we can develop over the next few years. This discovery science toolkit is more than just what you call supplements, it also can be applied to skin care as well. So it’s a broad-based toolkit and we are rather proud that we have such a toolkit within Nu Skin because that’s the only way we believe that we can innovate.
When you are finished with the discovery science, you move into the real business of making a product. After all, we do have to make a product and we are not staying in an ivory tower. So when we have a much better understanding of the aging process, these discoveries or these big ideas or insights will allow us to crop a product and to make a product in such a way that we believe that we have a good chance of making sure that it works in the humans. This is where, importantly, we conduct human clinical studies. In our industry, we believe we are at the leading edge in conducting such clinical studies and more importantly also, we look at the global regulatory environment and see how we can adapt our products o fit those regulatory requirements.
So importantly then this development toolkit has many tools to allow us to achieve that particular outcome to be able to make a product to crop a product in such a way that it meets the global regulatory environment. So if you take these toolkits together and combine it, that’s what you have. At the end of this particular pipeline, if you will, is that the generation or the creation of innovative anti-aging products, both in skin care and also in supplements as well.
Those are just two examples, most recent examples of what we have been able to achieve with this particular process and that is the development of Transformation set a couple of years ago. That would be the first or the second ageLOC skin care product we launched. At the bottom, it is the most recent addition to our supplement category and that is the ageLOC R² product. So you can see through that one toolkit feeds into the second toolkit and they are really very, very powerful for us to innovate and continue to make ageLOC product.
So the products are meant to refresh the business opportunity and you will hear much more about how we do that when Dan comes up after to me speak about the launch process. It is a very innovative process whereby how these new products are launched in our channel and I think with our pipeline being full for the next five to seven years, it will be very interesting to see how these products get into the field.
We have a method to support our scientists and many of you have heard that we are building a new innovation center in Provo, Utah and that this will be completed in the second half of next year and a part of this innovation center will be housing our team of scientists and these are scientist that we will be adding resources to them, both in terms of building a state-of-the-art lab and also adding new skills to our discovery science and development toolkits so that they can continue to innovate on the product.
This new science that we will be adding, you will be haring a little bit more in a few minutes time because there is a press release this morning regarding a recent acquisition of new biotech company. Also in China, you can see, this is the new Innovation Park. Again, we anticipate that this particular facility will be completed somewhat in the later half of next year and again will be housing our China scientists in this facility so that they can combine an leverage all of the work that we are doing in Provo and be able to access the knowledge that we can get from the China's scientific team as well. It's been a very powerful and productive combination of two slides of the coin where the scientists bring different sets of skills and different sets of knowledge to product development.
You have heard about the acquisition of LifeGen Technologies last year. In fact, we formally announced this acquisition at our October global convention in 2011 and we believe very strongly that when we started the recent collaboration with these the founding scientists of LifeGen back in 2009, we started an exclusively research collaboration with the scientists. We didn’t know where we would go or where we were going with that gene expression science, if you will. We really felt that it was important to understand the genetic basis of aging and this was one of the best group in the field. So when we collaborated we got rather excited because those scientific insights, if you will, lead us to the introduction of ageLOC product that many of you might be aware of, called Vitality.
That was the first result, if you will, or outcome from the research collaboration and from that it was, we thought what maybe that the end of the research collaboration, but it turns out that it was very productive and after another year or so of collaboration and doing scientific studies, with LifeGen, we decided that perhaps an acquisition would be far more effective for the company. So therefore, in November 2011, we acquired LifeGen and we continued to apply this kind of gene expression science to the nutritional supplement category that we have and we will apply similar type of science as well to our skin care line. As I mentioned to you, this ageLOC umbrella of brand is now covering both categories.
We also have added and this is what I have been alluding to the acquisitions of NOX Technologies and this morning we issued a press release on this particular acquisition. Initially, in fact, again this was the final outcome, if you will, of the research collaboration that we started back in 2007 and because of this understanding of a scientific molecular target, we call it, this particular enzyme that is called arNOX, we have been successful in launching through this particular scientific insight several skin care products, more specifically on Galvanic Gels that are used in combination with our Spa and also the Transformation skin care system, the anti-aging system that we launched a couple of years ago, those types of skin care products were much based on what we found with the role of arNOX in the aging process.
So one thing led to another and again, this would be a very effective addition to our scientific toolkit, if you will, so that we can continue to use this technology to leverage our weight to develop the next generation of products. Since it came out originally from the skin, with this acquisition we can also apply the science to our supplement. So LifeGen came from the supplement angle and arNOX technology came from the skin care angle and you can see once we have the acquisition complete, we can apply this type of science to either category depending on where we wish to go in the future.
So again this baseball analogy. We have used it a couple of years now. We have played four innings, for all intents and purposes. We have launched during this four innings four of those products listed there and the most recent obviously is R² and also the announcement of the launch of another version of the Galvanic called the Body Galvanic which is a tool or an instrument that you can use away from the face and for the rest of the body.
So with that completion we are going into the fifth inning very soon and we can see and I think we have been talking and hinting at this particular new product or the new product system and this would be in the weight management category and that we anticipate it to be launched in the fourth quarter of next year during all global convention.
If you go down the list, we are going to fill out the ninth innings. We left the extra innings somewhat vague for you. It all depends on where we go with the science but you can see that I think with the ageLOC science, as it becomes more mature, we can apply that type of science to the rest of our product portfolio as well. So lots of exciting and rather interesting products coming out in the future.
In October of this year, just to bring you up to speed, we, in the United States, we had been launching all the ageLOC Tru Face Essence. This is an example, actually a demonstration of the proof of principle, if you will, of how we can apply ageLOC science to a pre-existing product. Many of you are aware that Tru Face Essence has been one of our best-selling skin care products and then when we added ageLOC science and infused that into a pre-existing product like Tru Face Essence, we can actually improve its' efficacy and also its appeal to all our skin care consumers.
So that was just launched in the United States and we also somewhat not ageLOC related, but equally exciting for us is that for many years now since 2003 we had this antioxidant instrument that we called the biophotonic scanner. This has been and continues to be the only noninvasive method of measuring antioxidants in the human body. You don’t need to take any body fluid to measure antioxidants. All you need to do is to place the palm of your hand on this particular scanner for less than 5 minutes and you will be able to get an antioxidant reading. So it has been a fairly effective tool in the field and it continues to play an important part in our business opportunity and recently we believe that we have advocated sufficient technology now, both on the electronic side and also in terms of the biophysical, photomultiplier tube to call it to be able to create and develop this much smaller version of the biophotonic scanner.
We are targeting the summer of 2013 for a limited launch of this new generation of biophotonic scanner. It doesn’t require a laptop. The covered unit does. Here it going to be wireless and initially we will be able to feed the antioxidant value or the reading into an iPhone or an iPad. So it's much more user-friendly and we think it will continue to be an interesting feature for all our scanner centric distributors as well.
Okay. So this is our big gorilla coming out in 2013. Much of our scientists, no, all our scientists are focused on developing a very comprehensive weight management program to be launched at the global convention, as I mentioned. The most important thing is that this particular weight management system incorporates some new gene expression science. We are leveraging once again what we have learned in ageLOC to see how we craft and develop a very healthy and a very scientifically sound weight management system.
Clearly, it is going to help us, obviously at the end of the day, the science needs to result in a healthy weight loss but importantly, I believe too, that this particular system will allow the person to maintain that weight loss over many, many months. Hoping and one of the most important objectives we have is to make sure that this system is able to maintain weight loss rather than just to trigger some weight loss and have a rebound after that. So we are working very hard at that. We are going to conduct a very extensive clinical study with this weight management system. We believe that once it is launched in October of next year or thereabout, we will have one of the leading edge weight management systems in the industry.
Here is what it is going to look like. It incorporates both supplements together with a very healthy nutritionally, scientifically proven system. You can see there are two supplements in the middle. Those are the supplements in the bottle, and one on the left is really what we call the pixie stage. Essentially it is some powder that you can mix into a drink and essentially you take that over the next 90 days you continue to take our protein shake which is shown in the box on the right and together that whole system will result in some significant healthy weight loss.
Okay, we continue in our pipeline as many of you are, again, would be aware that one of our best-selling product in the nutritional supplement category would be our LifePak franchise. We continue to develop and infuse that particular product with more and more new science and this is perhaps an interesting product for us because it results, we really want to make sure that LifePak remains a very important foundational product for us in the supplement category and you can see some of the examples over the last six or seven years how we have evolved LifePak and the mix evolution would be right now it is under this code-named ageLOC Alpha. We think somewhere in 2015, we can do an LTO or limited time offer with this particular product launch and ageLOC Alpha is the culmination, we will be infusing all the ageLOC science we have up to that point.
We are working very hard using that discovery toolkit, if you will, to get all the insights we can and we believe that ageLOC Alpha, once again, will be of a leading edge, the most advanced anti-aging supplement in the marketplace. So, this we are working on it in the R&D department and we believe that by 2015 we would have completed our study and we will be able to get it in to our distributor's hand.
You may notice that we use an acronym, the M.O.A.S. and we pronounce it as moas and again it might bring its multiphase because that’s an acronym that we use to stand for mother of all supplements but that’s an internal acronym.
Finally, we have in the baseball analogy, the ninth inning as we enter and play the last inning in that game, will be our Delta and Kappa projects. This would be the maturation and demonstration of how our ageLOC science has evolved and we are looking into 2015, then two years later in 2017 and these two products are very much focused on how we can customize skin care and also customize the supplements to each individual. The science will cover how we can do that.
Clearly, we are far ahead in terms of how we can do that in the skin care category and we still have lots to learn on the nutrition side but the skin care, we think, by 2015 we will be able to develop a system in such a way that those products are particularly and specifically targeted for each individual. So that would be our Delta project and then follow on the Kappa project will be a personalized nutritional regimen. So these are all targeted for 2015 and 2017 respectively.
So that’s our pipeline and I hope you have an idea how we have been able to fill our pipeline all the way to 2017. We have fairly specific and definitive ideas how those products will come through. But that’s just on the product side regarding innovation and you hear from Dan now that equally important is the ability to launch these products in a very strategic and effective manner. Now I will yield the podium to Dan to tell you about that launch process. Thank you.
God morning. As Joe mentioned, I want to talk about our channel management process and really focus on three specific things. First, how we manage the differences across our different markets. Second, how we are performing, specifically using some of the metrics that we use in terms of the health and growth of our channel. Lastly, touch on the launch process which is turning out to be a very important part of what we do in a repeatable part of our business.
Steve mentioned earlier that the first thing we look at in the process of transformation was how we position our company across the world. We were at a point when we were starting to see a lot of differences crop up based on where we were in the world. Then we did a lot of research asking ourselves the question. Should we be different in each of our countries or should we present ourselves as a single strategic positioning philosophy and culture around the world? What we found as we did the research, spoke with our leaders and looked at the various advantages of one versus another is that one company philosophy or an operating philosophy that was common across all our markets is what would work the best.
So if you go to our meetings in the United States or in Europe or in North Asia or Greater China, what you will find is that we, as a company, present ourselves in a very similar way. Our strategy is consistent in terms of products and what we launch, what our consumer base uses and the values and culture that we espouse in one country are very consistent across all of our markets. What we do do is that we create operations that conform to the local regulatory and socioeconomic position conditions of specific markets and I will touch a little bit more on that later and tell you exactly how we do it and how we manage those differences and how we have made that one of our core competencies.
But before I do that, let me just touch on our management team. We have five regions across the world with five regional presidents. You will notice a couple of things. First of all, one is that they have all been with us for quite some time, 15 plus years. Each of them are native to the regions that they manage. If you look deeper into their backgrounds, each of them have also been in various Nu Skin positions over the years. Many of them have opened up some our markets and worked in other regions of the world. Each of them has a deep understanding of the specific geographies that they manage and how to work with the specific regulatory government agencies and then have a deep understanding of how to manage our channel and our business in the various markets. You will also notice that each of them is native to the region that they manage.
Core to what they do along with managing the operations is partnering with our leadership. We are a sales channel that spans 53 markets globally. What we do and what we consider one of our core competencies is the way we partner with our 48,000 sales leaders across the world. This is how we measure our growth. This is how we measure our success. Our ability to partner and align with those individuals. At a very fundamental level, there are really two roles that are present in every one of our markets. One of them is a consumable very similar to what you see in the consumer products industry. Consumers buy and use our products. If they buy them and use them and like them, they buy them again. If they are dissatisfied they stop buying them. When I moved to Utah, I moved in the neighborhood, he heard I worked for Nu Skin and he told me that had been using one single product for the last 15 years, a skin enhancer and talked about how much he loved it. It had nothing to do with the business side. Simply a consumer. We have a lot of those around the world.
Sales leaders, part of those 48,000 that we talked about, buy use and resell our products. So they act as consumers as well but they also find new consumers through the process of talking about their experience of the product and also the process of talking bout business. They also perform a fundamental role of training and developing new sales leaders and this is a critical aspect of what we ask them to do and something that we are continually focusing on to get better at.
So I talked about these commonalities, those I mentioned earlier. One of our core competencies is also managing the differences that are across the world. So if you think of these two common roles of consumers and sales leaders and look around the world, if you look at our product and pricing, there are variations according to the local market needs. If fact, Joe talked up here and he was talking about Nu Skin and Pharmanex. We don’t typically talk about some of our other brands but to me, some of socioeconomic needs in some of our markets we introduce lower-priced brands. One of those is Scion which is pervasive in Southeast Asia and Greater China. Actually the number two unit selling product in Greater China is a Scion toothpaste, or actually in Mainland China is the Scion toothpaste. So that’s an example of how we vary our product offering to offer that specific product to a specific nature or segment.
Our product format and registration. In Europe we don’t sell LifePak as one product. We sell it as a life potential products and an antioxidant product because of the regulatory environment. Again, another example of adjusting.
Our product claims and our branding conform to the local regulatory environments. We talked about our $1 billion plus brand of ageLOC. Well, in our largest market, Japan, that brand is actually genLOC because ageLOC is perceived as a claim there. So again, another example of adjusting.
Physical infrastructure changes, sometimes dependent on our need to create a distribution system in a market where there is less development. Sometimes it is based on the regulatory environment. We, for example, have retail stores in Mainland China that are focused on enabling our model there.
Compensation structure and payout. Now this is one that has been getting a lot of play and discussion over the last several months. We manage this effectively around the world. In Korea we have 35% commission cap that we can manage to. In China, we use our employee and current contract service model to compensate our sales leaders in way that is consistent with the regulations in Mainland China.
Manufacturing requirements are another example. In general you can see though, across the world, we understand how to work with, manage and face the differences in the various markets, while moving our business forward. Our global sales strategy is very simple. We look at how we sustain and increase the size and the output of our distribution channel. Now some of you have heard this part of the discussion before. We have some very specific metrics that we use to measure our activity and our productivity. I am just going to go through those briefly again.
Activity, we look at as actives. Actives are defined as the number of individuals who purchase directly from the company. In terms of our public metric that we disclose, we look at a three-month active number and that between 2009 and 2012 has gone up 20%.
Productivity, we look at average monthly volume, or AMV. That’s the amount of monthly volume that goes through on a per active basis. That is all also up 30%. A great example of how we look at AMV. How AV increases by 30% in a market is what we have seen in Southeast Asia when we launched the R² product just last year.
In Southeast Asia, one of our countries Malaysia has a very robust weight management system. So a three-month weight management system for roughly $1,000. Our leaders very quickly realized the complementary nature of R² which is about $100 product and through the LTO process they incorporated that into their weight management system. So effectively, taking what was a $1,000 three-month program and making the $1300 weight management program. Therefore 30% increase in the average monthly volumes that was moving through those sales leaders.
If you look at our product innovation that Joe was talking about, you can see over the years, we have become more and more effective at leveraging our product innovation within our channel to drive these very specific metrics. Channel growth in actives by expanding the offering of our products and by attracting new consumers and sales leaders. Increasing our productivity or AMV using the example that I just talked about and what we are seeing as a result of that is that our new product innovations are becoming far more incremental than they used to be. What used to be largely a function of moving dollars around and creating excitement and generating a lot of volume for the new product has now become new products generating incremental volume and growing our channel and productivity at the same time, so hitting on all three of those important aspects of our business.
We look at this in two-year launch cycles. You will see this being very consistent as you look both in our future plans and as you look at what we have done in this past year. These curves that you see represent the trial, the excitement, the pipeline and the field, if you will, of each new product that we launched. In 2007 to 2009, we were focused on the Galvanic Spa, which later became the ageLOC Galvanic Spa and that generated the excitement. In 2009 to 2011, we launched our first ageLOC skin care branded product that was completely new which was our Transformation system that Joe talked about.
If you see that curve going on the last one, think about as a new baseline volume, a new base of consumers who are using that previous product and then the next curve adding onto the baseline volume as people use, the excitement is generated around the new product.
In 2011, we launched our R² products and the ageLOC Body Galvanic Spa creating the same dynamic and as you look to the future, Joe talked about our new weight management system Gamma, which will launch in 2013 and as you go out of the future years, the same thing has happened. Each building on the previously higher baseline volume creating that channel growth.
There is more that goes into it than just launching the product and Joe and Truman and Steven have all alluded to this, we are a leadership company and how we work with our global sales leaders is critical to our success. I came from the consumer products industry prior to coming here. In the process, even though the world changed a little bit it is very similar. If you look at our three steps, Product Sell-in, Channel Fill, Channel Growth, if you think about Procter & Gamble or General Mills when they develop a new product and do the research, put together the advertising plan, they go after their customers, start to work with them, gain distribution access to the Wal-marts, the Kmarts, the fruits of the grocery trade and then they get their shelf space, launch the product and create demand for those products, and create a new business.
For us, it is very similar. We are in the process, in this first sell-in process for our gamma product which means we are working with our sales leaders around the world right now talking to them about a product that’s going to be launching roughly one year from now. We start with a select group of leaders, but by the time we come to the point of launching the product next October, 100% of our top sales leaders understand what the product is, what the pricing structure is, what the promotion program is behind it and they have worked deep into their sales organizations to prepare their organizations to create the demand for this product, which is what happens when the LTO starts.
You see that very quick big spike. That is the channel fill. Essentially our sales leaders bring in for their consumer bases and for the consumers to prepare for this a lot of product to fill the pipeline related to the demand. As we go on and eventually launch over this two-year cycle and sometimes running into third year, as we launch the product then you see the channel growth creating that new baseline effect as our channel grows and the output increases.
So we showed this last year, that’s our phase one, phase two, phase three. Each of the phases in between houses focusing our leaders on the next launch and building in that baseline volume. If you go back and look at how we model this for the future and how we are getting better at executing this process, you have to go back to 2009, the first time that we did it. In a way, tested it and found out, in some way it is the hard way, just what the strategy was capable of doing. In 2009, we had our 25th year anniversary. Prior to that, our biggest product launch had been a $5 million launch. So a convention when we launched Transformation, we exceeded that by three times which basically meant that we were out of stock within the first half an hour of our launch and as we look back on it, only about 5% of our global sales and consumer force had actually purchased the product.
So as we look forward to 2010, we saw that increase in a very natural way. Each of the markets executing a little bit differently but really our focus was on 2011, R² and Body Galvanic. We started early with our selling process, with our leaders, set goals, aligned behind our strategy and created a product inventory capable of being much more significantly than what we had done two years before. We also made our products available in regional centers around the world so they wouldn’t have to travel all the way to the United States convention to purchase those.
I think you know what happened. We exceeded our 17 million by significant amount. We doubled basically from the previous two years with participation of our active base in purchasing the product and had a product launch of $107 million.
2012 now has been the regional LTO, or regional rollout and we have seen the number, year-to-date increase. So this number does not include our fourth quarter LTOs, which happened in Korea, Japan and Europe but so far this year those regional LTO rollouts have achieved $229 million. So you see the trend and about 13% active trial.
So as we model forward to 2013, we are anticipating with our gamma launch that it will be much greater around conservatively a $300 million launch with 15% participation. We have markets in our world that have 20% participation. Some are slightly higher than that. So we are working with each of our markets to execute, to work with, to align with our sales leaders in the same way as our most successful markets and we are very optimistic about the progress in doing that.
So if you take those same three years or four years that we are looking at and project onto that on an annual basis what those two growth metrics looks like, channel growth and channel output. You can see a very consistent growth in the size of our distribution channel from 2009 to 2012 and a very consistent growth in our channel output or average monthly volume during those same years generating the results that Truman touched on earlier.
So we are optimistic because we understand now how to work with, execute, leverage what we are good at and work with our sales leaders across the world to leverage what they are good at. We have here through 2017 very consistent plan on how we will execute these product innovations, starting in 2013 with the continued rollout in the global gamma LTO and then carrying on, as Joe shared with you, moving our product innovations into our pipeline and executing the business in our 53 markets across the world.
So our launch process is driving the activities that’s healthy for growth and driving in a way that’s sustainable and we are seeing it have the additional effect of improving the productivity of our sales force and by leveraging our collective understanding of how to do this around the world. Our markets collectively are working more effectively at leveraging our new product innovation.
So with that, I will turn time back over Truman. Thank you.
I want to talk about some of our market-to-market dynamics for a bit. Before I do, I just wanted to note that one of the questions that we have really faced over the last few years is that we are generating substantial revenue boost at the time of our global convention launches of these new product innovations and one of the questions has been, how are you possibly going to lap the impact of these huge launches. What we are finding is as we then take a global launch and infuse it into these regional launches, regional LTOs, the revenue punch we are getting out of the regional LTOs is actually exceeding the revenue increase we are getting out of the global launches. So it makes for, what we think, is a very powerful combination of significant global launches followed by the regional LTOs. It is working very effectively.
One of the markets that is a testament to the power of this approach is Japan. Our largest market globally. As you know has been our challenging, our most challenging market globally over the past 15 years, really. It's been in just a slow secular decline. When we put a new management team in place in 2010, we had a business plan put together for 2011 that we really felt would turn market around so that we would be at breakeven to showing growth by the fourth quarter of 2011. Then along came the earthquake and tsunami in March of 2011. Very strong and obviously negative revenue impact and the whole region of Japan set that plan back a year.
So you will recall that shortly after the earthquake, we indicated that we felt that our growth plans would be delayed a year and sure enough, that is what happened. The market returned to growth third-quarter 2012 and now are projecting a 15% year-over-year increase in the fourth quarter which will bring a market to 3.3% growth rate for the year. We would encourage you to model a similar rate of growth in 2013. We are seeing very strong underlying trends with our sales leaders there. We would like the key indicators and we are confident that we have the ammunition to grow this market at a modest rate in 2013 and obviously at a very impressive rate in Q4 of 2012.
South Korea was also a market that slowed a bit in the first half of 2012. This market has a unique regulation in place where the government limits what we can pay our sales force, 35% of revenue whereas our global pad as you knows is more in the mid-40 range. At the end of 2011, we had to essentially do an across-the-board clawback of commissions paid to the sales force in order to stay under that 35% level. That had a negative impact on sales force psyche there obviously but the good news is that the second half of 2012 is going to show strong growth, very successful launch of the Body Galvanic Spa there last month and it will make for good fourth quarter and we would encourage you to model again in 2013, 10% to 12% revenue growth rate for this market. So a return to good healthy growth in South Korea.
The Americas is a market that we are very proud of. We have being here obviously longer than we have in any other market. We have doubled its size in the last 10 years which we are very happy with. The U.S. is growing at a 15% rate which is nothing to sneeze at, even though we have a couple of U.S. leaders here today who would prefer to see a 50% growth rate. We don’t feel too bad about 15% growth in the United States.
Latin America is small but growing at a robust rate and again for 2013, we would encourage you to model 12% to 15% revenue growth in our homework here in the Americas, generally.
South Asia/Pacific has been on a tear. It has been just a very dynamic market these past three to four years. You will note here that we are modeling 5% to 10% revenue growth for 2013 which is obviously far more modest than what we generated in the past few years. That is because in 2013, we are going to lap a very significant LTO volume in the South Asia region in 2012. We actually had about $15 million push from our Q4 2011 launch in to Q1 of 2012 because we delivered product order to a convention in January and then the LTOs of Body Galvanic Spa and R² this year have generated about $70 million in sales.
So that’s an $85 million challenge to lap in the year 2013. But despite that strength of revenue growth we are still projecting about a 10% growth rate in the South Asia/Pacific region and the real key to the growth here is going to be the participation rate in 2013 gamma launch. You will note that in Dan's model where he showed a $300 million pop out of the weight management launch in the second half of 2013, he is also projecting about 15% participation rate by active distributors globally. If we get a deeper penetration rate than that then, particularly in this region, that 5% to 10% growth is going be significantly larger.
Europe, the Middle East and Africa has also been stellar market for us over the past 10 years, 20% CAGR, very strong local currency growth in 2010, the market benefiting from LTOs both by Galvanic Spa and R² in 2012 and we will continue to see very strong double-digit growth throughout the European region. We are projecting again modeling 12% to 15%.
Greater China is obviously a market of great interest. Our growth in Mainland China has clearly been very robust and we continue to feel like Greater China can be a very successful high growth rate market for us. We are modeling and encouraging you to model 15% to 18% revenue growth in 2013. Again that is going to strike most of you as being a conservative growth rate which it is.
The real key here to the region is the Mainland China market where we have a very long operating history. We started our exploration of this market in 1998. So we are really 15 years into our development of the market. We are growing very strong distribution channels. We have made substantial investments in infrastructure as you have already seeing in our Greater China headquarters and we continue to feel this market just has huge potential. It is already the third largest direct selling market in the world. Despite the fact that direct selling is relatively new here. The market is generating over $16 billion in retail sales, 20% growth year-over-year. Still only 30 companies have received direct selling licenses in the market which is a very modest number of companies but the market is huge and very vibrant and we remain optimistic about our potential in this market.
You will recall that Taiwan and Hong Kong, Singapore are very successful markets for us. We have substantial market share of the direct selling industry in those environments. In fact, in Singapore just this year we became the number one direct selling company. In Taiwan and in Hong Kong, we really run neck-and-neck with the other largest international direct sellers in those environments as the leading direct selling company and when we see the size of our competitors' businesses in Mainland China we can't help but think that this market can be very, very substantial.
So I want to invite Dan back up who is going to run through our operating plan here over the next five years as we published about six weeks ago a development plan for the market that shows how we intend to grow in terms of infrastructure, diversify our channels of distribution and continue to build the direct selling side of our business. So, Dan, come up and walk us through that.
Thanks, Truman. As Truman pointed out, we have a long history in China, over 14 years that started in 1998 when we acquired Pharmanex and at the same time acquired a couple of smaller direct selling companies as we prepared to enter that market. The history continued on the 2003 when we began selling products out of our retail stores. 2006, when we received, we were one of the several companies who received the direct selling licenses and then most recent period, 2008 to 2012 where we achieved more licenses and we will continue to execute our business in a way that has created significant growth that we are seeing now.
Very similar to the discussion about the regional presidents, we have a very seasoned, if not even more seasoned, I think the average for our regional presidents was 17 years, our average for our Greater China management team is 20 plus years. Again many of these individuals are working across several of our markets. Many of them have worked in various responsibilities within the Nu Skin organization. All of them extremely capable and with a deep understanding of Mainland China, Hong Kong and Taiwan, and an understanding of how to execute the Nu Skin business in those markets.
The team understands the local regulatory framework. They work on a daily basis. Those who are responsible with the government regulatory agencies and we continue to work closely with them as the Chinese government continues to adjust their expectations and regulations for our industry. We work closely with them and are highly adaptable to where they are taking our industry. We work cooperatively with the local regulators, both on a national and a local basis. We have track record of regulatory compliance and successful operations in Greater China.
As Joe mentioned, we are investing significantly in our new China headquarters but it goes beyond just the headquarters. It will open sometime late next year or early the following year. We have four manufacturing plants in China, two R&D labs, 40 stores and we are planning to increase that number and 15 licenses for provincial municipalities, which cover most of the large provinces and cities throughout China. So we have a strong infrastructure that is capable of supporting our future growth.
Those stores are spread across the country. As you look at how our business is spread, you can see it is very evenly spread across the North, South, East and Western parts of China, all of them growing, all of them operating both efficiently and effectively. We are one of many direct sellers. This is a very fast growing industry in Greater China. I think we are in this list down at number 13.
We are not growing the fastest. We are certainly not the largest. We have great aspirations of being there but a lot of successful U.S. companies who are doing business in China and a lot of Chinese companies who are successfully doing business in China.
So we are happy with our position. We are not satisfied that that’s where we are going to be long-term but we are confident that we can compete effectively and work effectively within the Chinese environment.
Our five-year plan in China. This was a part of a news release that came out a couple of weeks ago. We, as I mentioned earlier, have a very consistent strategy across the world. It does not change for China. We will execute on our product launch strategy that we have around the world. It is as relevant for China as it is for Hong Kong and Taiwan and our other 50 markets around the world.
We plan to increase the number of direct selling licenses. We don’t have a lot of control over that other than applying, providing information to the government and waiting for those licenses to work through the system but we have a consistent track record of receiving those to support our business. As we receive those licenses it gives us the ability to improve or increase the way we execute our direct selling model and that is one of the goals that we have, is to expand the number of direct sellers in those markets where we have licenses. We plan to triple the number of retail stores. That is part of our model that enables our employees and our service contract sales force to expand both of those groups sell out of our retail stores.
Lastly, we are extending our distribution channel by adding, this will happen most likely sometime this year as we are working with the government, an independent marketer position which is, another word for it is an independent business owner. We have several of our larger competitors who do this basically allows our sales force to take advantage of being a business owner. So they are able to submit their taxes as a business entity, more flexibility and how they sell, how they operate, and just some very basic advantages for how they participate in our direct selling opportunity. So we think that’s going to make a difference as well in our business model in Mainland China.
So, in summary, we are confident about where we are today. We are confident in the long-term growth potential of China and we believe that we have both the knowledge, resources and the operations in place to operate in Mainland China effectively to maximize this business opportunity for us as a company.
I will turn the time back to Truman,
Okay, we feel that the 53 markets we are currently in give us the geographic strength we need to be able to reach our $5 billion vision but we also recognize that there are parts of the world where we are not yet relevant and where we can do a lot better.
One of those areas of the world is Latin America. Brazil currently is the fifth-largest direct selling market in the world. We do not do business there. We have tried to do business there. Gave it about ten-year effort under our global model and actually this is the one market in the world where we withdrew from the market a few years ago.
Six of top 20 direct selling markets in the world are found in Latin America. So we want to find a way to be relevant here. When we look at how the larger companies revenue in Latin America compares to our own, you will note on this slide that we are obviously very, very small as is the Amway organization who also hasn’t really figured out how to do business in Latin America, but there are several companies who have significant portions of their revenue based in this market which is again a reflection of the market potential there if we can get to them all right.
So we know that this is a market that is dominated by single level sales models but we also believe that that is changing. A single level distribution system really has limited income potential for salespeople and also is different in that essentially you are sales representative for a particular company as opposed to being an entrepreneur or business owner creating an asset for yourself. The research that were doing reflects the fact that salespeople in these environments recognize the weaknesses of the single level model and as these economies develop and purchasing power increases, we feel that the market is ripening and is ready to be more receptive of a higher octane opportunity.
Now what we did there and what most companies have done is essentially try to fit a global model. Many of which originated in the U.S. into these environments. That was our experience in Brazil and that is what we are currently trying to do in Mexico and Argentina and Colombia and Venezuela with some success but still with small businesses. What we have concluded is that we want to design a new model that is customized specifically for Latin America as opposed to trying again to force our global model into these environments. But we do want to continue to take advantage of global resources like our global sales leaders and our product expertise, our direct selling experience to really offer the global Nu Skin sales leaders a viable robust opportunity on the ground in Latin America.
So we recognize that this is going to require us to put together an alternative product line that can be locally manufactured where price points can really hit the local socioeconomic key income levels. We want to tailor this business opportunity to still provide a career income opportunity for those who are interested but realistically that means were going to pare back our commission level from the current 44% of revenue to roughly 25% or so of revenue. So we are working on this project currently. 2013 is going to be another investment year for us in the development of this Latin American business model with a mid-2014 launch of this model in a country where currently Nu Skin doesn’t exist.
So we envision a world where both of these models could coexist potentially in a market side-by-side and where our sales leaders have the opportunity to do business either in the Nu Skin model or in this new model which we think is going to be very compelling proposition in an area of the world where we have yet to really generate significant levels of revenue.
All right, so, we have come to the time of the presentation. I will now invite Ritch up to walk us through his modeling.
We certainly engaged the same analytics and process and people so forth in providing this guidance that we have every year for the last many years. So our guidance would be consistent in terms of the way we think about the businesses as we have done it in the past.
So starting with our revenue, 7% to 9% growth. I will break that down region by region, here in just a second. Improvements in our operating margin of 10 basis points to 30 basis points. Again, we expect this year to end in the 15.7% to 15.8% range. So on 10 basis points to 30 basis point increase from that next year, EPS therefore 10% to 15% growth of around $3.70 to $3.85.
From a region-to-region standpoint, Truman mentioned that we will guide Japan to 1% to 3% growth rate. We feel good about that because of our growth and sales leadership. You will notice for the last quarter in Q3 we actually reported a growth in year-over-year sales leaders in Japan. We see that continuing here as we come in to the fourth quarter with a very strong launch. That gives us confidence in believing that business will continue to be strong going into next year and we are guiding Korea at about 10% to 12% growth rate.
Jumping to Greater China, again we are comparing against launch volume, LTO volume that was significant in 2012. Now we very well may exceed the guidance we have given for our LTO next year but that’s the area where I am being conservative. Likewise that is exactly what we said last year. We are guiding conservative in what we have in our launch volume. We understand the direction of the business. We understand the growth in our sales leaders. But when it comes to the LTO volume we try and build on conservatism into what that is expected to be. So 15% to 18% growth in Greater China next year.
Americas, 12% to 15%. Again we see the business solid and performing well in this region. South Asia/Pacific, Truman already spoke about and then EMEA again 12% to 15% growth.
So this we expect to be a very strong year that accounts 8% to 10% local currency growth, that’s on top. I would remind you of a 23% local currency growth rate this year and continuing to see the business very, very healthy, Even in a conservative look at what we forecast our launch revenue to be next year.
We have modeled the 1% to 2% currency headwind. I will walk you through that in just a second. From a quarter-to-quarter basis, recognize two things that are important in your modeling for next year. Number one, in the second quarter of 2012, we had about $160 million of LTO volume in Greater China and Southeast Asia. Next year will be the actual rollout of these products in the quarter but we don’t expect the same bump with a rollout as we do with an LTO. So we don’t anticipate that same bump. So our revenue will likely be down, somewhere around 10% to 12% in the second quarter. In the back half of the year, when we launch the gamma, the weight management product, the revenue will likely be up, somewhere around 18% to 20% as we compare against smaller launches in the back half of the year.
We haven’t modeled out exactly quarter-to-quarter. Greater China will most likely LTO the weight management product in September in advance of our global convention, which is in October. Southeast Asia will either be September or October, depending on the timing of registration completion in those markets. It might be September, it might be October. Then the rest of the markets, EMEA, Americas, North Asia will all be in the fourth quarter that they launch the gamma product next year.
From a currency standpoint, 40% of our currency is essentially tied to the US dollar. So no fluctuation in those numbers for the most part. I throw the Chinese Renminbi there. It doesn’t fluctuate a lot. 28% is in this basket that is essentially Southeast Asia and Korea currencies. We have modeled the Korean Won at about 1150 next year. It is currently trading this morning around 1085. So there is some cushion in that one. The Japanese Yen is bouncing all around the 80 range right now, slightly above 80 this morning. We have modeled the Japanese Yen at about 80 for next year and they are at about 22% of our revenue we expect to come through Japan. Then finally the Euro accounts for approximately 10% of our revenue. We have modeled that at about 0.8 range. So if you factor this in with our growth rate, that’s essentially our revenue model. We do this each year. We know its going to be wrong. We are not exactly sure where but we got cushion in there so that if things move around we are very confident. We will sleep well knowing that we put out numbers that we are pretty confident that we can execute against for next year. We think there is some upside obviously as we go throughout the year.
We plan to continue to increase our operating margin. I talked to you about these phases that we have gone through from when we started our restructuring back in 2006 it was all about cut overhead. 2006 to 2008 was reduce, reduce, reduce. 2008 to 2011 was about leverage. Leverage overhead growth and maintain. Hold that overhead structure at about the same level.
Now we have moved into a phase where we have gotten our operating margin up above 15%. We believe we can accelerate our top line growth by investing in future opportunities that will drive and sustain our ability to grow the top line and we talked about what those are. Increases in our sales force incentives. These have been hugely effective through our LTO program through incentives that we put in place that we think make a meaningful difference in both the retention and motivation of our sales force. We are investing more than ever before in our product discovery and development. In fact just in the human clinical that we will do with the weight management will be an additional $2 million to our budget through the next year, let alone the investments we are putting into the product that will be launched in the several years following that.
Channel innovation and infrastructure. You are going to hear us talk a lot about this item right here. Not a lot today but as we go forward, we think there are a lot of opportunities for us to expand this activity and productivity in our channel through a number of different innovations that we are doing. We will talk to you about those. We are doing them right now. We are investing next year in Japan and London. We are doing some initiatives in South Asia. So we will talk to you more about those as we go forward. Then finally, Truman mentioned the Latin America development where we have target about $3 million in investment next year in advance of being ready to open that model in 2014.
Even with those investments we believe we can continue to see an increase in our operating margin which we have doubled over the last six years and we anticipate that increasing somewhere again between 10 basis points and 30 basis points in 2013. Let me break down those individual pieces of the operating margin. Our gross margin, nice increases but we expect our gross margin to remain fairly constant going forward. This 83.5% is a great range for us. We don’t anticipate that to continue to go up in the future but rather maintain that range. Selling expense, on the other hand, has increase. We have talked about what's driven that. A part of this will be driven by the size of the LTO. I have forecasted about $300 million LTO of the weight management product launch in the back half of next year. The larger that LTO is, the higher our selling expense will be because more of our distributors will maximize the compensation plan in that period of time. However, we save those dollars in the general and administrative expense line. So it is a trade-off between line item but we will still be able to maintain our operating margin as we go forward.
Three key factors that are driving that selling expense line up. Number one, our product launch impact. So the average volume of each of our sales leaders goes up during an LTO and they maximize the amount we pay on the commission payouts. So instead of maybe it being 44% that month, it can jump up to about 50% during that one month and we will then track back down but there is always the push in that month.
Secondly promotional incentives have been a great use of our investment, we believe, to motivate and incent our management or our sales force to continue to push for higher levels of achievement. Those are working effectively. We are having a lot more of our sales leaders qualify for those trips and driving growth in our revenue line, obviously, but increasing our selling expense. Then we have mentioned to you special selling incentives that we have put in place particularly in South Asia, in Greater China.
So Greater China, for example, we mentioned some couple years ago, the aspirational goal to get to $1 billion in Greater China by 2014, and there were some progress payments along the way, as well as a pool that would accomplish if we got there. That didn’t seem very possible when we announced it a couple years ago but as we get closer and as that target becomes possible, we begin to accrue expense toward that goal. This is not in our guidance.
This would be well ahead of anything we have guided to but the accrual of some of these bonuses is showing up today in our selling expense because there is a possibility based on the current growth method, that growth metrics that we are seeing that we need to start accruing for that. So that is another area that has driven slightly increase in our selling expense line. Guys, this is a great problem to have. I will tell you right now. We are happy to pay next year over 45% because if we do it's going to mean that our revenue growth is staying very, very high.
Here is G&A. Again we offset that when we have a big LTO there is very little impact in our G&A. So as a percentage of revenue that comes down and next year we anticipate that it will continue to be more efficient in our G&A line, somewhere around 22.5% for next year. Our G&A is impacted by our ability to leverage our fixed costs. We will continue to invest in our high-growth markets, specifically China and South Asia. We are building new stores. We are advancing our business there. We will invest more in product discovery and development. That shows up in our overhead line. Then, as a modeling number, and this becomes less and less important today as it used to be is that we will have our global convention where we will spend somewhere around $7 million to $8 million in the fourth quarter. That will be in October in the U.S.
In the past, that used to cause a big uptick in our G&A number, but now it is offset somewhat by the LTO revenue that we have. So, as a percentage it does not impacted nearly like it used to but just for modeling purposes note that we will have that in the fourth quarter.
Net interest expense and income and the other interest expense line, about $4 million of expense. We don’t model any impact from the foreign currency fluctuations as we translate our debt and intercompany balances back. That normally each year will wash out some times from a quarter-to-quarter standpoint will have fluctuations but for the course of the year, generally it all settles back out.
We do see our tax rate continue to decline a little bit. We talked about this initiative of ours a couple years ago. We believe it will be about 35.5% and possibly as high as 36% next year and continuing to fall about 0.5% a year to 34.5% by 2015, which puts our earnings per share to about, this year we have already guided $3.33 to $3.37 which is a 33% CAGR over the last five or six years. Very consistent, very steady as we go here and another 10% to 15% next year at $3.70 to $3.85. That will be impacted by a number of things including stock repurchase, potentially, which we have not forecasted in to the model. So we have held our shares consistent with where we are at today.
Cash modeling. There are in your binder. You can look at those. The big one here is our capital expense where we will complete the building of our Innovation Center in Provo together with the building in China. So bit uptick in CapEx next year. It will come down to around $60 million in 2014 but we will see that pop-up.
I put TBD on dividend payments. This is a board decision that will be made in the near future as it relates to our dividend payout for next year.
Cash from operations, Truman mentioned this, but that is what our business does. It generates earnings which are cash-based earnings. So you will see our cash flow continue to increase as well.
Here is our dividend history. We have increased our dividend every year for the 12 years that we had a dividend payment and specifically, let me just go back one, you will see a fairly significant increase in the last year or two. You can understand that we got behind a little bit in terms of how fast we are increasing our dividend with the growth in our earnings and cash flow. So you can probably anticipate us to be more aggressive as we go forward in raising that dividend which we believe is an important priority for shareholders.
We also buy our stock back. We try and be careful as we do this. Our first priority is to make sure that we invest back in the business and we don’t hamper our ability to grow but at the same time when we have excess cash we watch for good opportunities to be in the market. Over the eight years of this period of time and by the way, I have been the CFO since 2002, 2003, I didn’t put in here but we made a huge purchase in 2002, $125 million at $12.75. That would bring these numbers down even further but over this eight-year period of time, we bought back on average 2% of our outstanding shares at an average price of $21.43. In the current year, up to Q3, we had bought $180 million, 4.1 million shares, 7% reduction in our outstanding share count with the excess cash and we continue to have a very strong balance sheet. So cash on the books and very strong cash flow which puts us in a position to continue to generate shareholder value if we feel like that’s the right use of cash.
One final point here. We have a very young aligned management team as it relates to our incentives tied with shareholder incentives. We talked about this. I think it is important that we highlight because it is a key factor in how we think about growing the business as well.
Our Board of Directors has authorized performance-based management incentive tied to EPS growth. The first of these incentives was implemented back when we went through a transformation. The real incentive to make the hard decisions in reducing headcount and so forth, to drive a doubling plus of our EPS. So at the time we were on a trailing 12 month basis at about $0.75 per share. The board authorized some performance-based options which would vest if we reach $2 per share within a five-year period of time. So by the end of 2012.
You will notice what happened at the point of time that we completed our transformation and put this in place. Very strong growth. We achieved that in three years by the end of 2010. At that time initiated the second performance-based management incentive, which by the way, expanded to a group of a little over 100 of our management. This first one was about 25 of our managers and at the fourth quarter of 2010 they initiated a $4 per share performance-based incentive, if we achieved that number by the last quarter of 2015. So again a five-year period of time.
Last year we updated you on our progress towards this $4 goal, estimating that we could then achieve $4 by the first quarter of 2015. So advancing by three quarters our ability to achieve that $4 per share target. This year we expect to come in at $3.35, which is the middle of our range and we are advancing again $4 per share to be approximately the first quarter of 2014, which advances it one more year. That would be really easy to come up with on your own since our modeling for next year is $3.85. There is a likelihood obviously depending on the size of the LTO that we achieve this goal next year but this has been a very powerful motivational incentive for our management team.
It is so easy to do budgeting nowadays because every single operational unit has a budget which ties to the $4 per share. We would anticipate, as we go forward, we have got a couple Board of Directors here. So I am dropping a hint. They have already talked about this. That there would be a follow-on incentive that would probably go from $4 to $8 per share initiated about the time that we accomplish this one. Again it is a powerful motivational force to help our management team think link shareholders as we go forward.
I will finish on the slide I started with. Never before has there been a time where I feel more confident that we can sustain growth in our business because of our ageLOC brand, our product pipeline that Joe walked you through, our launch process that is getting more and more effectiveness out of each launch of the product that we do. We are seeing growth in every region. That gives me confidence that we can continue to see growth. We invest in channel innovation. Our balance sheet is clean and strong. We have strong cash flow and an experienced management team and sales leaders that we believe the best is yet to be.
So with that, we do have a little bit of time for questions. I believe Scott has a microphone and we will open it now for questions.
So can you just talk about, is there any heightened regulatory scrutiny behind the weight management product? Is there a different process there?
Yes, okay. So, one thing to keep in mind is that the regulatory framework for cosmetics and for dietary supplements is different in virtually every country but particularly in the United States. So in the weight loss areas, weight loss falls in the dietary supplement regulations. In this area, we and other manufacturers are entitled to make what is called structured function claims. So we can essentially have claims associated with products that are related to the structure or function of the body. Whereas on the cosmetic front, FDA has not yet allowed companies to make structure function claims.
The regulatory environment for dietary supplements generally and for weight loss, specifically has been stiffening over the years. There is a higher level of scrutiny that the FDA is applying to dietary supplement companies and those who are selling weight-loss products but this is a regulatory framework that we are very familiar with. We have obviously been operating under it for 28 years and we are confident that we can put claims out that are appropriate associated with our weight-loss system.
Another thing to remember is that there is a difference between describing the science that we apply in the product discovery and development process and claims associated with or tied directly to weight specific products. So the process that we use in the product development process, we will often talk about the scientific rigor that we are applying in various ways. The description of the process is not necessarily tied to a product claim. So we are very, very careful about what we put on our labels in our marketing materials with respect product claims.
Then, something on the Latin American side. It is probably going to be done inorganically, like i.e., via acquisition and because of the 25% average that means it has to be a much lower price point product. So my assumption is 25% it means that you probably can't sell. If those are the assumptions and if it is how big would a Latin American acquisition be?
I think in terms of acquisition, we don’t plan on acquiring a company. We will actually build it locally. Hire a talent but have a good understanding of the marketplace, but obviously the gross margin would be down around 70% range. So the net contribution margin which is what we look at for the rest of our business normally runs around 40% when you take out gross margin and selling expense, will be very similar in Latin America, But it will just be a translation essentially between gross margin and selling expense, which gives us the same opportunity to have a similar profit margin in Latin America. It will just be split a little bit in how gross margin and selling expense work.
Got you, then just a last one. I always hit you guys up on this. But why don’t you have any debt in the balance sheet? It is not that you are getting $10 a share of earnings by 2020, as you said. Why not a little bit more aggressive?
Well, it’s a possibility.
With the board members.
I mean, it’s a possibility, obviously. We generate good, healthy levels of cash flow and we hear from our shareholders that they are in favor of increasing dividends and also in favor of increasing stock repurchase levels. So it’s a nice problem to have and great flexibility to enjoy.
Let me say, by the way, that we haven’t authorized anyone to video record this meeting. So if you are, will you please turn your cameras off? Thank you.
Olivia Tong - BofA Merrill Lynch
Why don’t you talk about the quarterly sales and EPS projection? Ritch, you talked about Q2, but given that the LTO from the weight management product have been coming Q4, you have got some pretty tough comps in Q1 and Q3. Can you talk a little bit about your expectations for local currency sales and EPS? Would you expect to grow sales and EPS in Q1 and Q3 as well?
Q1, definitely. We don’t have real big comparisons to go against. So see probably somewhere in 8% to 10% growth rate is how I have modeled Q1 of next year. Q3 is going to be really big because we will have our Greater China, at least the Greater China LTO. It should be in September. So we are going to have a big LTO. Then in Q4 obviously we will be very, very big. So the only quarter where we have a difficult comparison is Q2 for next year.
Olivia Tong - BofA Merrill Lynch
Got it, thanks. Then just following up on the Latin America. Historically, direct selling, it’s a relationship business and Latin America has been primarily color and fragrance and your strong points is skin care and nutrition. So with very little infrastructure on the ground in Latin America already and your strong points being a little bit different than what the bigger selling products in Latin America. Can you talk a little bit about how you are planning to grow that market and break ground there?
So the product portfolio that we envision for Latin America, Olivia, will be different than what you see in our portfolio today but we think that there is a large and growing market for anti-aging products. The initial product areas that we are likely to focus on is weight-loss and weight management which is a big product category in Latin American environments, particularly as you look at the larger direct selling countries like Brazil and Mexico, for example.
Olivia Tong - BofA Merrill Lynch
Then on building the distributor base?
We have a wonderful asset in our global sales force and its one of the things that allows us to expand into new countries effectively. Building a distributor base in these markets is going to be similar to how we do it everywhere else. We will empower our global sales leaders to go in and recruit into the new model and generate commissions in their home markets for volume generated in Latin American countries.
So that mechanism will be very essentially be the same as it is today.
Scott Van Winkle - Canaccord Genuity
Truman, given the likely upcoming change in the dividend tax rate in your deleveraged balance sheet, would the company consider paying a special dividend before the end of the year?
Well, yes, I mean that obviously is another board question and an issue that probably will be addressed. We do have an event and those of who have followed us for a while know that we have been engaged in a dispute with the Japanese government on customs payments that have had us pay them substantial sums of money. We do anticipate a ruling at the Supreme Court level in Japan on a customs case before the end of the year that would what if we win it generate a substantial amount of cash for us. In the event we received a positive judgment there it would be awfully tempting to give our shareholders a Christmas present.
Scott Van Winkle - Canaccord Genuity
Ritch, if you were to do the $4 of EPS in 2013 what will be the hit from incentive comp? Would it be noticeable?
Hi, Scott, it is already built into our modeling.
Scott Van Winkle - Canaccord Genuity
Sorry, and can you go back through the timing of the launches again next year, just to make sure I have it. It was the China Q3 LTO and then Southeast Asia maybe Q3, Q4 September, October and then the big launch in the fourth quarter and there was nothing else of significance?
That's correct. We do have roll outs in the first half of the year. So product becoming fully available, for example, the Body Galvanic Spa in Japan and Korea becomes available in January. The R² product and Body Spa, I believe in Greater China becomes available in the second quarter. We don’t necessarily see the big uptick but we see the strength in the growth in the active number as we roll those products out. So we have ammunition that should continue to grow the core business very strong. The upticks would be primarily in the third and fourth quarters of 2013 when we LTO the new product.
Scott Van Winkle - Canaccord Genuity
Then, any further update on the Galvanic Spa and the FDA?
We continue to disagree with the FDA's statement on the Galvanic Spa with their argument on it but we have gone ahead and filed a registration statement. A registration on an alternative spa unit that in the event we will have registered in the upcoming months in the event we lose the argument on the current unit. But in any event, let me just add to that, Scott, we don’t expect that issue to have a material impact on our global results in 2013.
Scott Van Winkle - Canaccord Genuity
Thanks. As I look at the participation in the LTOs, what we have seen is basically a doubling of your actives that are participating. Obviously that active number is a percentage. That active number has grown in total. But we have seen the revenue per LTO increase, on total LTO it has increased probably about 13 fold at this point. So that’s a dramatic increase in LTO revenue per active. Can you talk about your comfort level in terms, obviously these are great opportunities for them, how comfortable you are that the inventory that is getting purchased in the LTOs is then moving through the system?
We track that as carefully as we possibly can and one of the key indicators associated with the movement of inventories are product return rate. We continue to see return rates that at low levels, which is comforting. We also monitor online activity. It is one way to measure whether inventories is really getting through the channel is the rate at which we see product appearing on the eBay's of the world, around the world and the prices at which products are appearing. It is actually quite comforting that we are seeing a decrease in the amount of product that’s being diverted into those unauthorized channels.
So you know that we do have substantial levels of inventory moving into the channel on these LTO on the LTO mechanisms but remember that sales representatives are essentially buying product to serve their needs during the period of time when the product is not on the market and the average purchase levels of sales reps in countries that are participating in this LTO mechanism are not exorbitant, if we were using that as a reasonable benchmark.
But I do think it is likely. To be quite honest, I think it is likely that going forward, we will even moderate the size of our LTOs by just limiting inventory. We are very sensitive to this issue. The last thing we want is unreasonable levels of inventory loading and one way we can control that is just by putting a governor in ourselves that we are not going to allow sales to exceed a certain level per sales rep.
Scott Van Winkle - Canaccord Genuity
Thanks. I wanted to go back to Korea. I guess, broadly, are you surprised, were you surprised by the magnitude of the slowdown this year? And I guess I asked if you did talk about effectively cutting the payout ratio to the distributor. So in theory, could have something like that playing out but broader path from the fact from all of our standpoints, and as I think about it going forward, are you going to get back to double-digit growth next year? What gives you confidence that you do where the existing distributors are still making less than they were on a per sale basis? Are you talking about those existing distributors forgetting about the products, forgetting about what they were making previously or you are bringing in new distributors as a combination to and sort of the dynamics in the market like are competitors in the market also experiencing similar sort of ebbs and flows in the business?
Well I honestly don’t know the extent to which competitors have had to take measures like we have to keep our payout below the authorized level. I just do not know. But I do think the market factors you cited, it really is a combination of those things. The haircut that our sales reps took in the fourth quarter of last year was substantial. It was 16% reduction in sales leader commissions across the board in the month of December.
That’s a pretty significant haircut to a sales force and obviously if you are sales guy out there working hard you don’t like to see things like that, but they understand. We have done our best to explain to them that this is a regulatory issue. We really have no choice but to keep our payout below that level. I think they are getting used to that. What gives us comfort in the rebound is just that we are seeing great dynamics in the sales leader KPIs. There is just a lot of people come into the business and submitting applications to become sales leaders. So that 10% to 12% projection is a comfortable one for us.
And maybe highlight one other thing. We had to make adjustments. This is our third or fourth adjustment of the last five or six years. We reduced the level of commissionable amount per product at the beginning of this year as well. So going forward we think we are where we need to be. We shouldn’t have to make further adjustments. All that being said, the consumer base of the business, the active number always stayed strong through this whole period of time. What got hit was the number of executives, the number of sales leaders and what we have seen as we invested a couple million dollars back into additional training events and so forth that were kicked off is a real strong uptick, as Truman mentioned, in the number of applications for sales leaders, and that number growing which gives me very good confidence that you we are back on track and the next year will be a another strong year in Korea.
Scott Van Winkle - Canaccord Genuity
Great, and then on the NOX acquisition, I was very curious on the timing. Why now? Like you did LifeGen, you rolled out Vitality and R². So it made sense as it had product from a royalty standpoint. Is there something down the pipeline near term, longer term as it pertains to that business?
Well, we are evaluating use of the technology in other ways. That is one thing but frankly, it just makes financial sense for us to buy out the royalty that we were paying to NOX and they were motivated because of what they anticipate in a likely change in tax rate here at the end of the year. So it just made financial sense for us and we had a motivated party on the other side.
Provides about a penny accretion per year, going forward.
Scott Van Winkle - Canaccord Genuity
You spoke about your existing weight management products being successful in Southeast Asia. What differentiates the new product that gives you confidence that it is going to be so successful, going forward? It is a big category. There is a lot of products on the market and a lot of protein powder based product. So what differentiates it?
Yes, the description, protein powder is probably not an adequate one when looking at the total product offering for ageLOC weight management system. But the big difference is and the story that our sales force will have to tell, is that this is the first time a weight management product has been developed in conjunction with or the incorporation of gene expression science. That’s the foundation of the ageLOC story. That’s the differentiating development future of this particular system.
Ultimately what matters most is does the product work? We are in clinical trials now on it? We are seeing encouraging results and we think that it is just a matter of people trying it, seeing it work and then it will develop a life of its own.
Scott Van Winkle - Canaccord Genuity
Just follow-up question. Can you talk about the markers for that clinical trial, like what they are?
Joe, you want to say anything about that?
Well, this would be a double-blind randomized controlled trial whereby there us placebo group. The primary endpoint would be the amount of weight loss followed by another extension of that to see if when the weight loss happens whether that weight loss persists over the next 52 weeks or at least a year. So those are the two primary endpoints. We would be measuring other biochemical markers related to gene expression and so on. For all intents and purposes, this study would provide us with pretty reliable evidence on the weight loss system that it is going to be acceptable to all regulatory authorities.
Scott Van Winkle - Canaccord Genuity
And will you be releasing those results at some point?
Yes, it will be published once the study is completed and we anticipate over the next 12 months when it is finished. We will get beyond the publication into a peer-reviewed journal.
Dr. Chang, weight loss is exciting but living longer is much more exciting to me. So with regard to ageLOC could you just talk about its ability to extend life either on overall basis or on a cellular basis and what tests have you done that show stability of this major product?
I think there is a slight misconception of what we are trying to do with ageLOC science. It is not so much about living longer. The key operative word that we would like to insert is, is to live better longer. So it is really all about focusing on the quality of life throughout whatever the lifespan of an individual is. That’s really the most important distinction and sometimes when the misconception goes into living longer, it becomes something that is bit not ready for prime time, if you will, you know. The science doesn’t allude to that particular notion.
What is gene expression? Okay, well, the body, for intents and purposes, you are what your genes make you out to be. So the basic functionality of the gene is to make nothing but proteins and those proteins has a specific function in your body, for example, an enzymes, for intents and purposes, all enzymes are proteins and in order for that enzyme to be produced in your body, it has to go through this, what we call gene expression. The gene has to express itself.
So we are talking about the functionality of the genetic system in your body. We now know from the science that the expression of the overall gene expression profile of a person varies over time. When you get older, that particular profile when we analyzed it, is very different from what you had when you were younger, let's say, when you were 20 year old. So the basic ageLOC science, what you are trying to focus on, is to discover how do we reset or how do we get a profile of an older person back to look very much more similar to when you were younger?
We believe that through that kind of intervention that we can improve all the healthy aging parameters in your body. So that’s why we are saying when we talk about ageLOC science, our toolkit, our discovery toolkit, its primary focus on quality of life, living making you live better longer rather than just living longer, per se.
So does it actually adjust what your genes are producing? The protein outputs of what your gene does different after the ageLOC is done?
Yes. When you eat an apple, for example, and 30 minutes later, when I take your blood and be able to analyze the gene expression profile of your blood it has changed dramatically. Just the mere physical act of eating an apple will change your gene expression profile, because if it doesn’t change your apple will not be digested by your system.
So I have seen your blue versus orange comparison video. What is that measuring?
That’s measuring the activity level of that gene. That’s the level of gene expression.
You can actually measure, like how fast it vibrates or what it does?
No, the degree of protein production, if you will.
So it produces more proteins?
More proteins so it become red, less proteins it becomes blue?
Just my last question. It seems like an amazing invention but I don’t see R&D on your income statement. How much the cost to invent that? You talked about two R&D centers in China. Are you guys going to have more on R&D to invent these new products? Talk to me a little about R&D expense and how you came about inventing this?
Ritch, maybe you can talk about the budget side of that? We certainly will be spending more in R&D and we have actually for the last several years invested significantly more as we have gone forward with R&D budgets. We believe this a great place to be spending our money. It really is stabilizing the opportunity to continue developing these products going forward.
LifeGen Technologies, the company we acquired has 30 years of R&D effort into their know-how. So it is not just dollar spent that is a lifetime spent by these scientist in this area.
So there is no estimate on dollars it took to invent ageLOC or anything?
We could probably add something up for you but we don’t have dollar number to give you.
We will spend our budget, you will notice on our tax return there is actually a numbers that we produce that in our 10-K, certain R&D expenses which are for tax purposes, R&D, like last year, that was somewhere around $50 million. It is not all-inclusive. It doesn’t include all the R&D expenses. Just kind of a tax number.
Thank you very much.
All right. No more questions. Well, we are happy to have you all here today. We have an exciting business and an exciting story to tell. We are looking at 2013 as a continuation of our growth trajectory and as a note another record year for Nu Skin Enterprises. So thank you for joining us today.
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