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Executives

Scott Pond – Director, IR

Truman Hunt – President and CEO

Ritch Wood – CFO

Analysts

Olivia Tong – BofA Merrill Lynch

Tim Ramsey – D.A. Davidson

Faiza Alwy – Deutsche Bank

Scott Van Winkle – Canaccord Genuity

Frank Kema – Sidoti

John Faucher – JP Morgan

Mark Astrachan – Stifel Nicolaus

Nu Skin Enterprises, Inc. (NUS) Q4 2012 Earnings Call February 6, 2013 12:00 PM ET

Operator

Good day, ladies and gentlemen and welcome to the Fourth Quarter 2012 Nu Skin Enterprises Earnings Conference Call. My name is Kim and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of the conference. If at any time during the call, you require assistance, please press star zero and an operator will be happy to assist you. As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Mr. Scott Pond, Director of Investor Relations. Please, proceed, sir.

Scott Pond

Thanks, Kim. We appreciate everyone joining us today. Today in the room are Truman Hunt, President and Chief Executive Officer; Ritch Wood, Chief Financial Officer; Dan Chard, President of Global Sales and Operations; and Joe Chang, Chief Scientific Officer.

Just a reminder, during the call, comments may be made that includes forward-looking statements. These statements involve risks and uncertainties and actual results may differ materially from those discussed or anticipated. We encourage you to refer to today’s earnings release and our SEC filings for a complete discussion of these risks.

Also during this call certain financial numbers may be discussed that differ from the comparable numbers obtained in our financial statements. We believe these non-GAAP financial numbers assist management and investors in evaluating and comparing period-to-period results in a more meaningful and consistent manner.

And I’ll turn the time over to Truman.

Truman Hunt

Thanks, Scott. Good morning, everyone. We appreciate you joining us today. As noted in our release this morning, Nu Skin Enterprises recorded another record quarter with revenue of $588 million. We’re very pleased with our fourth quarter results given that we were going up against an aggressive comp [ph], with about $90 million in sales in connection with our 2011 fourth quarter distributor convention.

And with a strong fourth we reached a new milestone with actual revenue surpassing $2 billion for the first time. Our annual revenue of $2.17 billion represents the 24% increase year-over-year and is our fifth consecutive record year of revenue.

On the earnings front, we came in and have expectations with earnings per share of $0.97 which is 27% improvement over the prior year. This increase our annual EPS to $3.52 which is a 48% increase or 31% when excluding charges we took in the prior year due our [inaudible] customs case.

These results speak to the strength and momentum of our business. As noted in our press release this morning, we also remained optimistic about 2013 and have raised our guidance for the full year which Chris will talk more about in a minute.

Suffice it to say that 2012 was a terrific year. We ended with the strongest quarter in our 28 year history, our key metrics continued to be strong and overall, we’re very bullish about our ability to sustain growth going forward.

Now as you know, there’s been a lot of noise about direct selling over the past year and some of you may have wondered if that noise has had any impact on our results. I’m pleased to say that we continue to see strong trends around the world and we have continued confidence in the model and our expectations for growth. The energy within our sales force surrounding our products and our business opportunity is at the highest level in 10 years that I’ve been CEO of this incredible business.

Together with our sales leaders, our management team is staying focused on growing the business and we’re doing that in two primary ways. First of all, our product development teams are continuing to pave the way for our compelling product pipeline. We continued to advance our understanding of the science behind the aging process. We continue to acquire the science of gene expression and the formulation of our products and in the development of future anti-aging products. This is an area where we believe we’re out front and ahead of others.

You’ll recall that we introduced the ageLOC brand just four years ago and in 2012, the ageLOC brand generated over $1 billion in product sales, something that we very proud of.

In 2013, we’re also looking forward to the launch of our ageLOC weight-management system. This is arguably the largest product category we have focused on in many years. The products in this white management system are coming along nicely and we’re excited to introduce them at our global distributor convention in October.

So white management will be our focus in 2013 and 2014 and then in 2015, we have two very robust products in development; one in the health aging space, and another which will allow consumers to cut the money to personal care product regimen. We’ll discuss these products in more detail as the time for launch gets closer.

The second thing that’s really driving our business is the innovations that we’ve made on our business opportunity spot [inaudible]. Over our 28-year history, our innovation on this front have enabled us to successfully differentiate ourselves. In our latest innovation which is the refinement of our product launch process has been an important part of our growth equation.

Those of you who follow us or heard us talk about the limited time offers that we implement on a global and a regional basis, before making a product fully available to consumers and to our sales force. This process has added [ph] a great dynamic to our business opportunity and our sales leaders have aligned around this process as we execute strategy around the world.

So for example, we generated 26% growth in Japan in the fourth quarter which resulted in about 6% increase for the year with a successful limited time offer by the Atlantic Spa in that market. And that’s an example of the success we’re having as a result of this mechanism. And country by country, as our sales leaders continue to better align behind the self fill [ph] launch process that continued to drive including the results.

Our business cycle, as you saw them unfold in 2011 and 2012 is the model that you’ll see us execute our global and regional LTOs in ‘13 and ‘14. We generate great excitement and consumer awareness to our global LTO and then in the subsequent years, our regional LTO launches sustain itself for us and the consumer base growth.

After we stabilized the consumer base for a new product, we then repeat the cycle. And we’re continuing to improve our execution of product launch process and expect to see great results coming from this going forward.

We’ve increased our guidance for the second half of 2013 as a result of increased in market forecast for the ageLOC weight management system. The confidence of our market management team continues to increase as they work closely with our sales leaders to plan the LTO and this is the reason for the increase in our expectations which we’ll talk a little bit more about in a moment.

Now, from a geographic perspective. As I’ve just noted, Japan was a highlight in the fourth quarter. We’re very pleased with the work of our local management team and sales leaders in Japan. 2012 results demonstrate that Japan can indeed contribute to our global growth and we expect Japan’s growth to continue in 2013.

South Korea also continues to move forward in double digit local currency growth. As you know, it’s been one of our stellar markets for well over a decade and we expect Korea will continue to be one of our top growth markets going forward.

Greater China also posted very strong growth in the fourth quarter. We continue to believe that this region holds tremendous potential and we’re continuing to invest in our business there. In fact, the construction of our Greater China regional headquarters outside of Shanghai continues to progress quickly, and we expect the new regional campus to be completed by the end of this year. The development plan that we outlined in the September press release is also moving forward and the footprint of our business continues to expand in rapid rate.

In other markets, South Asia-Pacific has been on great run for the past several years. Our sales leaders have been focused on expanding their consumer base and reaching into new markets including the recent addition of Vietnam in 2012. Now we have difficult comparisons through the first half of 2013 given the very significant LTO sales in the prior year. I shall talk more about this in a moment but we expect a solid 2013, and a strong growth in the back half of year with the launch of weight management system which is a part of a category that is already highly relevant in this region. And we expect that the region overall that show revenue growth of about 10% of the year.

The US grew 18% in the fourth quarter when taking out sales to non-US distributors in the prior year convention. It’s a very positive result and we continue to be optimistic about continued strong growth in the United States.

And finally, the EMEA region posted strong results of double digit revenue growth and strong growth in sales leaders and in actives. This growth happening all throughout the region. This region is now a material part of our revenue base and we’re optimistic with our continued growth throughout Europe and the Middle East.

So from a financial perspective, our strong cash flow will allow us to continue to increase dividends, continue to repurchase shares and also be able to invest in important growth initiatives to sustain growth going forward. As we’ve recently announced, we plan to increase our 2013 dividends by 50% which will represent a 140% increase in dividends over this past the three years.

So in summary, we remain focused on executing our business plan and in driving our growth in our sales leaders and in our consumer base. We’re very encouraged about the positive growth trends that (inaudible) in our business. And we fully expect 2013 to be another record year for Nu Skin Enterprises.

So with that, Ritch, take it away.

Ritch Wood

Thank you, Truman, and hello to everyone there. We’re proud to report another very strong year improving in all of our financial metrics; revenue, profit, operating margin and balance sheet strength and stability. And we really are excited about a terrific year coming in to 2013.

So first of all, let me address our guidance for 2013. Today, we raised our guidance for both revenue and for earnings per share for the year. There are three primary factors impacting our guidance for which I’d like to give a little bit more detail.

First of all, we see growing optimism from our region and market management teams relating to the plans of weight management launch in back half of the year. Our initial guidance for this launch was to generate somewhere around $250 million to $300 million in sales during the limited time offering of the product which would happen in September and October.

Today, I’m increasing our expectation of the launch of this weight management system by $15 million, now expecting limited-time offer sales to achieve $300 million to $350 million.

Second, the strength of our business in Japan, Korea, Greater China and the US during this fourth quarter, including the positive trends and the number of sales leaders in this key market has encouraged me to move to the high-end of the range of our guidance or slightly above the high-end of the range of the guidance that we provided for each of these markets and regions back in November.

This change adds another $50 million revenue guidance. Together with the strength of the core business and the higher expectation of the product launch, today, we’re raising our increasing revenue or increasing revenue guidance by $100 million for an increase of 4% to our initial guidance that was provided just three months ago.

Third, we have adjusted our assumption for three key currencies in this next year. I adjusted the yen to dollar rate from 80, which is what guided in November and 93, which is where I have it now for the balance of this year. This change negatively impacts our revenue by $72 million for 2013.

Offsetting this – and also just my model for the Korean won and the euro. I now have the Korean won at 1,100, previously at 1,050 and the euro at 0.77 for the balance of this year compared to my previous model at 0.80.

These two changes in currencies benefit our revenue by $22 million. So the net impact from currency in the changes in our guidance today is $50 million of net headwind to our revenue. And we now expect the currency to be a negative 3% to 4% for the year from our initial guidance of 1% to 2% that we forecast back in November.

Altogether, these changes allow us to increase overall revenue guidance by $50 million. That puts us at $2.30 billion [ph] to $2.5 billion [ph] and raise our earnings per share by $0.07 to our previous range which now takes us to $3.77 to $3.92. Our constant currency revenue growth in now expected to be 10% to 12% for the year, up from 8% to 10% that we previously guided in November.

And now for the first time, we are providing a first quarter guidance. We’re looking to achieve revenue of $500 million to $510 million, an increase 13% in constant currency terms. And as you compare our guidance to our prior year, I remind you of two unique items in the prior year. First, Q1 of 2012 included $18 million, $15 million in South Asia and $3 million in Greater China of sales from our Q4 2011 product LTO that were shipped and recorded as sales in Q1.

And then secondly, we booked last year a $0.04 gain from foreign currency translation, reported in our earnings per share number of $0.74 in the prior year. If I exclude the carryover sales, our constant current growth rate for Q1 is expected to be in the 16% to 17% range of a very nice year last year as well.

As we come in to the second year, we would note that we’re comparing against prior year LTO sales of approximately $140 million and a reported revenue growth rate in the prior year of 40%. And currently modeling our sales to be down around 8% to 9% in constant currency or 10% to 12% in US dollars, and then of course in Q3 and Q4, this year, we’ll launch our weight management system, and we would model very, very strong growth in both Q3 and Q4 of this year.

As is customary for us, and for me particularly, our intent is to model the business in a way that gives us confidence that we can deliver and hopefully beat our numbers. Even if unexpected issues arise as they always will.

Operating margin for the first half of the year will be around 15%, as we invest to support expected growth in the back half of the year specifically, we’ll be spending dollars in the first half of the year in training, logistics, marketing, R&D, including clinical support for the product launch, and China development to sustain and support the core business growth and prepared to execute a very successful product launch in the back half of the year.

The operating margin in the back half of the year will be very, very strong with these product launches, and for the year, we expect to be in the 15.8% to 16.1% range.

So now, I’ll quickly cap to our fourth quarter and full year 2012 results, the company’s operating margin for the quarter was 15.1% representing a 20 basis points decline compared to the prior year, primarily due to our increase in selling expenses.

And for 2012, operating margin improved to 15.7%, that’s up 40 basis points over the prior year when we exclude the Japan customs charge in 2011.

We made steady improvement in operating margin each year since 2007 and expect to expand operating margin, another 10 to 40 basis points in 2013.

Our gross margin for the quarter was 83.8%, that’s even with the prior year, selling expenses came in at 45.0% compared to 43.3 for the fourth quarter of 2011, the increase is being driven by acceleration in our revenue growth as well as many more sales leaders qualifying for incentive trips in recognition.

Selling expense will be around 44% in the first half of the year, and then increase in the back half of the year, and that increase will be dependent upon the size of the LTO and the product launch.

General and administrative expenses for the quarter, as a percent of revenue were 23.8%, that’s 150 basis point improvement over the same period in 2011, and on an annual basis, our G&A was 23.3%, 170 basis point improvement over 2011.

Our tax rate for the quarter was 35.5% compared to 34.9% in the prior year, and going forward in 2013, we expect our tax rate to be around 35% to 35.5%. We are very proud of our cash from operations, continue to grow at about $311 million in 2012 compared to $224 million in the prior year, and during the quarter, we paid out 11.7 million in dividends, we repurchased 21.9 million of our outstanding shares, and that left our stock repurchase authorization at approximately $135 million at the end of 2012.

With that detail, we’ll go ahead now and open up the call for questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, if you wish to ask a question, please press star followed by one, on your touch tone telephone. If your question has been answered, or you wish to withdraw your question, please press star followed by two.

Your first question comes from the line of Olivia Tong with Bank of America Merrill Lynch. Please proceed.

Olivia Tong – BofA Merrill Lynch

First question is around Japan and the FX impact, just broadly speaking, you gave the FX impact or the update on the top line, can you give us a sense for what impact it could have on the bottom line including any hedges you have in place, and then also the Yen-denominated debt? Thank you.

Ritch Wood

You bet. Yes, I have not factored in gains by the way for the Yen-denominated debt. So by the way, in the first quarter, if the Yen were to remain in kind of a 93 range, we’d probably pick up about a $3 million to $4 million benefit in other income from the translation of our debt.

In terms of the overall operating income impact, it will – the $72 impact has about a 10% or sorry, $0.10 negative impact to earnings per share.

Olivia Tong – BofA Merrill Lynch

Got it. Thank you. And then there’s obviously been a lot of noise in the market place since the last time you guys held – since the Q3 call. Has the recent noise in the market impacted any of your distributors? What are they telling you? I mean certainly, the Q4 distributor numbers don’t look like it’s impacted them, but then again, a lot of the noise really picked up sort of late in the quarter. Thanks.

Truman Hunt

Yes, as I indicated in my remarks, Olivia, we have been very encouraged by the lack of impact on our business results as a result of the market noise. I mean I think our distributors are seeing through the intensions of short sellers, and they’re just climbing ahead, in fact as I indicated, I never sensed in 10 years that I think – as much energy and enthusiasm as there is in the field right now.

And that’s not just in the US, it’s really global. And so we’re plowing through it, and have not seen business disruption.

Olivia Tong – BofA Merrill Lynch

Thanks.

Operator

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

Tim Ramsey – D.A. Davidson

Hi, good morning. Thanks a lot. Ritch, you mentioned that with a greater LTO in the second half, there would be higher selling expense. I just wondered if you would kind of bracket that or give us a sense of how that tends to work out on a percentage of sale spaces?

Ritch Wood

You bet, Tim. Generally our core compensation plan pays right around let’s say 42% or so, and then we have another 1% or so that’s associated with these sort of trips and so forth.

When we have LPOs, essentially, the average volume per sales liter goes up, and so the pay out on the compensation plan also goes up.

Depending on the size of the LTO, and what percentage that LTO represents of our overall sales for the quarter, it will push our selling expense higher. So if I were to run some really rough numbers, let’s say, that our LTO accounts for somewhere around 30% to 40% of our fourth quarter sales, we would expect that our payout would do somewhere from 44% to 46% or 46.5% as the LTO becomes a bigger percentage of our sales, it will push the selling expense up.

And generally, that’s just in the month or so that we have the LTO, and then it goes right back to kind of where the core compensation plan pays out.

The other thing that has impacted us is that we are, well, two things, we have more sales leaders qualifying for trip incentives which has pushed that number up slightly. In managerial [ph] recruit call, we announced a couple of years ago, or our China management team talked about I think in a investor day that we had, a special incentive that we had in greater China, that if our greater China business achieved $1 billion, there was going to be a special payout to sales leadership qualified along the way.

And we are accruing towards that as the business looks more and more likely to hit $1 billion in 2014 and possibly even sooner than that. So that is also pushing our selling expense up slightly.

The idea is that we offset the vast majority of that through the efficiencies we gain in our G&A line. And so generally, our overall margin should continue to improve as we go forward.

Tim Ramsey – D.A. Davidson

So just the bottom line that is, it sounds like maybe there’s 60 or 70 basis points in the second half that would be incremental to the selling expense?

Ritch Wood

I have our selling expense running at around 45.2 to 45.3 for the year, but again, that will be dependent somewhat upon the size of the LTO.

Tim Ramsey – D.A. Davidson

Okay, great. And I’m surprised that given the shape of the business and the mix of the business, tax rate guidance, perhaps seems conservative, I think you shared that before, but thoughts on why tax rate wouldn’t go down?

Ritch Wood

I think there’s some upside to it as well on that number. Generally, our plans for cash this year would be payout a higher dividend which we’ve announced, buy back stock, we’ve got our buildings that we’re putting in, that we’re not planning to use our balance sheet for, we’re paying out of cash flow for those. So most of those cash ends up coming back to the US.

If we determine to part cash offshore, which we could, particularly in China, with our building there, and so there is an opportunity to bring our tax rate down below the 35% rate that I put into my guidance.

Tim Ramsey – D.A. Davidson

Great. Thanks so much.

Ritch Wood

You bet.

Operator

Our next question comes from the line of Faiza Alwy of Deutsche Bank. Please proceed.

Faiza Alwy – Deutsche Bank

Yes, hi. How are you?

Truman Hunt

Hi, Faiza. Good, thanks.

Faiza Alwy – Deutsche Bank

Hi. So I guess I wanted to one, just get a little bit more detail on the weight management LTO, and how it’s going to be broken down between the quarters and the regions. So is it going to be a global roll out all at the same time, or should we model it, should it be staggered across the two quarters?

Ritch Wood

It will be staggered across the two quarters and we’re still waiting for final product registration confirmation and so forth.

The way it looks today is that greater China will launch in September, possibly south east Asia, a couple of markets in September, some in October, but the whole world will LTO the product between September and October. And right now, I would kind of forecast greater China in Q3, and the rest of the markets in Q4, that may adjust slightly, but that’s generally the way we’re looking at it.

Faiza Alwy – Deutsche Bank

Okay, great. And then just if you have any updates on capital allocation plan. I know we’ve talked about potentially doing an accelerated share repurchase or levering up the balance sheet a little bit, so if you have any updated thoughts on that, that would be great.

Ritch Wood

These are always questions that we work through our board of directors with, and continue to monitor and analyze. Right now, we’re generating strong cash flow, so we’re using cash flow obviously to buy back shares.

We bought back $200 million of stock last year, that was 7% of our outstanding shares. We think that’s a great use of our cash. We haven’t to-date, used our balance sheet, it’s always an option that we continue to consider with our board, but we’ll evaluate that as we go forward.

Faiza Alwy – Deutsche Bank

All right. Thank you.

Ritch Wood

You bet.

Operator

Our next question comes from the line of Scott Van Winkle of Canaccord Genuity. Please proceed.

Scott Van Winkle – Canaccord Genuity

Thanks. Congrats, guys. Ritch, what was the actual interest expense in that fourth quarter?

Ritch Wood

Let me look real quick. About 1.5 million, I believe. 1.4 million.

Scott Van Winkle – Canaccord Genuity

1.4 million. And so the remainder of the other income, was the end going your way towards the end of the quarter?

Ritch Wood

Yes. By the end of December, it had moved, certainly not to where it’s at today, and in fact I can pull that end rate, but there’s about a $3.7 million gain in FX for the quarter.

Scott Van Winkle – Canaccord Genuity

And as you go into the LTO for weight management, when do the numbers kind of come to you? You’re going to know how big this is, either from the standpoint of executive distributors of indications, when does visibility really become clear on how big it gets?

Truman Hunt

You know, Scott, visibility really clarifies on a daily and a weekly basis. And as our management teams around the world, sales leaders, and as they work with their groups, the feedback we get really just kind of clarifies visibility on the launch going forward.

And we continue to believe that the $300 million to $350 million projection we noted this morning, is still conservative.

Ritch Wood

Okay. I’d just highlight too that we’re having to build inventory starting today, Scott. So we continue to get those forecast in, and updated regularly, and we’re building inventory for a launch that’s half a billion dollars to support that sort of level if it goes to that high. And by the way, the Yen ended at 87 in December.

Scott Van Winkle – Canaccord Genuity

Okay. And then last on Japan, you talked about it, obviously, been a big, strong fourth quarter, if you kind of exclude and LTO in Q4 and what’s coming with the big product launch later this year, what do you kind of see underlying kind of the day to day business in that market?

Truman Hunt

Yes. The market is still – we wouldn’t characterize the market as being extremely healthy, but we are encouraged with underlying trends in our active numbers and in our sales leader numbers.

And we are starting to see the fundamentals of the business turn positive there which is why we’re speaking optimistically about continued growth in Japan here in 2013.

Scott Van Winkle – Canaccord Genuity

Great. Thank you, much.

Operator

Our next question comes from the line of Frank Kema [ph], of Sidoti. Please proceed.

Frank Kema – Sidoti

Good morning. Most of my questions have been answered, but I was wondering if you just could give us a little more detail on, in particular, it was obviously a very strong quarter there, and in light of the macro environment, how did you achieve that?

Truman Hunt

The macro environment where?

Frank Kema – Sidoti

In Europe being kind of weak from economic standpoint.

Truman Hunt

Europe? You know, we turned the corner on Europe a few years ago where we finally, after many years of hard work, frankly, reached critical mass with sales leadership in that market, it is now really established and effective.

And I really think it’s been that, along with implementation of the product launch process that we’ve talked about this morning that have enabled that market to continue to growth with strong rates despite economic turbulence in the market.

And frankly, we’re still small too, I mean we have a lot of room to run before we really reach anywhere near our potential in the market.

So we’re still small, happy with our progress, sales leaders maturing, and aligning behind the product launch process, all of those things add up to 20% plus growth in a market that is otherwise difficult for many consumer product companies.

Frank Kema – Sidoti

Right. Can you remind us what countries you’re most exposed to in Europe?

Ritch Wood

In order of size, France, in Germany, are our largest markets. In eastern Europe, Hungary is a significant market, we’re growing nicely, and Russia which is becoming more and more meaningful, and then in Scandinavia, Demark and Norway, they’re both very good markets for us.

Frank Kema – Sidoti

Great. Okay, that’s all I had. Thanks.

Operator

Our next question comes from the line of John Faucher of JP Morgan. Please proceed.

John Faucher – JP Morgan

Thanks. Two questions. First off, Ritch, can you talk about, you talked about sort of staying a little uncommitted in terms of the balance sheet opportunity, can you talk about what you have built into the model from a share repurchase standpoint already?

And then secondly, if you look at the rollout of the weight loss product particularly in Asia, what’s the competitive advantage that you guys have there, and how well is the market developed from a competitive standpoint? Thanks.

Ritch Wood

Yes, on the balance sheet, use of balance sheet, I have our share count for the year at 61 million which is reflective of where we’re at, at the end of the fourth quarter. So I don’t have any net benefit showing up for the year in use of our balance sheet, which is always a possibility, but again, something we’re working with the board on.

Truman Hunt

With respect to competitive profile in Asia, I mean Asia is obviously a bit place and competitive profile really varies from market to market, some markets single levels are excelling models, do better, and in other markets, multi level models do better.

Generally, we compete there on the same factors we compete everywhere else. There’s a healthy appetite for high quality, western branded consumer products. Frankly, the push back that we give from our management teams in many of the Asian environment is that our products aren’t priced high enough in line with other premium skin care products in particular.

I think one of the things that sets us apart, really, throughout the whole Asia region is that we have very mature and very experienced management teams who have been with us for a long time, they are locally, they’re natives to the markets that they manage, certainly the case in greater China, in north Asia and south east Asia.

They have been with us for a long time, they know who are, they know what we’re trying to do, they’re aligned behind everything that we’ve talked about this morning. And we enjoy very strong field leadership, great sales leaders who run our businesses very effectively, and it’s just enabling us to really hit stride in a region that still has a tremendous potential and lots of room for us to continue to grow.

When we look at our competitors’ success, in the markets such as mainland China, and look at companies who are doing in the range of $4 billion to $5 billion a year in sales, and we compete head to head with them in other Asian environments such as Taiwan and Hong Kong, Singapore, other Chinese markets.

It’s hard for us to not be enthusiastic about our potential in mainland China, and in other Asian environments. We’ve been far more successful in Korea, than many direct sellers have been.

Japan is clearly a multi level market. Single level companies have not done well there, whereas multi level marketing companies have done well.

And all of those things add up to really give us tremendous confidence in the fact that these Asian markets are going to continue to grow.

John Faucher – JP Morgan

Okay. And specifically on the weight loss product, what’s the competitive environment there and what gives you guys the right to succeed in that category?

Truman Hunt

Well, as you know, John, we’re already succeeding in the category in south east Asia, and in Taiwan and in Hong Kong too where we have very successful weight management offerings.

The thing that’s going to distinguish us from everything else in the market place, is the fact that we’re applying these science to category. So for the first time, the science of GN [ph] Expression will be built into a product formulation that we think will yield good results for consumers.

And ultimately, when someone looses weight on a product and manages their weight effectively on a product, they become a walking sales ad. And they’re the best brochure. And that’s what we’re seeing right now with the success of our TRA [ph] weight management system in south east Asia and in Hong Kong and Taiwan. So the addition of a new ageLOC system is just going to add fuel to that fire.

John Faucher – JP Morgan

Thanks.

Operator

Our final question comes from the line of Mark Astrachan of Stifel. Please proceed.

Mark Astrachan – Stifel Nicolaus

Yes, thanks, guys. Just following up on the last question. How do you think about the weight management product cannibalization broadly, in terms of just the overall products more on the nutrition side, and then on personal care side, and then specifically within the 300 million to 350 million that you talked about in terms of contribution in September and October.

Truman Hunt

Yes, I mean as we shine the light on a particular new product, we’re always going to see the attention shift that direction a little bit which is not at all surprising. And so we would expect to see some modest cannibalization of other products as we launch the new weight management system, but one of the benefits of our new approach to product launches is the fact that the LTO volume is far more incremental in nature than a normal product launch has been in the past.

And so where as in the past, say 100 million product launch might have been 70% cannibalistic, the new approach has cut that in half, so maybe it’s only 30% cannibalizing of other sales. And so that’s part of the beauty of the LTO approach market that it’s been far more incremental than just a standard, here’s a product on the market forever type of launch model.

Mark Astrachan – Stifel Nicolaus

Okay. And then looking at over the next two or three years, maybe this is a question for Ritch. Where do you think selling expenses as a percentage of sales end up? And maybe broader, from an operating margin standpoint, how do you think about that as well over the next two to three years?

Ritch Wood

Yes, great questions, Mark. I think selling expense again, will be somewhat dependent upon the percentage of our sales each year coming from the LTO sales.

I would generally forecast it out to hold in the 45% range. And that would really forecast out very strong growth into our future model. If our top line growth rate comes down a little bit, then selling expense is going to come down as well.

So the nice thing about top line continuing to be strong even with selling expense being higher at 455 or so, we should make that up on our G&A line.

Our commitment has been to really get to this level, and then we shifted our focus a little bit to invest back in the business in a lot of these top line growth areas that we believe will sustain a high level of growth for extended periods of time in China, investing in Latin America, some of these other concepts we’re looking at.

So I think our commitment going forward is to maintain our operating margin where it’s at, and trying to increase it by approximately 20 to 30 basis points a year, but we’ll make those evaluations each year as we look at the opportunities to expand the top line and continue to drive more earnings.

I mean the bottom line is, what we’re really shooting for, is to increase our overall earnings and cash flow into the company, and we try and evaluate and balance that between investing in the business and just improving operating margin.

So I hope that answers your question, but that’s the way we think about the business.

Mark Astrachan – Stifel Nicolaus

Yes, that’s helpful. And then just lastly, the weight management gross margins, how are they on a relative basis?

Ritch Wood

Yes, mostly similar to our other nutritional supplements. It should not be a drain or a drag to our overall. The only pressure we’ll get from our gross margin as we look at it today, is the currency impact. We have a negative impact from currency, it may impact our gross margin slightly.

Mark Astrachan – Stifel Nicolaus

Thanks.

Ritch Wood

You bet.

Truman Hunt

Thank you for joining us this morning, everyone. And we appreciate your attention on what we consider to be one of the world’s great businesses. I wanted to conclude with just one thought that has been in my mind over the course of the last nine months that the spotlight has been shined on the direct selling channels.

There are skeptics out there who want to argue that direct selling companies, the directional model is less sustainable than other types of business models. I would invite those skeptics to take a look at our November investor day presentation where we reviewed with the investment community our revenue history over the past 20 years, or 28 years since we started.

I would invite those skeptics to show me where it becomes apparent that our model isn’t sustainable. The reality is, the direct selling is still a drop in the bucket of total consumers spending.

And to me, as I have dived into this channel and into this model, I would argue that direct selling is as sustainable as any other business model and even more so. I look at even here at our home town where Nu Skin started to do business in the mid 80s.

We worked alongside high flying companies like Work [ph] Perfect or like Novel [ph], and then along came Geneva’s Feel [ph] which was a local still new, but enjoyed the moment in the sun. And these companies enjoyed at those moments in time with tremendous profile and tremendous credibility. And yet I ask myself where are they now? Well, two of them are out of business completely, and one of them is essentially irrelevant, while Nu Skin continues to put up record year after record year.

So in reality, it’s really difficult for any business to really project a future out beyond five years because the world changes a lot in 10 or 20 year period of time. So I don’t know where Nu Skin Enterprises will be 20 years from now because it will be a different world. But I do have a high level of confidence that five years from now, we’re going to continue to celebrate record years as we work to achieve our vision of becoming a $5 billion company in that period of time.

So thank you for joining us. And we look forward to answering any other questions you may have off line.

Operator

Ladies and gentlemen, this concludes the presentation. And you may now disconnect. Have a great day.

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