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Nu Skin Enterprises, Inc. (NYSE:NUS)

Q2 2009 Earnings Call

July 29, 2009 11.00 AM ET

Executives

Scott Pond - Director, Investor Relations

Truman Hunt - President and Chief Executive Officer

Ritch N. Wood - Chief Financial Officer

Daniel R. Chard - President-Global Sales and Operations

Analysts

Olivia Tong - BAS-ML

Timothy Ramey - D. A. Davidson

Mark Astrachan - Stifel Nicolaus

Douglas Lane - Jefferies & Company

Scott Van Winkle - Canaccord Adams

Mimi Noel - Sidoti & Company

Operator

Good day, ladies and gentlemen and welcome to the Second Quarter 2009 Nu Skin Earnings Conference Call. My name is Merisel (ph) and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, today's conference is being recorded for replay purposes.

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

Scott Pond

Thanks Merisel. We appreciate you joining us today. Sitting in the room is Truman Hunt, President and Chief Executive Officer, Ritch Wood, Chief Financial Officer; Dan Chard, President of Global Sales and Operation and Joe Chang, Chief Scientific Officer.

Just a reminder, during this call comments maybe made that includes some 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 on these risks. Also during this call, certain financial numbers maybe discussed that differ from comparable numbers contained in our financial statement.

We believe that these non-GAAP financial numbers as fixed management and investors in evaluating and comparing period-to-period results in a more meaningful and consistent manner. These refer to our investor portion in the company's website for a reconciliation of these non-GAAP numbers.

And with that, I will turn the time over to Trum.

Truman Hunt

Thank you, Scott and good morning, everyone. We appreciate you joining us this morning to review our second quarter results.

Last month in the month of June, we celebrated the 25th anniversary of the incorporation of Nu Skin Enterprises. And we were pleased that last month ended up being our largest volume month in our company's history. And as our press release indicates, we're also pleased to generated record results for the second quarter. We posted revenue of 322.6 million, which represents the 4% constant currency revenue improvement over the prior year quarter.

Earnings per share excluding restructuring charges in Japan were $0.36, which is a 13% improvement year-over-year. We're also pleased with the 24% improvement in operating income, which is reflected in our operating margin at 11.2% excluding charges and which is the result of the business transformation after we began about three years ago.

So, our strong second quarter performance leads us to increase our EPS guidance for the year. And we'll talk about that a little bit more in a moment.

We continued to see really solid results in all of our geographic regions with continued strength in Europe, South Korea and United States. In particular, and as our second quarter results also reflect, we're seeing encouraging signs in Japan and China.

I would attribute our positive second quarter result to three primary factors. First, our innovative anti-aging products continued to attract a loyal following. Our Nu Skin brand grew 14% over the prior year with the Star skin care product continuing to be the Galvanic Spa system. Galvanic actually grew 68% over the prior year and jumped up about 20% over the prior quarter. This Galvanic Spa is just a fantastic product for our channel. There is five proceed value in the product and ideal for demonstration, and can show immediate improvement in skin tone and skin texture. So frankly, Galvanic momentum is continuing to build globally and we feel it still has a lot of room to run around the world.

Second, our business model remains highly attractive to increase in numbers of people who are facing financial reality. And you seek the supplemental replace income, thinking that about nine months or so ago when the economic crunch began. It's there it was the direct selling would be a hedge in times of economic turmoil. And I think we're seeing that very prove out in 2009.

We're seeing increases in those interested and pursuing the business on a full-time basis. And we're also seeing an improvement in our average order volumes.

Over the past year, we've implemented as you know an innovative enhancement to our distributor compensation model called the Wealth Maximize. This enhancement augment income in the early stages of the distributorship, which leads to improve retention and also incentives given to reach higher levels of productivity.

Compensation plans changes are almost always tricky for direct selling companies, but in this case, I think the change was well executed and the enhancement has positively impacted our result in 2009.

And third, I'm really pleased with our profitability improvements. Our business transformation efforts dating back to 2006 are clearly paying dividend. We've made significant progress in cutting costs. Just to say one example, you'll recall that in 2007, we invested about $23 million in unprofitable market and I'm happy to report that in 2009, those same markets will operate profitably.

So, we're operating with a higher level of discipline and are very pleased with the progress. we're making here. We're making good strides as well in getting our operating margin, where we'd like it to be. And anticipate continued improvement over the next three years.

Our results reflect improvement in two key markets in particular. We're pleased with year-over-year growth in Mainland China, which you may recall, we projected a couple of quarters ago. Andrew Fan and his team there are doing a great job is what continues to be a significant business model transition.

In addition, our Japan team has done a terrific job in executing a business transformation plan there and has generated improving top-line trend, while simultaneously restructuring the labor force to improve the bottom-line. So we're encouraged with recent results in Japan and we look forward to ageLOC introduction, there in the fourth quarter of this year.

Now, we'll be holding, our 25th global distributor convention this coming October. And we're really looking forward to this event because it will present, we'll have the opportunity to present the full ageLOC story to our global sales leaders for the first time.

ageLOC has tremendous potential for our business. So I want to take just a moment and expose you a little bit to ageLOC into our product direction. As you'll recall for the past 18 months or so, we've been talking about wanting to stake our competitive proposition on the principle of being the company that attacks the sources of aging and not just the signs of aging, which was where we feel our competitors are.

We want to cut through all of the noise in the clutter in our product categories with a competitive message with a difference and more compelling than what anyone else is offering.

Phase 1 of ageLOC was announced with the discovery of the arNOX enzyme. This is a free radical producing enzyme. It significantly escalates aging in the skin as we get older. The Galvanic Spa gel which were launched last year include arNOX inhibitors. It generates significant improvement in the skin. But arNOX inhibition, as compelling as it is, it's really just a small part of the ageLOC story. The ultimate source of aging is found in the human genes. The way that our genes respond to aging and to all of the external and internal influences that way on our genes are what really dictate, how we age and how we look as we age.

The biological study of aging is study of the human gene as well as advanced in computer technologies are all converging to put Nu Skin Enterprises in the right place at the right time. So going forward, we want to distinguish our products by formulating them to ensure that they are supporting, the healthy functioning of particular sets of genes or super markers that we've labeled as new gene clusters. These are the genes that we believe are most responsible for helping us, helping keep us as youthful as possible. So, in the next few years, you're going to hear a lot more about the impact of nutrition and skincare products on genetic expression. This is the future of our product categories and we're pleased to have a significant head start on the competition in this regard.

So, that our conventional to whatever it will be unveiling much more of the sign behind ageLOC and we'll be launching our first ageLOC skin treatment system. This will be a four product system that includes a cleanser toner, a day cream, a night cream as well as the daily use serum. And we've referred to in past discussions as MOAS which stands for mother of all serums. But its real name is actually the Nu Skin future serum. We're very excited about this system and equally excited to continuing using ageLOC into a wide range of Nu Skin and Pharmanex products.

The ageLOC system will be available as a limited time offer a convention and then we'll launch in the U.S., Europe and Japan in January of 2010. I personally believe that ageLOC will be the most significant platform launch in Nu Skin's history. And that we've already began to see great momentum that the Galvanic Spa gels with ageLOC and we expect that to continue in the second half of the year and well into 2010.

So, overall, we started 2009 off well. We expect to make further gains in the second half of the year. I'm very encouraged with the direction of the business and we remain on-track to exceed our goals for the year and post another record year.

So, with that, let me ask Ritch to provide some details on the numbers.

Ritch N. Wood

Thank you, Trum and good morning, everyone. I'll provide the local currency revenue figures in our major markets and then some discussion here as to the financial results.

In the North Asia region, second quarter revenue in Japan was ¥10.8 billion compared to ¥11.5 billion in the same quarter of 2008. And South Korea achieved another record revenue quarter with local revenue of ¥46.2 billion versus ¥41.7 billion in the prior year.

In the Americas, the U.S. posted $51.3 million in revenue compared against 48.8 million in the prior year. Canada showed tremendous growth and reported C$7.0 million in the quarter compared to C$4.1 million in the prior year. And Latin America revenue was $4.9 million compared to $4.4 million in the prior year quarter.

In the Greater China region, Mainland China revenue was RMB119.0 million during the quarter versus RMB112.6 million in the prior year. And quarterly revenue from Hong Kong was HK$93.6 million compared against 113.9 million in the same quarter last year, which you'll recall benefited from a successful Greater China convention held in Hong Kong during the prior year.

And Taiwan revenue was NT770 million compared against NT761 million in 2008.

Our gross margin for the quarter was 81.2% at the 40 basis point decline over the prior year and the decline is primarily related to foreign currency fluctuations which you'll recall impacted revenue by about 4%.

And also slightly impacted by the Galvanic Spa unit sales which have a slightly lower gross margins then our other personal care products. Selling expenses for the quarter were 41.7% compared against 41.6% -- 42.6% in the second quarter of 2008. And this improvement as Truman mentioned, can be attributed to the Wealth Maximize modification to distributor compensation. That plan is now been adopted by nearly every market in which we operate and we're pleased with the recent successful rollout of this plan in Japan and many of South Asia, South East Asia market, during the second quarter.

Taiwan and Hong Kong adopted this plan in July. The objectives again of this plan are to achieve retention income for early executives and increase productivity of our sales leaders and we're seeing success on both of these fronts.

General and administrative expenses for the quarter were $91.3 million or 28.3% of sales compared to 30.0% of sales in the prior year period.

Note that the prior year period did include convention related expenses in Greater China and Japan. Overall though this represents solid progress in streamlining our business and we'll continue to stay focused in this regard. We incurred a restructuring charge of $1.6 million during the quarter, again as related to our restructuring of operations in Japan. And the majority of our plan restructuring efforts and costs for this year are now behind us. We anticipate approximately 2.5 to $3 million of remaining restructuring costs, again associated with Japan, spread across the final two quarters of 2009. When fully implemented, we expect our restructuring efforts in Japan to save approximately $10 million annually off the 2008 overhead base in this market.

The company's operating margin was 11.2% for the second quarter excluding restructuring charges, representing a 220 basis points improvement over the prior year. We're tracking well ahead of our planned operating margin target during the first half of 2009. And so we now revise our 2009 operating margin excluding plan restructuring charges to be close to 10.5%.

Operating income for the quarter excluding restructuring charges increased 24% over the prior year. During the quarter, we reported a net gain of approximately $900,000 in the other income expense line of income statement. Foreign currency translation gains of about $1.9 in the current quarter more than offset net interest expense.

In the prior year, the company reported a foreign currency translation gain of $5.3 million. Our tax rate for the quarter was 37.4%. We've made $7.2 million of dividend and purchased $3.9 million of company stock, which leaves our company's approved repurchase authorization at approximately $78 million at the end of the second quarter.

In the past 12 months our cash has improved approximately $30 million and debt has decreased $20 million resulting in an approximate $50 million improvement in our debt position in the past 12 months.

We now estimate our 2009 revenue to be in the 1.26 to $1.27 billion range. This includes a projected negative foreign currency impact for the year of about three to 4%. Based upon the higher operating margins that we're generating we are increasing our earnings per share estimate for 2009 to $1.23 to $1.28 excluding 2009 restructuring charges of approximately $0.14. And also for modeling purpose, we remind you that our global convention is planned for October. And that has a cost of approximately 6 to $7 million, which will hit in the fourth quarter this year. And that's all built into these projections that we provided to you.

For the third quarter, we project revenue to be in the 312 to $317 million range putting earnings per share in the 32 to $0.34 range excluding approximately $0.02 of restructuring charges. And this reflects a negative currency impact of approximately 1 to 3% during the quarter. And again sales growth on a constant currency basis in the three to 5% range.

So with that detail, we'll go ahead now and open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Olivia Tong from Bank of America. Please proceed.

Olivia Tong - BAS-ML

Thanks. Good morning, guys. How are you?

Truman Hunt

Hi, Olivia. Good. Thanks

Olivia Tong - BAS-ML

Good. Want to start just maybe if we could go over a couple of the countries, since Japan declined at a much lower pace and had been in the past couple of quarters, and then also the U.S., a decline in the growth. So, just wondering if you could give a little bit more detail, between behind those two markets?

Truman Hunt

Sure, let's take Japan first. As you'll recall, Olivia, we parachuted a new management team in there, just over a year ago. And they've really have undertaken a complete start to finish reform there of how our business opportunities is presented to the field there. Had done a terrific job growing the top-line and really playing business initiatives in place that are returning the top-line around to get ahead of the right direction.

And it's really just a question of doing there what we're doing everywhere else in the world that is working so well. And they're executing that very effectively. And at the same time has significantly restructured the labor force and some of our overhead there to result in a significant improvement on the bottom-line. In 2010, just saw you know, we're looking at about a $10 million improvement to the bottom-line in Japan based on the restructuring that's already happened so far this year or so, good things happening there.

In the U.S., we see continued enthusiasm for the business and strength for the business. You'll recall that we grew at a very robust rate of about 20% in 2008. That growth rate has come down a little bit, as reflected in our second quarter result. But what leaves me feeling really pretty comfortable with the direction of the United States is that we just have great ambition to work with during the second quarter or in the second half.

We just introduced some of the ageLOC story, a good part of the ageLOC story to our top sales force leaders about a month ago. And they're just catching a vision now, reformatting their presentations to incorporate the ageLOC story. And working towards convention in October, here in United States we fairly just have great ambition to work with.

Olivia Tong - BAS-ML

For Japan for the minus six do you think that -- I think that you said in the past you should expect decline for the slower pace. Do you think -- in the second half that you should see less than a minus six or better than a minus six growth rate decline in Japan.

Ritch Wood

Yeah, you recall that we guided Japan to be down around 8% for the year. And we expect to deliver on this and possibly exceed our commitment. So, we're working our best to improve the decline even further. And we expect the third quarter to be probably in the same range, might be down 68% or so. And then we'll see what we can do to further improve that with the launch of ageLOC in the fourth quarter in Japan.

Olivia Tong - BAS-ML

Got it. And then I was kind of surprise at the gross margin declined in the part of it is effects, but I thought with Japan getting a little better in relative terms, that being your highest margin region, and that would have helped a little bit offset that. Can you talk a little bit about some of the dynamics that went into the gross margin number this quarter?

Ritch Wood

Sure, Olivia. If we're just to be on a constant currency basis, our gross margin actually would have been slightly higher than the prior year. So, pretty much the full impact was related to the currency issue. We've have several initiatives in place, that continue to improve our gross margin going forward, including the launch of ageLOC products which will have very nice gross margins for us.

So we'll continue to stay focused on that. We did see a little impact in the second quarter. But we expect, to really continue to see slow improvements in the future. So, there is nothing that concerns me substantially. The changes in Japan, in the U.S. really didn't impact much in the second quarter. We did have very strong sales of the Galvanic Spa which has a slightly lower gross margin than our weighted average personal care product. But that continues to balance out with sales of the Galvanic gels which have strong margins. So not concerned, I don't anticipate that it will drop going forward. So, I think we'll see it strengthened up a little bit in the future.

Olivia Tong - BAS-ML

Okay. And then just lastly, Truman you talked a little bit about sort of counter cyclicality of direct sale and how people turn to direct sales for income opportunity in tough times. But I have a little bit trouble with that considering when I look at the distributor numbers that, relative to -- you look at Q1, Q2.

Truman Hunt

Yeah.

Olivia Tong - BAS-ML

It seems like the active numbers which is where I would expect that to show up. Those will not -- they were worst in Q2 than they were in Q1, when you look at it. So, just, if you could talk a little bit about that that will be great?

Truman Hunt

Yeah, that's a fair observation, Olivia. And I think that my comment with respect to direct selling being hedge against economic turmoil is really reflected in our overall results more than it is distributed trend specifically but you recall that we include in our active account anyone who places an order in the time period reference. And so that includes frankly a lot of people who want to act as distributors, they're just acting as consumers. And in our case with the implementation the Wealth Maximizer compensation plan we redirected some compensation incentives away from customer acquisition and more towards distributor acquisition. And we feel that the shift in our active number is really more reflected, more reflection of the Wealth Maximizer incentives than it is economic impact.

Olivia Tong - BAS-ML

Okay. So the active is really probably not the right number to look at because it reflects consumer sort of like people who enter into the business just to get sort of a discount on the product

Truman Hunt

That's correct.

Olivia Tong - BAS-ML

And that of course should come down.

Truman Hunt

That's right. And I think as we see consumers interact a little bit. I think we would chalk that up somewhat to economic impact. But my point is that we're more than making up for that through people who are coming to the business to supplement income.

Ritch Wood

And those are really the people who end up driving the business going forward. So, this is a very strategic shift that we've made as we rolled out the adjustments in the compensation plan, which we believe will help to drive future growth.

Olivia Tong - BAS-ML

Got it. Thanks very much.

Operator

And our next question comes from the line of Tim Ramey from D.A. Davidson. Please proceed.

Timothy Ramey - D. A. Davidson

Good morning. Congratulations, guys.

Ritch Wood

Hi, Tim.

Timothy Ramey - D. A. Davidson

I wondered if you might discuss the price points on the four product ageLOC system and what exactly the mother of all serums might do for me or anyone else?

Truman Hunt

You won't believe what I'll do for you, Tim.

Timothy Ramey - D. A. Davidson

I could use your help.

Truman Hunt

The new skincare system will really be the flagship. The skincare system that we offer and will be offered in our highest price point versus other existing systems.

So, the three core components, the cleanser, toner, the day cream and the night cream will be offered for a price in the $100 range with the future serum, the mother of all serums being added on top of that and approximately be the $150 range.

So, this is not a cheap product but it comes with a tremendous story and the feedback we're getting from the clinical trials on this product are off the charts. So we're just very optimistic about how consumers in the field will respond to this new system.

Timothy Ramey - D. A. Davidson

And what's the expected usage cycle and it is a monthly cycle or...?

Ritch Wood

Yes, in fact we've really formulated it and packaged it to 30 days supply. We work on monthly cycles in our sales force likes the monthly replenishment programs. And so this product is formulated and packaged for us a month specifically.

Timothy Ramey - D. A. Davidson

And just questions on your strategy if cash management you've maintained fairly large cash balances. And now almost net, almost no debt I think net 39 or whatever. Can that -- I think you have shrunken a bit, but can that shrink even further?

Truman Hunt

Well, no we do operate very conservatively and have never been huge fans of debt. But I think our record also shows that we have used cash very generously with our shareholders, we've increased our dividend now for what nine years in a row. We have a very healthy track record of using cash and even incurring some debt to buy stock back. And so, we're really pleased to be in such a healthy financial condition at this moment in time. And I have enjoyed the flexibility that comes being in a position we're in. And we'll continue to use our cash to benefit shareholders.

Timothy Ramey - D. A. Davidson

Great. Thanks.

Truman Hunt

Yeah.

Operator

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

Mark Astrachan - Stifel Nicolaus

Hey, good morning everyone.

Truman Hunt

Hello, Mark.

Mark Astrachan - Stifel Nicolaus

Hey, first question relates to, what your views are in cannibalization from the new products. And in particular, I guess as you sit here and think about these new product launches which sound pretty exciting. How do you think about, what the impact is on your other products? Plus what the potential long-term outlook is meaning, what potential impact do you see for 2010 and beyond?

Truman Hunt

Yeah, I think that's a good question. And clearly, every time we launch a new product, it is essentially in the same category as it is in products. There is going to be cannibalization. And we do take that into consideration, when we project revenue and really forecast demand for a new system. In this case, we're actually welcoming for the most part cannibalization, because, we're pricing the ageLOC system at price points that enjoys a healthier gross margin and our existing gross margins out. So there will be some cannibalization. But we've also seen to our 25 years history that people, consumers become very aware to whatever product they maybe using. And it's still frankly a little bit surprising to me that we have a very, very loyal customer base on skincare products that we launch 25 years ago. And people tend to stick with what they use and what they like. So, there is some cannibalization, but there is also high level of loyalty among consumers.

The story associated with ageLOC is so different than other line and wrinkle stories that we think we're really opening up our whole new world of people, whom we can convince of the ageLOC's story and the fact that ageLOC products really are attacking the source of aging and not just the signs of aging to make them all the more compelling.

Ritch Wood

And maybe just one other comment that this new line of products works perfectly with the Galvanic Spa. So it continues to compliment and harmonize with the Galvanic Spa story.

Mark Astrachan - Stifel Nicolaus

Great, and then in terms of just thinking about would be the potential impact would be on longer-term hotline trends. It seems like then it would stand to be a bit incremental there, especially given the price point?

Truman Hunt

Yeah we really haven't given any guidance yet for 2010 or beyond. And we probably won't do that until our Investor Day meeting in November. But we view as I indicated in my opening remarks we view ageLOC as the most significant product platform the company has ever launched. And we're just delighted with the competitor proposition and the really differentiated story that we have to go to market with. And we're confident that as we tell that story effectively we will see incremental improvement on top-line.

Mark Astrachan - Stifel Nicolaus

Great. And then just to more housekeeping oriented question, the savings you talked about from Japan. I am assuming most of that will fall to the bottom-line versus being reinvested in the business?

Truman Hunt

Yeah, that's true. We'll get about half of the savings, $5 million this year. That's not including the restructuring charges that we're taking the full $10 million next year anticipate most of that falling to the bottom-line. We have upped our promotional activity particularly our advance spending consistent with what we're doing in other market. There are little bit. But generally it's going to be savings that'll improve profitability.

Mark Astrachan - Stifel Nicolaus

Right, in the 5 million for this year in the guidance I'm assuming.

Truman Hunt

That is right, yeah.

Timothy Ramey - D. A. Davidson

Great. And then just on the tax rate, 34.4, does that's going to be a good number using going forward?

Ritch Wood

Yeah, I think probably right around 35% for this year. It should drop down to around 30% in the third quarter and then be back up in the 37 to 38% for the fourth quarter.

Timothy Ramey - D. A. Davidson

Great. Thank you.

Truman Hunt

Yeah.

Operator

And our next question comes from line of Doug Lane from Jefferies. Please proceed.

Douglas Lane - Jefferies & Company

Yes, thank you. Good morning, everybody.

Truman Hunt

Hi Doug.

Douglas Lane - Jefferies & Company

Back on the new product the ageLOC system; mentioned $100 price point is that for each of the four components or three components.

Truman Hunt

No that's for the set.

Douglas Lane - Jefferies & Company

So a month supply of the set is a $100 and then if you want future that's another 150 amongst supply?

Truman Hunt

That's correct.

Douglas Lane - Jefferies & Company

How does it -- can you help me put this is perspective with some of your existing products like Tru Face Essence which is also a very premium price skincare product. Is there a rebranding that's going to go on the Tru Face Essence, is it going to operate in parallel with it, I mean, how does that fit into the new system, if you will?

Truman Hunt

Yeah, that's a good question Doug, we love the Tru Face Essence product. And that's become very significant to our top-line and to our bottom-line. And frankly, if there is a single product, where the new system, where they might be overlapped with the new system to some degree, it's with the Tru Face Essence product. Ideally, in the perfect world, we probably would have infused ageLOC into Tru Face but unfortunately, the formulations were just not compatible.

And so, Tru Face Essence also you'll recall Doug is really all about firming. And we will not be making firming claims with the new future serum product. So, a consumer really can use continue to use Tru Face Essence also for firming specifically or they'll have to decide just based on which serum they prefer, which product they prefer to use. They are compatible to be used together, just a question of whether a consumer is really a skincare or really wants to go around and buy both the new system and continue to use Tru Face Essence also or not.

Douglas Lane - Jefferies & Company

Now, you haven't incorporated the Tru Face Essence product line with the Galvanic Spa, right?

Truman Hunt

Well, with the Galvanic Spa, a consumer can use whatever skin treatments skincare system they want. And so most of the people who use Tru Face Essence Ultra, I would venture to guess they're also using the Galvanic Spa. And that will continue to be the case.

Douglas Lane - Jefferies & Company

I just want to insure. Okay.

Truman Hunt

Tru Face Essence Ultra is not applied with the Galvanic Spa.

Douglas Lane - Jefferies & Company

That's what I am asking. Okay.

Truman Hunt

Right.

Douglas Lane - Jefferies & Company

Shifting to back on a recruiting front, on the executive distributors, it seems to be sequentially moving in the right direction. The two areas that stand out are Greater China or Europe but I mean still double digits 20% they can't really I mean that's just continuous to grow strongly, but maybe China, Greater China where both executives went from declining 2.7 to declining 4.9. And also your active distributors there have been declining pretty sharply in the past couple of quarters. Seems to be backing the trend, can you give us some color on that?

Truman Hunt

Yeah that's an issue of essentially reformatting the business model in China. And we've been asked that now for a couple of years in light of the new regulations. And so, I would encourage you to look more at just overall top-line results and how that active number looks for the time being, because I think that the dust is still yet to settle on the transition of the business model. We might continue to see some contraction in the actives. But what we're really delighted with is the commencement of business building activity, there that is reflected on the top-line.

Truman Hunt

And then, just one other comment on the active numbers there. Because of the convention in the prior year, sometimes we get a push for people to qualify and be recognized. So, executive number in the prior year would have been a little higher likely in the second quarter, which impacted the comparison a little bit.

Douglas Lane - Jefferies & Company

Got it. Okay, thanks.

Operator

And our next question comes from the line of Scott Van Winkle from Canaccord Adams. Please proceed.

Scott Winkle - Canaccord Adams

Hi guys. Congrats and Doug took all my questions. So I try to make a couple here. First, the products being launched the convention in a limited availability and then a full launch in January in U.S., Europe and Japan I think you said. Is that the way you wanted it or was there a push back or I just wonder there's about two month a black out window hurts.

Truman Hunt

Scott, let me have Dan Chard, he's our President of Global Sales to hit that question.

Daniel Chard

Scott, one of the reasons we did it the way that we are -- what was found is the critical period between convention and launch which is essentially used to train our entire executive force, so convention is going to be launched to the general public. And then we have in the various markets of U.S. and Japan, a series of potentially growth shows training and sales meetings will go on throughout the various countries to start driving both the interest each side. And we're really putting together amount of sales tools and components to make the January launch as successful as possible. This is a system that's been protected largely in South Korea, where we've consistently had almost successful launch than we're spreading that out and using the same tactics in our other markets. So, that's the primary reason for doing it that way.

Scott Winkle - Canaccord Adams

And have all necessary approvals particularly in Japan that attend (ph)?

Daniel Chard

Well, I'm not exactly sure Scott, where we are in registration of each of the new ageLOC products. But the skincare products are typically much, much easier to qualify for sell everywhere in the world in the nutrition products side. And we don't anticipate a registration issue with this new skincare system.

Scott Winkle - Canaccord Adams

Okay. And is there -- the MOAS, I like that name better actually. Is there any ingestible that's going to be involved there or just a skincare product at this point?

Daniel Chard

Yeah, eventually, we will infused ageLOC technology and ageLOC components into the Pharmanex line as well. And we are working to do that so, we are prepared to do that in the fall of 2010, whether or not, we actually pull the trigger on that launch will probably depend on how sales are trending generally. And Scott, we're just not anxious to disrupt good momentum in the business. And frankly if things are going well and things are on-track, we'd probably will save a Pharmanex launch for a later point in time that would be prepared with an ageLOC Pharmanex offering in the fall of 2010.

Scott Winkle - Canaccord Adams

Okay. And there were several questions about the price points and suite of products. If you took a guess on all the products that might be cannibalized, what would be average monthly cost of the products that could cannibalize there?

Truman Hunt

The 180 system is probably the most comparable system. And its price points for the whole system as more in the $150 range. And so, we're really moving the average price point up significantly with a higher gross margin on the new offering.

Scott Winkle - Canaccord Adams

So, cannibalization certainly won't be bad?

Truman Hunt

No.

Scott Winkle - Canaccord Adams

And I had a kind of a different take on the China distributors. It looks like active distributors were up sequentially for the first time around three years or so, am I reading that right and that's a Greater China number, is that all main driven?

Ritch Wood

Yeah the Greater China numbers really reflective of Honk Kong and Taiwan as well. But I think you are reading the sequential increase correctly. We're seeing a similar impact; anticipate that we'll wrap around as business model change probably in the next couple of quarters. So the year-over-year comparison will begin to look more realistic probably somewhere fourth quarter or first quarter or next year. And we'd keep our eye very closely on the sequential change as well.

Scott Winkle - Canaccord Adams

Okay. And Ritch that 6 to 7 million spend for the convention, can you remind us what last year's spend was or the last event spend was, pardon?

Ritch Wood

Yeah we spent, it would have been a year and a half ago and we spent about 5.5 to $6 million, that was in I believe the first quarter of ''08 -- first quarter of '07 maybe. So, it's been a while since we've had the global convention. This one will be a little bit more expensive as we celebrate the 25th anniversary and really put a lot of energy behind the ageLOC launch. We think that will be a good investment that will comeback to us as we start to rollout these products.

Scott Winkle - Canaccord Adams

Is the higher spending associated with higher attendance or just a lot more excitement?

Truman Hunt

Primarily associated with a different venue, we're holding our 25th anniversary in Los Angles this time versus our historical conventions which have been Salt Lake city.

Scott Winkle - Canaccord Adams

Okay, great. Thank you very much.

Truman Hunt

Okay.

Operator

(Operator Instructions). And next question come from the line Mimi Noel from Sidoti & Company. Please proceed.

Mimi Noel - Sidoti & Company

Good morning Trum and good morning Ritch.

Ritch Wood

Hello.

Mimi Noel - Sidoti & Company

Just a few questions, first, as you make your ways through the over all in Japan, in China, do you look beyond that. I mean are there any other markets that could benefit for some right-sizing or at that point is you going to be uniform across all markets and there are no best practices to implement et cetera.

Ritch Wood

Well, Mimi Japan is really the final stopping place for our transformation efforts. And we've been through a similar transformation over the course of the last year and a half or so in China as well. But frankly, Japan is the last place where we anticipate dealing significant restructuring in. And we're really happy with the works, that's been done there. But let me just touch on the last point of your question which is best practices and I tell you the truth, one of the things that Dan Chard is doing so well is really implementing, taking best practices from all over the world and insuring them globally. You just refer to the fact that South Korea is really been the all star market in terms of product launches. And we're learning a lot from them and implementing globally what we're learning there so. Best practice wise. The focus really at this point now and going forward is best practice on the top-line.

Mimi Noel - Sidoti & Company

Okay. And also wanted to ask, Truman you mentioned average order volumes, I don't know if it was exactly as I heard it but it sounds like they're increasing, is that correct or would elaborate on the comment you made in your prepared remarks?

Truman Hunt

Yes, that is correct. And we as part of the Wealth Maximize implementation we put an incentive in place to improve productivity. And that incentive that is offered has proven to be very valuable to our 2009 because we simply have carried out there that people are chasing after and its increasing our average order volumes almost everywhere in the world.

Mimi Noel - Sidoti & Company

Okay. And then the last question LA for the global convention it is little bit more expensive. Why the convention there is this year is that just a place to do the Silver Anniversary or there is something else that work?

Truman Hunt

Yeah, we wanted to do just something different for our 25th anniversary. And it's going to be a spectacular event. I am really excited about it but more than the location it's really all about exciting for the ageLOC launch I mean that's really what was going to make a great event.

Mimi Noel - Sidoti & Company

Okay. And do you have any reason to think that because its in Los Angeles over Salt Lake City that are actually to draw more entities.

Truman Hunt

Well actually the office the event will be held in the Nokia theatre in L.A., which only seats 7000 people.

Mimi Noel - Sidoti & Company

Okay.

Truman Hunt

And we will have an overflow area, but the fact that we can only put 7000 in room we'll put a little bit of a cap on attendance. So, what we did this year was also an incentive in place where people have to qualify in order to get in the room. And so, it's been a nice dynamics on overall business results to essentially require our sales force to reach certain levels in order to attend.

Mimi Noel - Sidoti & Company

Okay. So, the exclusivity of this is creating some competition too?

Truman Hunt

Right.

Mimi Noel - Sidoti & Company

Okay, all right. That's all I have. Thank you very much.

Truman Hunt

Thanks Mimi.

Operator

And there is no further questions in the queue at this time. I'd like to turn the presentation over to Mr. Truman Hunt for any closing remarks.

Truman Hunt

Thanks for joining us again this morning everyone. Ritch and I are going to be in Boston and New York in the upcoming few weeks and look forward to visiting to you. We also want you to know that we would welcome your participation and intended at our convention in October. Let us know through Scott Pond or Ritch is actually attending. Also scheduling our traditional Investor Day in the month of November which will be a great opportunity for us to really talk to the street more about the sign behind ageLOC which you're going to find very interesting and very compelling.

And let me just conclude by saying that we're very optimistic about the remainder of 2009 and going into 2010. We're confident that '09 is going to be another record year that will set us up well to continue to reach our objective as becoming the world's leading direct selling company in the upcoming few years. Thanks very much.

Operator

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

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