Nu Skin Enterprises' CEO Discusses Q2 2012 Results - Earnings Transcript

Jul.26.12 | About: Nu Skin (NUS)

Nu Skin Enterprises Inc (NYSE:NUS)

Q2 2012 Earnings Call

July 26, 2012 12:00 p.m. ET

Executives

Scott Pond – Director, Investor Relations

Truman Hunt – President, Chief Executive Officer, Director

Ritch Wood – Chief Financial Officer

Joe Chang – Chief Scientific Officer

Analysts

Bill Schmitz – Deutsche Bank

Olivia Tong – Merrill Lynch

Mark Astrachan – Stifel Nicolaus

Timothy Ramey – DA Davidson

Scott Van Winkle – Canaccord Genuity

John Faucher – JP Morgan

Operator

Good day, ladies and gentlemen and welcome to the Second Quarter 2012 Nu Skin Enterprises Conference Call. My name is Shaun and I’ll be your operator for today. At this time, all participants are in a listen only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. I would like to now hand the call over to Mr. Scott Pond, Director Investor Relations. Please proceed.

Scott Pond

Thank you. Good afternoon everybody. We appreciate you’re listening in today. With us in the room are Truman Hunt, President and Chief Executive Officer; Ritch Wood, Chief Financial Officer; and Joe Chang, Chief Scientific Officer. Just a reminder, during the call today, the comments may be made that include forward-looking statements. These statements involve risks and uncertainties and actual results may differ 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 the call certain financial numbers may be discussed that differ from 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 with that, I’ll turn the time over to Truman.

Truman Hunt

Thanks, Scott. Good morning everyone. We appreciate you joining us today. And we’re delighted to share with you the results of another record quarter. We generated revenue of $593 million in the quarter which represents growth of 40% exceeding guidance by more than $50 million. I think you all agree with us that these results are reflected a very strong business momentum. It wasn’t too long ago when we first generated revenue of $1 billion for full year and this year we’ve accomplished that in just a first six months.

Our earnings also came in well ahead of guidance with a record high quarterly EPS of $0.94, a very healthy 45% increase over the last year. These results were generated by a record level of active sales representatives and executive distributors. The number of executive distributors, who are those who are actively working to build successful Nu Skin business. And sales representatives in China are key indicator for our business direction and the number of these south leaders climbed to a record level of 54,000 at the end of the second quarter. So, we’re very pleased with the progress of our business. And we remain confident that we will continue to generate healthy growth levels.

I want to highlight five factors today that work to support our level of confidence. First, as today’s release demonstrates, we continue to improve the execution of what we call opportunity renewal process, effective product launches are a key component of our ability to continually renew the vibrancy of the business opportunity we offer. In the second quarter, we generated nearly $165 million of revenue from the launch of our ageLOC products in the South Asia, Pacific and Greater China regions.

We reported $140 million of these product sales during the quarter with the remaining $25 million to be shipped in the third quarter. You’ll recall the last fall we generated about $100 million in sales of these same products when we introduced them on our global distributor convention. And as we rollout new products around the world, we’re refining our approach to deliver increasingly impressive results. This approach is based on the notion of the utilizing global and local limited time offers prior to a product going online on a full-time basis and it’s just working extremely well.

We use this same approach in the second half of the year with LTO launches in Europe of R2 and the Body Spa in Japan and South Korea.

So the momentum we’re generating with the new region regional new product launches as a result of record level distributors and preferred customers nearly 900,000 at the end of the quarter. With each product launch, we’re improving our overall trial and our penetration rates and our sales leaders are also becoming more familiar with the process and frankly they become believers when they see the successful launch process reflected in their commission checks.

The second headline I want to site for the quarter is that while we’ve been very successful with our ageLOC product platform, the best of ageLOC is still yet to come. AgeLOC products in the market today consist of the Facial and Body Spas, the ageLOC skin care transformation system, vitality and R2, which are both energy products. But the larger categories are yet to come. Weight management in 2013, next year is going to be big. And then we will ageLOC, our core nutrition product, which will also be significant in the subsequent product launch. Both of these launches have more revenue impact than anything we’ve done so far.

And as we further refine our launch process to reach deeper into a growing consumer and sales leader base, we have great ammunition to sustain growth for the foreseeable future. Now, of course, we’re going to run into occasional quarters where comps are difficult because the timing of our launches may not always a line on exact annual anniversaries. So overall, we’re very confident that we have a very sound pipeline for growth for the next several years.

And our Investor Day in November, we were going to take a closer look at what’s coming down the pack for ageLOC. And we want to introduce you to at least one additional any new products that we have yet to discuss with our shareholder base and that we’re also very excited about.

So third, I would point out how quickly emerging markets are becoming a larger component of our revenue mix. The greater China region, obviously not the cover off the ball with 150% growth in the second quarter and we just returned this last weekend from a convention in Singapore for the South Asia Pacific region, and we’re just delighted with our developments there .This region has been our most steady grower for the past five years. And now represents about 15% of our revenue.

Virtually every country in South Asia Pacific region is enjoying very robust growth. And next month will add to that by opening the Vietnam market for our distributors which is a small market but a market that we think has good potential.

Russia and other eastern European markets also provide great upside for us. And Latin America is small, but it’s growing rapidly. And so we have great momentum in emerging markets and we have a lot of room to run.

Fourth highlight for the quarter is that our established markets are also performing well. We see trend improvement in Japan and although the environment is still difficult there we’re forecasting a return growth in Japan by the fourth quarter.

South Korea, which posted a slight decline in Q2, has been a stellar market for us for over a decade. The first half of 2012 has been – been tough for two reasons. First of all we had a tough comp against significant product launches last year. And secondly, you may recall the local regulations there have always required and other direct selling companies to keep our commission payouts below 35% of sales. So we had to reduce our commission payout in Q4 of last year in order to manage this issue. And as you can imagine that’s always tough on the sales force. So we’re working through this issue and we see excitement building for the launch of Body Galvanic Spa scheduled for the fourth quarter. So based on what we’re seeing today. We also expect Korea to show growth in the second half of the year.

We’re also really pleased with 16% growth in the U.S. and 20% local currency growth in Europe. The euro obviously isn’t doing the same favors, but even in the face of economic turbulence in Europe we’re seeing really healthy levels of business activity and expect local currency growth to continue at a robust rate in the second half of the year in Europe.

And finally, the fifth headline that I would site for the quarter is, would be reflected in our commitments to use our financial strength benefit our shareholders. We repurchased about 4% of our shares in the second quarter and with our operating margin at all-time high of 16.5%. We enjoy a strong in our business model to enable us to continue to use our financial strength to repurchase shares and still be able to continue to invest in future and continue o pay healthy dividend, which we’ve now increased annually since we started paying dividends over 11 years ago.

So all in all the news is extremely positive for Nu Skin Enterprises, we’re very pleased with the second quarter. We remain on track to deliver another record year, we’re confident that 2013 will be yet another record year, and we have great ammunitions to sustain growth for as far as any of us can see.

So with that I’ll turn the time over to Ritch.

Ritch Wood

Thank you, Truman, and thanks to each of you for joining us on today’s call. This morning we raised our annual revenue guidance by $115 million from our last guidance increase, which was done on May the 8. This now puts our estimated revenue for 2012 between $2 billion and $2.03 billion, and we also raised our EPS guidance and that’s to a range now of $3.16 to $3.24, an $0.18 increase over our previous guidance.

Growth in the business has been generated in nearly every market in which we operate. We are raising guidance on the back half of the year for several reasons including strong momentum continuing to build around our product innovations and launches. The South Korea launch of the Body Spa now planned in Q4 of this year and very strong executive growth, which correlates as you know closely with the growth of the business. We experienced a high level of incremental sales from the product launches in the second quarter with product returns remaining very low. And we’re picking up earnings per share of about 5% or – sorry about $0.05 in the second half of the year from the share repurchases executed in the second quarter.

The Company’s operating margin for the second quarter improved to 16.5% that’s a 90-basis point improvement over the prior year period and the highest level of operating margin that we’ve ever reported. Although our selling expenses were high due to the product launch and our general and administrative expenses included nearly $10 million associated with second quarter conventions, the growth in revenue more than offset these items in driving increased operating margin.

Our second quarter results put us well on track to exceed our stated profitability objectives for the year. And we now expect our annual 2012 operating margin to be approximately 16%. During the quarter, we crossed an important $3 per share benchmark when adding the past four quarters of earnings. This is another important step in our performance-based management incentive, where we targeted to achieve $4 per share prior to the end of 2015. We are well ahead of this target and will provide further update on our projected timeline to reach $4 per share in our annual shareholder and analyst meeting to be held in November. I would simply highlight the fact that we have a very focused and engaged management team all around the Nu Skin world.

Our gross margin for the quarter was 83.9%, a 70-basis point improvement over the prior year and consistent sequentially. And selling expenses for the quarter were 45.1% compared to 43.2% in the prior year. The launch of the ageLOC R-squared and the ageLOC Body Spa during the quarter drove the selling expensive tier by approximately $8 million or 1.3% of sales in specific incentives associated with this product launch.

The payout of 45.1% was higher than we initially guided due to the size of the launch in excess of our earlier forecast. Also, the overall compensation plan paid out at a higher level as many sales leaders benefited from the higher volume of sales with these product launches. Fortunately, our model works in a way that the increase in our selling expense generated from accelerated revenue growth is offset by the leverage we pick up on the overhead base, protecting our overall profit margins. We would estimate, however, the selling expenses will retract in Q3 to around 44% or slightly below that level.

General and administrative expenses, which included the previously mentioned $10 million in convention related expenses, improved 210 basis points over the prior year to 22.3% sales. Our tax rate for the quarter was 36.1% compared against 36.7% in the prior year and would expect the tax rate to track in the 36% to 36.5% range for the balance of this year.

We borrowed a $100 million of debt denominated in yen during the quarter. The primary purpose of that was to strengthen our hedge position in Japan, and we were able to borrow this at a 1.65% interest rate on a note that will be paid back over 10 years. During the quarter, we paid $12.3 million of dividend and repurchase $108 million of our outstanding shares.

Our Board of Directors you recall authorized an increasing share repurchase of $250 million during the quarter. And at the end of June, we have – we had approximately $220 million remaining in our board authorized repurchase program. So based simply on share repurchases during Q2, our outstanding share count for Q3 will drop by approximately 1.5 million shares from the level that we reported in the second quarter.

For the third quarter of 2012, we project year-over-year revenue to increase approximately 16% to 18% in local currency terms with an estimated negative impact from currency fluctuations of approximately 6%. This modeling puts our revenue guidance at $465 million to $480 million of revenue and net earnings per share in the $0.71 to $0.75 range.

Also would note that for the fourth quarter we are now forecasting revenue to be up about 1% to 3% in local currency or flat on a U.S. dollar basis when considering an estimated 3% currency headwind in the quarter. We feel very positive about this as we are comparing against $100 million product launch and a growth rate of 23% reported in the fourth quarter of 2011.

So with that overview, I will now open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first line of the question comes from Bill Schmitz, Deutsche Bank. Please proceed.

Bill Schmitz – Deutsche Bank

Hey gentlemen, good morning.

Truman Hunt

Hi Bill.

Bill Schmitz – Deutsche Bank

Is there any way you can give us sneak peek into what the weight management products would be like next year?

Truman Hunt

I mean in terms of the product composition itself?

Bill Schmitz – Deutsche Bank

Yeah, the composition sort of the plan, launch plan that kind of things. It’s sort of (inaudible) in your materials just 2013, so sort of like the timing of launch and what the product may look like?

Truman Hunt

Well, you’ve going to get a good sneak peek of the product offering itself in our November Investor Day conference. But remember that, the ageLOC platform is all about the formulation of products to maximize the right kind of generic expression and that is the unique angle of this weight management product is essentially we’re going to reset that gene clusters that have to do with weight loss.

And so the product suite itself is going to bear some resemblance to other weight management systems, it just that it – we’re coming out of from the very unique angle. And there is just no question, but what the launch of this weight management system in Q4 is going to be big. With rising baseline of both consumers and sales leaders with a more effective launch process, with our sales leaders really believing in the line process, fourth quarter is going to be big in 2013 and then as we rollout the system globally as we have this year with the products that we launched last fall convention. The revenue impact is going to be enormous.

Bill Schmitz – Deutsche Bank

Got you. Will it be a supplement or meal replacement product?

Truman Hunt

That would be components of both.

Bill Schmitz – Deutsche Bank

Okay, great. And then Rich, just kind of housekeeping question. How come the share count in the quarter was flat year-over-year?

Ritch Wood

Yeah, we ended up buying about 2.4 million shares during the quarter, but the average date for when they were purchased was the end of May. So, most of the benefit will play out in the next quarter. And on a year-over-year basis, there was actually some dilution of options that were coming into the money. So, those two factors kind of made it so that’s equal year-over-year, but Q3 should be around 62.7 million to 62.8 million shares on a diluted basis going forward.

Bill Schmitz – Deutsche Bank

Got you. And since you’re kind of ahead of plan to that dollar EPS number, is there anything we should keep in mind as model it to kind of reflect maybe some more aggressive accruals for getting there early?

Ritch Wood

No, we’ve accelerated our estimated timeline for accrual purposes. So, we’re already bringing that into our overhead number. And actually the achievement of the $3 per share number in the second quarter accelerated a couple of million dollars of expense into overhead. So, we’re bringing that in as we continue to bring that date closer and closer to when we expect to hit $4 per share.

Bill Schmitz – Deutsche Bank

Great. Thank you. And one quick last one, South Korea, the macro has been tough for about a year now. Are there any signs that the broader macro environment is improving there?

Truman Hunt

Well, we’re not hearing build from our management team there that the broad macro environment is negatively impacting the results. I mean it’s possible that they may be, but they’re not using that as an excuse and we aren’t either. And as we indicated in our remarks, we expect return growth in the second half there.

Bill Schmitz – Deutsche Bank

Great. Thank you very much.

Truman Hunt

Thanks, Bill.

Operator

Your next line of questioning comes from Olivia Tong, Merrill Lynch. Please proceed.

Olivia Tong – Merrill Lynch

Thank you very much. Good morning, just wanted to ask a couple of questions about this weight management product which you’re planning to launch in 2013. There have been weight management launches that you’ve done in the past. Can you give examples of the list that you seem to sales from the past launches and how this is going to be different under the ageLOC umbrella? Thanks.

Truman Hunt

We have taken steps of weight management from time to time in the past and actually weight management today even is a meaningful category for us, particularly in Southeast Asia, Hong Kong and Taiwan, where our TRA weight management program is doing very, very well. So, our plan here Olivia is actually to build on the successes that we’re seeing in the Asian markets by adding to the story that they’re already telling out there and telling quite effectively.

We’ve also learned from them frankly how to execute a weight management program most effectively. They’re the markets that have done the best. We’re going to be using their best practices elsewhere around the world. But I think what – the factor that gives us the most optimism for the category Olivia is that we all know that many markets around the world are facing obesity epidemic. So, we know the market is warm to the category and it’s not – it’s not going anywhere, but up in terms of potential.

And our sales force is just so enthusiastic about the ageLOC platform and about the product launch mechanisms that there’s going to be an awful lot of energy focused really – it’s actually beginning now. We’ve even seen the sales force starting to talk about optimism for ageLOC weight management now. Beginning really the first of next year, we’re going to see a lot of sales focus on this category and that’s really what gives us optimism for the category.

Olivia Tong – Merrill Lynch

Got it and then clearly for a couple of years now, you’ve been growing well ahead of you own expectations. What are your thoughts about long-term top line growth, particularly given that this year is going to be a difficult comp. You’ve gotten your product launching but, where – at what point to distributors – is that too much for distributors and what are your expectations for long-term top line growth?

Truman Hunt

Well by long-term are you talking three to five years or you talking beyond that?

Olivia Tong – Merrill Lynch

Three to five, so I guess maybe in terms of three to five years.

Truman Hunt

Yeah, so when we look at our product pipelines, weight management, what we’ve been working on for years and what we call our alpha project, which is applying ageLOC signs to a core nutrition product, and recall the LifePak is still one of our largest selling SKUs globally. And that’s what we’re talking about is the creation of a new core nutrition product under the ageLOC brand and in addition to other concepts that will expose you to in November.

When we look at what’s in the pipeline, when we look at how we’ve done already on the ageLOC platform, when we look at how effective we are markets are refining the launch process, when we look at how we get great pops out of global LTOs and then regional LTOs and then full-time rollouts and markets, I mean frankly it’s just really tough for us Olivia not to be very, very positive about the next five years. And our management team is focused on $5 billion revenue goal, which we originally set for 2020. We will review a few of longer term plan in November, but today we believe that we can move that up by years.

Ritch Wood

And maybe just we add one other thought to that Olivia is that the key to our longer term growth rates is growth in our sales force. And we’re terrifically encouraged about the growth we’re seeing in our executive base right now and that is going to be a key driver as we go forward. So, it’s not that we’re maxing out the sales force. We continue to grow that sales force, which propels growth longer term in the business.

Olivia Tong – Merrill Lynch

Thanks, that’s helpful. And then just lastly for Ritch two questions, first on share repurchase, what are your thoughts in the second half for incremental share repurchase issue, do you have quite a bit on your share authorization? And then sort of housing keeping question, the accrued expenses on the balance sheet went up about $50 million, is that related to the ageLOC sales haven’t shift yet or is there something else that we should be thinking of?

Ritch Wood

Yeah, on the share repurchase, we have $220 million remaining on the authorization and continue to have cash on our balance sheet and we’ll just continue to evaluate as we go forward the most effective use of that cash in driving shareholder value, that’s always our consideration, but we do have ammunition there. And then as it relates to the accrued expenses, you’re exactly right. It’s a accrued commission payout as well as deferred revenue that will roll through in the third quarter.

Olivia Tong – Merrill Lynch

Great. Thanks so much.

Truman Hunt

Yeah.

Operator

Your next line of question comes from Mark Astrachan, Stifel, Nicolaus. Please proceed.

Mark Astrachan – Stifel Nicolaus

Hey guys, good morning.

Truman Hunt

Howdy Mark?

Mark Astrachan – Stifel Nicolaus

Just a couple of questions. Could you help us from a house keeping standpoint go through some of the segment results in terms of brand by brand please?

Ritch Wood

Let me just pull that up real quick. We really don’t talk about that quite as much as we used, so I’ve got to share, yeah, looks like our revenue for the Nu Skin line was about $295 million and for Pharmanex was $296 million. So, very equal about 50-50% both showing very strong growth over the prior year.

Mark Astrachan – Stifel Nicolaus

And then like R-squared Body Galvanic and LifePak some of those other as well, if you could give us please?

Ritch Wood

Yeah. So obviously, the R-squared product with the launch was the largest seller in the quarter about $130 million in revenue. We had LifePak at $66 million just holding very, very consistent. The majority of that on subscription order and just remains very solid. The Galvanic facial unit $63 million, transformation $37 million, the Body Galvanic Spa – the Body Spa was about $53 million, so overall about $280 million, $290 million of ageLOC sales in the quarter.

Mark Astrachan – Stifel Nicolaus

Great, any vitality sales?

Ritch Wood

Yeah about $11 million of vitality sales. Most of those are offset now with the R-squared product.

Mark Astrachan – Stifel Nicolaus

Right. And then given the pretty unbelievable growth in China, I guess similar question to what I asked last quarter. Any granularity can you on how you track inventories or where the product is going to held return rates may look that sort of thing just obviously such a huge amount?

Truman Hunt

Return rates will be the easiest thing to track obviously Mark because we have total visibility on that issue. We obviously have a harder time tracking product once it’s in the hands of our sales force, but return rates are still surprisingly low frankly despite these big product launches, return rates have not spiked. So, we’re very happy about that. And the LTO really – people buy because the product is not going to be available for several months down the road. So, they are anxious to get their products on – their hands on the product so they can use that to continue to build their business as they go forward, but, yeah, return rates are at an all-time low frankly and we’re very encouraged with that.

Mark Astrachan – Stifel Nicolaus

And that’s an overall comment that China...

Truman Hunt

Correct. China included.

Mark Astrachan – Stifel Nicolaus

Okay, anything that you can give in terms of what you’re seeing in product that you sold into China in terms of what’s going on from a salesperson standpoint?

Truman Hunt

I would just highlight the growth in our sales representative base there. Our employee sales force grow very, very significant. We had the Greater China convention and there’s a lot of energy right now. As we kind of forecast outlook at our business, it’s highly likely that China surpasses Korea next year as the second largest business in our world and by 2015, it likely be the largest market in the Nu Skin world.

Mark Astrachan – Stifel Nicolaus

Great. Just one last question. When you looked at your business, how do you think about the percent of your product that you sell to the distributors versus to retail customers? I know you’ve given some more granularity on that from I think U.S. standpoint, is there anything more you can give overall?

Truman Hunt

Well, I am not sure where you’re getting out there Mark. I mean what’s the question?

Mark Astrachan – Stifel Nicolaus

(Inaudible) just trying to figure out how you’re selling into call it the distributor side versus how you’re selling into individual people, maybe it’s another way to put it?

Truman Hunt

Well, we’ll still have a significant percentage of our sales to go from us directly to consumers, both at the retail level as well as at preferred pricing levels through our preferred customer program. We are very confident, I mean, I think your question is kind of going to the issue that has resurfaced over the course of last quarter with respect to internal consumption versus consumption outside the sales network. We’re very comfortable that as we have stated multiple times in the past quarter that more than 70% of our sales are easily going into those who are just consumers and who do not receive multilevel compensation and did not participate in multilevel compensation plan. And so, we are very comfortable that ours is a business that is based on real consumption and not on problematic indicators that would be a concern to regulators.

Ritch Wood

Maybe a couple other stats to support that to Mark about 15% of those who sign up with our business eventually try to go down the path of the sales network. The majority of those who join our business are buying it just to by the products, 56% of our sales on a monthly basis, through our subscription program. And today, we ship over 540,000 orders a month on subscription orders. So, we just have a huge base of subscribers out there as well. So, yeah, we continue to see that base of subscription customers continue to grow every single month and we’re encouraged that growing base of overall business.

Truman Hunt

And let me understand that Mark because this is actually a point of some frustration for me I think given the fact that I come from a illegal background, but it’s really irritating to even have people ask this question the way they do because the SEC has clearly stated that internal consumption is not the definition of a pyramid scheme means this is not the issue. The issue is whether there is real consumption or whether people are purchasing products just for the right to participate in a moneymaking venture that’s the issue, not how much of yourselves is being consumed by the sales force.

Mark Astrachan – Stifel Nicolaus

Perfect. Thank you, guys.

Truman Hunt

Thank you Mark. Operator, next question please.

Ritch Wood

Hello?

Truman Hunt

Operator, can we take the next question please. Can you put a question now? All right operator, are you there? Well listen we seem to have lost our operator here on the call who is obviously controlling the queue for questions and I’m not sure exactly how that happened because it’s never happened before and we see that there are still a few analysts in the queue with questions that we would be happy to answer. So, we’re going to pause here for just 30 seconds and see if we can get the operator on the phone by a separate number and if not, we may have to just take your questions one on one. So, standby here for a moment. Mark, are you still on the line? We’re hearing some noise and I’m not sure where it’s coming from. It is not coming from us.

Operator

Your next question comes from the line of Tim Ramey. Please proceed.

Timothy Ramey – DA Davidson

Well the call survives.

Truman Hunt

Way to hanging in there. We need to get some vitality to our operator I think.

Timothy Ramey – DA Davidson

So, the sales Greater China were stunning and I know some of that is sell in and but I’d be interested to kind of hear how you would characterize what do you think the run rate of sales might be now versus your goal of getting to $1 billion. We’re certainly a lot of closer to that goal than we thought and then maybe just a follow on for Ritch. One of the theses that we’ve been working on is that as your sales in China as Southeast Asia accelerate number one you seem to get margin accretion and number two you’re likely to deploy more manufacturing capital in Southeast Asia. We didn’t really see the margin accretion maybe that’s because the product that was sold in the Hong Kong isn’t manufactured in China. So, let me be stop there and let you talk.

Truman Hunt

Well just objectively first Tim how it’s truly is stunning actually to attend our Greater China convention in Hong Kong a few weeks ago and just witnessed a stream of Chinese leaders coming across the stage and that it’s just the market is enormous. The potential is enormous. The people are hungry for opportunity. They work their tails off and our management team is bullish. I mean they believe that that $1 million goal is realistic.

I mean we’ve looked at it as perhaps more aspirational, but it’s hard not to start becoming a believer when you see the numbers that they are putting up and when you see the people walking across the stage and realize that these are very, very capable folks. I would have liked to have all of our analysts frankly sitting in at the Greater China Convention because you’d have a hard time coming away without being believers in the region. Do you want to talk about the run rate Riche?

Ritch Wood

Yeah, when this goal was stated by our management team in China – our Greater China region, we are at about $270 million that was in 2010, 2011 $342 million, and this year will be over $500 million in the region. And it’s frankly right on track with the forecast that we were provided by them few years back. So, as much as $1 billion seems unrealistic to some of it, our management team over there has a high level of confidence that they are executing on plans. And frankly, there’s so much opportunity in these markets that it’s not out of the normal possibility that we deliver on that target.

In terms of the margin issue, note that we had about we probably lost 20 to 30 basis points just in the FX headwind that we were dealing with globally. So, that impacted us somewhat and then the product you’re right was not all manufactured in China. This product was sold out of Hong Kong. So, we didn’t get quite the margin accretion that sometimes we will in the future as we build our own product in China.

Timothy Ramey – DA Davidson

And just a follow-up on Southeast Asia have similar comments on that Ritch and the likelihood of building a production facility there?

Ritch Wood

Yeah, bringing manufacturing in-house doesn’t seem to be the best use of our management resources right now. So, we continue to look for areas where we can streamline the supply chain. And actually do pieces of the supply chain in Southeast Asia. So right now, we have an objective where we’re doing a lot of our packaging and so forth in that region. So that we save on shipping expense and other things and we’re moving down that path of increasing efficiencies, but to actually build our own facilities and manufacture at this point in time isn’t the highest priority on our list.

Timothy Ramey – DA Davidson

Thanks.

Ritch Wood

Yeah. Thanks Tim. Okay operator, next question please. Operator, next question please.

Operator

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

Scott Van Winkle – Canaccord Genuity

Hi thanks, few follow-up questions for you guys. First on the weight management, I understand you’re doing a test in the U.S. or something in that regard, is that the complete new product that’s being used in a test and then can you give us any quantification or at least qualification of how it’s performing?

Truman Hunt

Yeah, it’s actually not the product at all Scott. It’s a basically a promotional campaign by the U.S. management team to warm up our sales leaders to the category and preparations for next year’s launch. So, the product is completely different. And but the category is the same and the program is doing very well. I mean we’re definitely seeing response to the sales force on category, but it’s not a test of next year’s ageLOC management system.

Scott Van Winkle – Canaccord Genuity

Okay, great. And then following up on the question about returns you (inaudible) they were low level, can you quantify as percentage of sales returns wise?

Ritch Wood

Yeah, about 2.65% in the quarter and that includes our experience ratio what’s actually coming back as well as what we would anticipate coming back in future months and we’ve tried to be very conservative in that area. So, very impressive on that area and it’s really a global phenomenon where returns were just staying very, very low.

Scott Van Winkle – Canaccord Genuity

Great and then in Korea, we talked about have to reset the compensation payout, does it simply creep higher as a higher percentage of distributors reach the executive level and we have to reset it down a little bit?

Ritch Wood

Yeah, as the market matures and as the sales leaders reach deeper into the compensation plan, the local payout creeps up. And so, we are working with the management team to figure how to navigate this issue. I mean it’s a regulatory reality. So, it’s not a surprise to our sales leaders, but you can imagine that it’s not a happy thing when we end up reducing emissions by 5%. And so, we’re looking at other ways to reward our sales force by investing in the market and making sure they realize that we’re not trying to just build profitability by reducing their commission levels.

Truman Hunt

And one another just quick comment to that Scott – our active base remained very, very solid and we see continued good strengthened sponsoring. We were impacted a little bit on the executive number, but we see that strengthening up as we go forward. We anticipate the business to be slightly positive in Q3 and then with the solid launch in Q4. It looks like a short-term issue that we can work through. Clearly, those are difficult things to do and hopefully the market at its maturity level now. We shouldn’t have to continue to make adjustments going forward. We should hopefully be very stable going forward.

Scott Van Winkle – Canaccord Genuity

And then the executive level distributor figure for the second quarter was obviously robust to say at least with the big launch in Asia. What is that look like in Q3? I assume that retrenches a little bit not having the big launch in convention to drive at high?

Truman Hunt

Yeah, it’s exactly right Scott. It’s reflective of the enthusiastic response to the opportunity that we provide people and people pushing for recognition on our convention events and we would expect that number to retract a little bit in Q3.

Ritch Wood

And somewhat in line with our revenue base – we’re projecting about 18% revenue growth in the third quarter, so somewhat in line with that obviously if it’s stronger than our revenues going to be stronger.

Scott Van Winkle – Canaccord Genuity

Got you. And then around the launches in Japan and South Korea in the fourth quarter, are there any events occurring at the same time that other launches will go with?

Ritch Wood

Yeah, there is a Japan convention in November – in October in connection with the launch by Galvanic Spa. I don’t believe that there is a Korea convention. I think it’s just Japan.

Scott Van Winkle – Canaccord Genuity

All right. Thank you very much.

Truman Hunt

Thanks Scott.

Operator

Your next line of question comes from Tim Ramey, D.A. Davidson. Please proceed.

Timothy Ramey – DA Davidson

Well, she’s got me twice now. But I really only have that one question, but it’s nice to talk to you again.

Ritch Wood

Nice to talk to you too Tim.

Truman Hunt

We’ve got a couple other in the queue. Let’s see if we can get them. Operator, can you get to the next? Operator, can you get to the next person in queue?

Operator

Yes. The line of question comes from John Faucher, JPMorgan. Please proceed.

John Faucher – JP Morgan

Thanks. Just a couple of questions here. First off, in terms of looking at your Q3 guidance, given the fact that the share counts down year-over-year due to the repurchase. It would look as though you guys would need to have margins actually down in the quarter in order to get to the – even the high end of your guidance range. So, can you talk a little bit about what you expect from a margin standpoint in the third quarter?

And then, looking at the executive distributor growth in China, just still be kind of understand how this should play out going forward? When we looked at the U.S. convention in Q4 of last year, we saw a little bit of slippage coming out because people qualify to be an executive distributor and then maybe didn’t stay at that level after the convention. Should we expect any get back on the Greater China executive distributor number? What’s the best way to sort of map that out going forward?

Truman Hunt

Yeah, why don’t you take through the first question?

Ritch Wood

The margin question, we do anticipate that it will retract a little bit from Q2. If you look sequentially kind of track it as we’ve gone along from after Q1, we are 15.5% and estimated to be 15.6%, 15.7% in the third quarter and then a little bit around 16% or little bit above in the fourth quarter.

John Faucher – JP Morgan

Okay, so more flat. I was thinking more year-over-year as supposed sequentially, but more flat year-over-year than in the third quarter.

Ritch Wood

Yeah, that’s right, that’s right.

John Faucher – JP Morgan

Okay.

Ritch Wood

And on the executive count, yeah, we would expect as Ritch just indicated the growth in executives to mere little across the revenue growth which we’re projecting at 18%. So, you will see a little bit of a contraction in the Greater China number we would think, but they are surprisings on the upside on an almost quarterly basis. So, we’ll just have to see how it plays out.

John Faucher – JP Morgan

Got it. And then sort of one other China related question, in looking at the country specific data since this was Hong Kong convention you booked the revenue through Hong Kong. If you wanted to sort of take that revenue and match it up more closely in terms of what was the Mainland, what was Hong Kong, is there number you could give us on that?

Ritch Wood

Yeah, we don’t actually break that out, but the growth rate in China would have been well in excess of 100%.

John Faucher – JP Morgan

Okay. In terms of the Mainland growth rate alone?

Ritch Wood

That’s right. Mainland growth rate would have been over 100% year-over-year.

John Faucher – JP Morgan

Okay, great. Thank you very much.

Ritch Wood

Thanks John. Operator, next question.

Operator

Your next line of question will come from Frank (inaudible).

Unidentified Analyst

Good morning guys and congratulations on a good quarter.

Truman Hunt

Thank you.

Ritch Wood

Thank you.

Unidentified Analyst

Just a couple of quick questions. How should we think about – I think Rich you gave some guidance on this what a normalized selling expense rate would be when you strip out promotions. Could you just go over that real quick?

Ritch Wood

Yeah, it’s going to go back into the 43.5% range most likely. It was pushed up by specific incentives related to the launch and that was about 1.3% of sales and the rest of the increase came from just a higher sort of payout based on higher levels of volume per executive. So, I think the average as we go forward on a normal growth rate I’d say 10% to 15% revenue growth is going to be in the 43.5% range. Q3 be a little bit higher than that probably because we have some commission associated with that product sale, which will book as we record our revenue in the third quarter. But then we would anticipate on a normalized basis that it’s more in the 43.5% range.

Unidentified Analyst

Okay, great, great and could you just give us an update on the CapEx spend during the quarter and where you’re at with the build out there? I know you are spending about $100 million in the shares that...

Ritch Wood

Yeah. We are about $30 million through Q2 for the first half of the year and expect to be about $70 million in the back of the year. So, $100 million total for the year.

Unidentified Analyst

Okay, great. And just a final question when you launch the weight loss products next year 2013, are they staged like you did your products previously or how do you anticipate launching that?

Truman Hunt

Yeah. We’re going to do a global LTO in the fourth quarter.

Unidentified Analyst

Okay.

Truman Hunt

And then regional LTOs in the subsequent two quarters of 2014 and then full-time launch is following that. So, again having seen what we’ve done with our (inaudible) by Galvanic Spa, of course the last year, it’s going to be a really great period of time for us.

Unidentified Analyst

Right, right. Okay, great. That’s all I had.

Truman Hunt

And it looks like we’re through the queue list. So, we just want to thank you again for joining us and again it’s been a great quarter for us. We’re very optimistic about the future and just on a personal note when I sit in our conventions and when I see the level of energy and enthusiasm, I sit there and wonder how in the world anyone could showed at Nu Skin, and our job here at the corporate headquarters is to make those people really nervous and that’s what we’re going to do. So, thanks for joining us today.

Operator

This concludes today’s conference. You may now disconnect and have a great day.

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