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Executives

Scott Pond – Director, IR.

Truman Hunt – President and CEO

Ritch Wood – CFO

Analysts

Simeon Gutman – Goldman Sachs

Tim Ramey – DA Davidson

Olivia Tong – Merrill Lynch

Doug Lane – Jeffries & Co.

Rommel Dionisio – Wedbush Morgan

Scott Van Winkle – Canaccord Adams

Mimi Noel – Sidoti & Co.

Nu Skin Enterprises, Inc. (NUS) Q2 2008 Earnings Call Transcript July 31, 2008 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Nu Skin earnings conference call. My name is Natasha and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. If at any time during the call you require assistance, please press star zero and a coordinator will by happy to assist you. I would now like to turn the call over to Mr. Scott Pond, Director of Investor Relations. Please proceed, sir.

Scott Pond

Thanks, Natasha. Thank you for joining us on the call this morning. With us today are Truman Hunt, President and Chief Executive Officer; Ritch Wood, Chief Financial Officer; and Joe Chang, Chief Scientific Officer. During this call, comments may be made that include 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 of these risks. In addition, during the call, certain financial numbers may be discussed that differ from comparable numbers contained in our financial statements. We believe that these non-GAAP financial numbers assist management and investors in evaluating and comparing period-to-period results of operations in a more meaningful and consistent manner. Please refer to our investor portion on the company’s web site for a reconciliation of these non-GAAP numbers. And with that, I'll turn the time over to Truman.

Truman Hunt

Thank you, Scott, and good morning, everyone. Thank you for joining us today. As our press release indicates, we're pleased to report record results in the second quarter, which keep us well on track to have a record 2008, and that are in line with our top- and bottom-line objectives we previously articulated for the year. We posted quarterly revenue of $321.7 million, which is a 12% increase over the prior-year period, and is the highest quarterly revenue we've ever generated as a company by a wide margin. Earnings per share was $0.32, which represents a 52% improvement year-over-year. You’ll recall that we took a $0.05 expense related to the translation of yen-denominated debt last quarter and we saw a $.0.03 reversal of this affect duty and movement during the second quarter.

We reported growth in all of our geographic regions in the quarter, and while a portion of this growth is currency-related, many of our markets not only met our expectations, but have far exceeded them. In the United States, South Korea, Europe, and Latin America, we continued to generate very strong 20% plus growth rates. This growth is yielding a more geographically-diverse financial profile for us, and it also gives us confidence that we can apply proven initiatives to generate growth in all of our markets.

Overall, I would cite three reasons for our accelerating growth. First, our sales force and our consumer base have responded very favorably to the Nu Skin Galvanic Spa product line. In the second quarter of 2007, the Galvanic Spa generated about $11 million of sales and by the second quarter of 2008, Galvanic products represented nearly $40 million in sales volume. As those numbers demonstrate, the Galvanic Spa is a very effective tool that has high perceived value among consumers. It is also ideal for our distribution channel because it is demonstrable, and shows an immediate impact on skin characteristics. Clinical data that we've generated also reflects very compelling data about the improved efficacy of other skin-care products when used in conjunction with Galvanic Spa treatments. So as a result, Nu Skin’s sales are up 31% year-over-year, and we see even more of upside potential for Personal Care, considering that the Galvanic focus is really just beginning in our Asian markets. At the same time, we're pleased to see good stability on the Nutrition side of our business.

Second, one of the results of the business transformation we started two-and-a-half years ago, is a much more focused and globally-aligned approach to our growth initiatives. For those of you who have followed us over the past ten years or so, you'll recall that we have operated our three brands largely independently in the past. These brands competed for the attention of the same sales force. So we found that we simply do better by aligning corporate resources and sales leader attention on single-growth initiatives in each market. That will of course change from time-to-time. Right now, that growth initiative is the Galvanic Spa.

The third factor that is contributing to our accelerating growth is that socio-economic trends are working in our favor. Global markets need both our products that fight aging, as well as the opportunity we provide to replace or supplement income. So we benefit from uncertain economic conditions such as those we're facing currently in the United States.

Now despite the success of our efforts generally, the one market that is obviously off its 2008 plan is Japan. We are not inclined to make excuses for poor performance, but in the interest of transparency, we would note that a significant portion of our 2008 decline in Japan can be attributed to recent external factors, specifically the regulatory environment and media scrutiny. These environmental factors have caused us to execute conservatively. We've been very pro-active, for example, over the past several months with our distributor leaders on distributor compliance efforts. So while we're experiencing some short-term declines as results of these efforts, we feel strongly that these measures are in the best interest of our business and are the right thing to do.

As we announced earlier today, we're devoting more management resources to Japan. The formation of a North Asia regional management team parallels the management structure that we use elsewhere in the world, where all of our individual markets report to a regional head. The North-Asia team is comprised of some of the best and brightest managers on our team. Brett Nelson, who has been appointed as the President of the North Asia region is an 18-year Nu Skin veteran who has a great understanding of our business. Most recently, he has been serving as the Vice President of Global Distributor Support and prior to that, Brett was the President of our Southeast Asia region and has held key positions in North America and elsewhere in Asia. And Brett will be relocating to Tokyo within the next month and Gary Sumihiro, who is the President of our Japan operation, will report to Brett.

In addition, Luke Yoo, who has been running our Korea business, has been appointed regional Vice-President of the North Asia region. Luke will also continue in his role as President and General Manager of our South Korea operations. Luke almost single-handedly took a small and declining market in South Korea and has grown it into one of our largest markets. In addition to other skills, I'm certain that his proven operational capabilities will be a major asset to the regional management team in Japan. We anticipate that Luke will spend about 25% of his time on Japan issues.

Strategically, we continue to believe that the best strategy for Japan is to execute business initiatives there that have proven successful in our rapidly-growing markets. To this end, we have defined strategic imperatives that focus on sponsoring, retention, distributaries ends, and product launches. So, the guidance that we provide today for the balance of the year, conservatively assumes no improvement in Japan over the second quarter’s results. But fortunately, Japan’s decline has been more than offset by strong growth in every other region.

Let me just also provide a brief update on our China business. You'll recall that our 2008 plan for China was reflected in the term that we've used with the industry community the ‘Crouching Tiger’ term. 2008 is the year where we get our feet under us and prepare for growth in 2009. Overall, we're comfortable with the state of our business in China. Our results for the second quarter were somewhat matched by China’s sales force purchases in Hong Kong at our regional convention in May. And you'll also recall that we closed about half of our retail stores in December of 2007. So a modest decline in the first half of 2008 is not surprising and we're starting to see some trend improvement sequentially. Since this week, we've also finalized the process necessary to launch the Galvanic Spa in China, which we believe will be very-well received there as it has been elsewhere. So forecasting China, we continue to look for China to be year-over-year even in the fourth quarter of this year.

Now looking at our bottom line, our restructuring efforts over the past two-and-a-half years continue to pay dividends. During the quarter, we posted a 9% operating margin, compared to a 7.3% operating margin a year ago. Our operating margin would have been about 10.5%, if we factor out convention expenses in 2008 that didn’t occur in 2007, so we're making great progress on this front.

Let me briefly give you a couple of other things that we're doing to leverage our revenue growth going forward. First, you’ll recall that we’d lost about $23 million in unprofitable markets in 2007. We projected 2008 losses in these markets of about $13 million, but as it turns out, we're well ahead of projections and anticipate that these losses will come in more around the $7 million level for the year. Europe has turned profitable much more quickly than we had anticipated; Mainland China G&A infrastructure has been scaled back further than we had projected and Latin America is experiencing terrific growth despite reduced infrastructure there. So we're making really good progress in these developing markets. In order to combat some pressure on our gross margins, we increased product pricing globally on April 1, an average of 2%. So this will help offset some pressures that we're feeling on input costs and Ritch will elaborate on this factor a little bit more in a moment.

Overall, we're confident that the business is moving in the right direction. We remain on track to meet or exceed our goals for the year and generate our largest revenue year ever. In fact, for the second- straight quarter, you'll notice that we've increased our revenue guidance.

Okay, with that, I'll turn the time over to Ritch.

Ritch Wood

Thank you, Truman. Good morning everyone. I'll quickly provide the local currency revenue figures in our major markets and remind you that these can be found on the investor section of the corporate website.

In our North Asia region, second-quarter revenue in Japan was 11.5 billion yen, compared to 13.2 billion yen in the same quarter of 2007. And quarterly revenue in South Korea was 41.7 billion won, versus 33.8 billion won in the prior year.

In the Americas, the U.S. posted $48.8 million in revenue compared against $40.3 million in the prior year. Canada reported 4.1 million Canadian dollars in the quarter, compared to 3.1 million in the prior year, and Latin America revenue was $4.4 million compared to $2.3 million in the prior-year quarter.

And finally in the Greater China region, Mainland China revenue was 112.5 million renminbi during the quarter versus 131.1 million in the prior year; and quarterly revenue in Taiwan was 761 million NT compared against 786 million NT last year; and Hong Kong, which hosted the regional convention during the quarter, posted local currency revenue of a 113.8 million, compared to 88.4 million in the same quarter of last year.

Our gross margin for the quarter was 81.6%, which was approximately 60 basis points lower than the prior year and also lower than we had projected. The decline can largely be attributed to the revenue shift which we've experienced from Japan, which has slightly higher gross margins to markets such as the U.S., with slightly lower gross margins. And also, the Galvanic Spa unit, which has a gross margin approximately 5 percentage points lower than our weighted average Personal Care products. The sales of this unit increased dramatically year-over-year, and even from the first quarter to the second quarter. So we're continuing to improve our margins on this unit as volume increases. We’ve renegotiated discounts in our contract there. We have great margins on the surrounding products, and we’ll continue to become more and more impactful overall. We have felt a little pressure from some input costs related to the products, although all these are offset as Truman mentioned with the price increase that happened on April 1. Also, I should just note that overall our Personal Care brand has slightly higher gross margins than our Nutrition brand, so as we continue to see the Personal Care brand grow, that goes well for our gross margin in the future.

Selling expenses for the quarter were 42.6% compared to 42.9% in the second quarter and also a slight sequential improvement, and these improvements can be largely traced to the compensation plan modifications that we've made in numerous markets. General and administrative expenses for the quarter were $96.5 million, or 30% of sales compared 32% percent of sales in the prior-year period. Current-year overhead included approximately $5 million of convention-related expenses, those were related to our Japan and Greater China convention, and the prior year just to get apples-to-apples included approximately $2.8 million of costs related to the closing of our Brazil operations. So the 200 basis point improvement can be attributed to an increased level of revenue, and our restructuring efforts over the past two-and-a-half years, whereby we've reduced our global headcount by approximately 25% and continue to stay focused on driving efficiencies throughout our business around the world.

The company’s operating margin was 9% for the second quarter, that’s a 170 basis point improvement over the prior year. And then just to speak briefly about the translation expense. The yen moved from 99.7 at the close of the first quarter to 106.2 at the close of the second quarter. So consequently, we picked about $3.5 million of gain associated with the translation of our yen-denominated debt. This was basically a reversal or a partial reversal of the 5.5 million translation expense that we incurred in the first quarter of this year. And we just remind you that we used this debt in Japan, which has approximately a 2% interest rate as a natural hedge against our cash flows and so as the yen strengthens and weakens, we get a benefit or offsetting decrement, which offsets the revenue benefit or decrement.

Our tax rate for the quarter was 37.7%, which was in line with our historical rate, and during the quarter, we paid $7 million of dividend and we purchased $2 million of company stock.

We project our annual revenue to be in the $1.23 to $1.24 billion range, based on a yen average of 108 for the remainder of the year, and continue to expect earnings per share in the $1.17 to $1.22 range. Similar to the prior year, in the third quarter we have some 1048 tax accruals which we would expect will reverse due to (inaudible) and so we anticipate our tax rate to be approximately 28% during the third quarter and then back to the historical rate of 37.5% to 38.0% during the fourth quarter. So for the third quarter and again with the yen at approximately 108, we're projecting revenue of approximately $305 million to $310 million, and EPS of $0.30 to $0.32. So with that information, we’ll open the call up for questions.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Simeon Gutman with Goldman Sachs. Please proceed.

Simeon Gutman – Goldman Sachs

Hey, it is Simeon Gutman. A couple of questions about Japan. At last year’s investor meeting, one of that market’s more pressing issues of diagnosis being not enough recruiting, can you specifically address the recruiting situation in Japan? Are there people coming into the business but just that many more that are leaving right now?

Truman Hunt

Simeon, recruiting in Japan is our number one priority and is the number one aspect of our plan for the remainder of the year. What is happening there is that we're in the process of essentially transitioning from what has been a Pharmanex-oriented recruiting pitch over the last few years to a Nu Skin-oriented recruiting proposition based on the success of the Galvanic Spa that we're seeing globally. And so, we're already frankly seeing good results from that. Sponsory numbers are trending up over the last few months. More and more of our distributors are using the Galvanic Spa as a sponsoring proposition and so we expect that to continue to happen. It is still just in the early stages and what is really required in order to effectively work a transition is for leaders to see a success among other sales leaders and when they see that success, they also make that transition. And so, we're in the process of doing that and have no reason to believe that the Galvanic Spa will be any less successful in Japan than it has been everywhere else in the world.

Simeon Gutman – Goldman Sachs

And the response to the convention, I guess was sort of at the back half of the quarter and the new products I think you were bringing Galvanic and the Tru Face Essence product into that market, was that right?

Truman Hunt

That is correct. We launched a new Galvanic Spa package and Tru Face Essence Ultra, just in the end of May, beginning of June, and so those products are just beginning to take effect. We also launched LifePak Nano in the market at the Japan convention and expect those launches to have a positive impact in the second half of the year.

Simeon Gutman – Goldman Sachs

And allocating more management resources into that region or market, can you expect a strategy or an execution change, or is that to handle some more of the regulatory things that you were talking about?

Truman Hunt

You know, what we're really trying to do here is free up Gary Sumihiro to focus on what he does best, which is external affairs, regulatory affairs, distributor compliance, media relationships, and right now in that environment, those efforts are fairly consuming. So we want to parachute in a proven leader on our management team who can really focus on growth and distributor relations and communicating with sales leaders and by having Brett Nelson on the ground there and in the market on a full-time basis, we’ll have someone there to do that while Gary is consumed with other issues.

Simeon Gutman – Goldman Sachs

Okay, and then lastly, for Ritch, with respect to the annual sales guidance. Based on your 2Q run rate and I don’t know what the currency situation will be like, but if based on 2Q and that Japan is stable, it actually seems like the high end of the guidance range for sales might still be conservative. Is that a fair assessment?

Ritch Wood

Yes. That is a fair assessment.

Simeon Gutman – Goldman Sachs

Okay. I mean, but that could then imply that maybe Japan could get a little worse, but you’re affirming that you think Japan might be stable for the back half.

Ritch Wood

Yes. That is a good summary of what I'm thinking.

Simeon Gutman – Goldman Sachs

Okay, thanks.

Operator

Next question comes from the line of Tim Ramey with the DA Davidson. Please proceed.

Tim Ramey – DA Davidson

Good morning. Just from the numbers it looked like there was a little bit of an inflection point in recruiting. The sequential numbers were certainly better than the year-over-year numbers it seemed in many cases. Do you think that economic conditions, do you think that’s internal factors, is that the Galvanic Spa, what do you think might be driving that?

Truman Hunt

I think it is all of that. I think the Galvanic Spa is proving to be phenomenally successful as a recruiting tool, and again it is an ideal product for our distribution channel, because an operator of the Galvanic Spa can do a demo very quickly. Many of our people are now training their sales force to do half-face demos where they’ll do a Galvanic Spa treatment on half of the face and people notice a big difference. So it is an ideal recruiting tool. But socio-economic factors are also playing in our favor. It is a good time to be involved in direct selling because people are looking for ways to supplement or replace income and so both of those things are converging nicely for us.

Tim Ramey – DA Davidson

Good. On the other income line, was that the Japanese currency translation on the bonds or I assume that is what that was, but –?

Ritch Wood

Yes. You're right. Most of that relates to the translation of our Japanese debts.

Tim Ramey – DA Davidson

It looks like it was more like $0.05 of benefit there. Was there some other items in there that—?

Ritch Wood

It was about a $0.04 benefit overall that applied to other foreign currency gains and losses on inter-company (inaudible) and so forth that we have with other markets around the world, but the primary piece related to the translation of our yen-denominated debts.

Tim Ramey – DA Davidson

Terrific. Thank you.

Operator

Your next question comes from the line of Olivia Tong with Merrill Lynch. Please proceed.

Olivia Tong – Merrill Lynch

Hi, good morning guys. Do you want to talk a little bit about gross margins in the second half? Sounds like the things that drove gross margin to be little weaker than expected with the Galvanic Spa and Japan. Those aren’t going to abate, at least not for the second half. So can you talk a little bit about what you're expecting on gross margin lines?

Ritch Wood

Yes. That is probably the hardest one for me to project, Olivia, to look out and try and forecast where Japan’s going to be, what the U.S. is going to be, how fast the Galvanic is going to continue to grow. You know, I'm encouraged that I really think we've leveled off, I think we'll see things improve actually as we go throughout the rest of the year, and there’s a couple of things doing that. Number one, we've negotiated some discounts based on volume with our Galvanic Spa, which will help. Number two, we're seeing more and more transition over to our Personal Care line, and then number three, we actually made an improvement of about almost 3% in our U.S. gross margin based on the price increase that happened April 1 and is now fully implemented. So I think we'll see that level out, Olivia, as we go throughout the year, possibly slight improvements; in fact, I would forecast about a 20 basis point improvement in our gross margin in the third quarter compared to where we're at in the second quarter.

Olivia Tong – Merrill Lynch

Got it. Thank you. Your statement improvement in gross margin in the U.S. because of pricing, I guess the pricing increase has been a success in the U.S. Have you seen any pushback anywhere else?

Truman Hunt

No. I think – we did not do the price increase in Japan, but the rest of the world, we have not felt pushback from the price increase.

Olivia Tong – Merrill Lynch

Got it. And then just turning to the U.S., the growth there has been phenomenally great, and maybe you got a convention comp in Q3, which obviously it’ll be tough to do those kinds of growth rates given that comp. How sustainable is this current level? Are you seeing any changes there?

Truman Hunt

No. if anything, we're seeing really a strengthening of our U.S. business, Olivia. We really feel that momentum is picking up in the United States as is reflected in the second quarter’s numbers and is also reflected frankly in Canada, in Latin America, and throughout Europe as well.

Olivia Tong – Merrill Lynch

Got it. And then, just lastly, back to margins. With gross margin kind of hard to predict, how are you feeling about your 10.5% operating margin target for the year?

Ritch Wood

Yes. I think you know our gross margin is probably around 60 basis points lower then what I had forecast. We are starting to see some improvement in our distributor incentive line, which is encouraging. We may pick up a little bit there. You know, right I would forecast this to be somewhere in the 10.0% to 10.2% range for the year.

Olivia Tong – Merrill Lynch

Fine. Thanks very much.

Operator

Your next question comes from the line of Doug Lane with Jeffries & Company. Please proceed.

Doug Lane – Jeffries & Co.

Yes, thank you. Good morning everybody. Ritch, can you remind us what the convention expense landscape looks like the remainder of the year? What you do and don’t have this year that you did or didn’t have last year?

Ritch Wood

There are no significant convention-related expenses for the balance of this year. We'll hold some events. There's one a little bit larger in the U.S., I believe it is in October, but not a significant expense, you know, about a million dollars or so related to that. Last year, we did have a global convention in the third quarter, it was a net of approximately $4 million and so there will be a benefit obviously in the third quarter this year as we compare against that, but for 2008 there's no significant conventions for the remainder of the year.

Doug Lane – Jeffries & Co.

Okay, thank you. That’s helpful. And getting back to Japan, I noticed the organic sales decline of 13% was more than the decline in the first quarter, it was really an easier comparison, so it looks things have deteriorated in Japan. Can you give us more color on what is going on there? I mean, Japan has been declining for the better part of three or four years and is down 34% from its peak earlier in the decade and there's got to be a bigger picture kind of trend or program or something going on there that is causing such pressure on the business.

Truman Hunt

You know, Doug, at the highest level, that 34% decline over the last decade is really consistent with the decline in the industry generally. The direct selling channel has been under pressure in Japan for the last decade and we have refused to use that as an excuse because we still continue to believe that we can grow, but as one of the larger direct-selling companies in the market, we have trended in line with the overall decline in direct selling. What has really happened though in the first half of this year is that these external factors, government scrutiny and media attention have cost us and maybe this isn’t reflected in the way other companies are executing in Japan, I don’t know, but we have felt compelled to execute very conservatively and to make sure that our sales force is operating in compliance with local laws and regulations and our own policies and procedures; and frankly, operating in line with the corporate culture that we want to promote. And so what has impacted us in the first half, it frankly wasn’t foreseen when we projected 2008 was the effect of that effort and the necessity of that effort. And so to some degree, the decline in the first half is somewhat self-inflicted. I hesitate to use that term because it could potentially be a confusing one, but we're policing our sales force and we're making sure that we're operating in a fashion that we're comfortable with there and that is what accelerated the decline in Q2.

Doug Lane – Jeffries & Co.

Have you seen that continue in Q3?

Truman Hunt

You know it is frankly hard to read. It is frankly hard to project the impact of that. We're doing that on a daily and a weekly basis, and we are optimistic about our ability to improve the business in the second half of the year, but frankly the response of some of our sales leaders to these efforts is hard to read.

Ritch Wood

You know, Doug I would make one other comment in terms of looking out for the balance of the year. You know, we have seen a fairly decent – our convention initiatives have taken hold fairly nicely over the last couple of months and we have to be conservative when we're guiding for Japan, because second quarter was a little worse from the trend standpoint in the first quarter. But I really believe that’s below watermark and I think we'll see as we go forward the initiatives continue to grab hold and see things improve.

Doug Lane – Jeffries & Co.

Okay, and switching gears to Europe, I know currency helped, but the sharp acceleration in Europe, what’s driving that, and are we at risk of that market overheating because of the big sequential growth there, it is a relatively newer and smaller market I believe, but the organic growth was just a big number?

Truman Hunt

No. It is fair to say we're rocking in Europe right now. And it really kind of started in Eastern Europe, but it is spilling into Europe generally. We're seeing really good activity in Western Europe, Scandinavia, Northern Europe, Eastern Europe obviously. What is particularly encouraging to us is that the enthusiasm of the activity is spilling into Russia over the last several months and Russia is a market of enormous potential, where we have a lot of room to grow. So in some markets, like Hungary for example, you know, Hungary has grown to be a very substantial market for us in the region despite the fact that there’s only 10 million people there. But what is impressive is that the enthusiasm in these markets is really spilling across borders. And so I think we still have a lot of room to run in Europe. Our business there is still relatively small and I think we have a lot of room to run there.

Doug Lane – Jeffries & Co.

Can you give us just a brief update on how you manage your – who is in charge and where do they operate out of? Just some level of comfort that Europe just doesn’t overheat with this rapid acceleration.

Truman Hunt

Well, the European region is under the responsibility of Scott Schwerdt, who also manages the Americas. So Scott is responsible for the Americas, Europe and also Australia, New Zealand, and frankly one of the things that has helped really grow the European region is the fact that those markets are really managed by a common management team who is implementing these growth strategies in a consistent fashion across borders. Scott has been with us for 20 years, and frankly knows the business better than anyone on our management team. He is the best sales leader we have and he recognizes the need to monitor carefully what is going on in Europe because he’s been around long enough to know that growth needs to be managed in a prudent and appropriate fashion. He has on the ground in Europe a General Manager for the European region who operates out of Copenhagen actually and manages the European region. We also have very capable general managers in each of the major markets, Russia, Hungary have dedicated general managers in those environments. So well, we're keeping a close eye on the growth there, but what is encouraging about it is to see the growth spilling across borders throughout the region.

Doug Lane – Jeffries & Co.

And I know that historically you may have overbuilt in previous times going into new regions and that is part of making those unprofitable markets profitable. I know you talked about that last year. Is there a capital spend on the horizon for Europe here or are you okay with the infrastructure that you have now?

Truman Hunt

We're okay with the infrastructure we have now and one of the things we've implemented there too by the way, Doug is that you're right, in the past we have perhaps overbuilt in new markets in particular, but the new approach, frankly to new market expansion throughout Eastern Europe is that a market will have to reach certain sales levels before we invest. So we're really requiring of our sales leaders a certain level of performance to justify corporate investment as opposed to the other way around, which is the historical model.

Doug Lane – Jeffries & Co.

Okay, thank you.

Operator

Your next question comes from the line of Rommel Dionisio with Wedbush Morgan. Please proceed.

Rommel Dionisio – Wedbush Morgan

Hi, good morning. I just want to talk about Korea for a moment. You guys have obviously posted continued strong performance there. In the past you have talked about how the multilevel marketing industry in general is declining there. You’ve seen continued declines in the industry and what continues to be driver for you to gain share in that market going forward?

Truman Hunt

Yes, Korea is just an all-star market. We just love what is going on there. We have a very strong corporate manager there in Luke Yoo and we have a very impressive group of sales leaders in that market as well. And you're right. The industry has been under pressure in Korea over the last several years, which is why frankly we refuse to use it as an excuse the contraction of the industry in Japan, because we really think we can still grow the business even in declining environments as Luke has proven possible in Korea. So you know the key there has just been frankly practices, best practices that we're now deploying in other markets, which is focused attention for a substantial period of time on a single sponsoring proposition and growth initiative. Korea does a better job of that than any other market and Korea frankly is also the master market at aligning sales force leaders with corporate direction and we've learnt that lesson time and time again that corporate and sales force leaders need to be aligned if we're going to see growth and those have really been the two keys to growth in Korea I believe.

Rommel Dionisio – Wedbush Morgan

Okay, and just as a follow-up, could you give us an update on My Victory and just on how the sales of that are proceeding and the market reception?

Ritch Wood

I don’t have the numbers specifically with me, but it is a small piece of our revenue, probably makes up around 2% to 3% of our revenue. I can go back and thinking about the first quarter Weight Management was about 3% and continues to be right about that as we go forward.

Truman Hunt

And frankly, the focus on My Victory has not been intense, has not been great because of the success of other initiatives, and we've been hesitant to even corporally promote My Victory much here in the United States because we don’t want to disrupt the growth that’s going on.

Rommel Dionisio – Wedbush Morgan

Sure. Fair enough. Thanks very much.

Operator

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

Scott Van Winkle – Canaccord Adams

Hi, guys.

Ritch Wood

Hello, Scott.

Scott Van Winkle – Canaccord Adams

A few questions. You mentioned China and the store countdown and some commentaries, what is the next big event going on over there to try and change the trend in the sequential revenue growth?

Truman Hunt

The next big event will be the launch of the Galvanic Spa this fall.

Scott Van Winkle – Canaccord Adams

But is there any restrictions on how you can market that product like you might face in Japan or something?

Truman Hunt

Actually, we're very encouraged by the receipt of the permits necessary to launch the Galvanic Spa in the market. So no, we anticipate that we can use it the way we do in the United States and elsewhere.

Scott Van Winkle – Canaccord Adams

Right. And is there any specific product success or weakness in China? But did you get to a point to – that I know historically was a rugged skincare market, is that still the case?

Truman Hunt

Yes, it remains about 70% skincare, Scott and 30% nutrition right now.

Scott Van Winkle – Canaccord Adams

And Ritch, what percentage of your G&A is in U.S. dollars?

Ritch Wood

About 35%.

Scott Van Winkle – Canaccord Adams

Great, that’s it. Thank you.

Operator

Your next question comes from the line of Mimi Noel with Sidoti & Company. Please proceed.

Mimi Noel – Sidoti & Co.

Hi, good morning. Most of my questions have been answered and I did have to drop off for a second, so Ritch if you wouldn’t mind clarifying, can you tell me what your assumption is for local currency sales in Japan in the second half?

Ritch Wood

We've held at essentially even with where we were in Q2 in terms of our year-over-year decline. So approximately 13% down in Q3 and Q4.

Mimi Noel – Sidoti & Co.

Okay. And then I want to ask a question that I think was already asked, just want to ask it a different way to make sure I'm not missing a nuance, but Truman and Ritch, please try and manage as need be, what has evolved in Japan in the last several months to prompt this restructured management team?

Truman Hunt

Well, what has happened is that we've found that Gary Sumihiro, who runs our business there, has just been spending more and more of his time on what we've characterized as external affairs; so government relations, media relations, and distributor compliance with policies and procedures. And so, what really prompts the infusion of an additional management resource is the fact that we want to have a dedicated manager there who is really focused on growth initiatives and growing the business while Gary’s focus is primarily on external affairs during this period of time.

Mimi Noel – Sidoti & Co.

Okay. And the initiatives that are in place or will be in place, are there going to be any shift there as a reflection of this new management structure or is it pretty much full steam ahead of what Gary had in place? You just have more people to support those initiatives.

Truman Hunt

No there will be some shifts, and in fact our revamped business plan for the second half really includes a number of adjustments in the strategy and the tactics, and as I indicated, Mimi, at the outset, what we're really doing in Japan is initiating and executing the same strategies in Japan that are working well outside of the market in a fashion that is very consistent with the way those tactics are executed outside of Japan.

Mimi Noel – Sidoti & Co.

Okay. And then one or two more questions. When you say that you're executing very conservatively in the market because of the regulatory environment, could it be implied then that you're actually walking away or giving up on some business in an effort to make sure that you're perfectly compliant?

Truman Hunt

Yes. These decisions are hard ones too, because we know when we go out and we discipline sales leaders for example, it is going to negatively impact results. But in the long run, you have to weed the garden too, while you're trying to grow it, and that is what we're doing.

Mimi Noel – Sidoti & Co.

Okay, that’s all I have. Thank you.

Operator

As there are no further questions in the queue, I would like to turn the call over for any closing remarks.

Truman Hunt

Thank you very much for joining us today. We would just close by reminding that in a world of financial turmoil, it is a great time to be involved in direct selling. We're optimistic about our prospects in 2008 and beyond and we look forward to a record year in not only 2008 but in years to come. So thanks for joining us today and please let us know if we can answer any of your questions.

Operator

This concludes the presentation and you may all now disconnect. Good day.

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