Patrique Richards - Kevin G. Guest - President of USANA World-Wide Paul A. Jones - Chief Financial Officer and Principal Accounting Officer G. Douglas Hekking - Former Chief Financial Officer.

Timothy S. Ramey - Pivotal Research Group LLC Scott Van Winkle - Canaccord Genuity, Research Division Frank A. Camma - Sidoti & Company, Inc. Robert Lewis Chapman - Chapman Capital L.L.C..

Good day, and welcome to the USANA Health Sciences Third Quarter Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Patrique Richards. Please go ahead, sir..

Good morning, everyone. We appreciate you joining us this morning to review our third quarter results. Today's conference call is being broadcast live via webcast and could be accessed directly from our website at www.usanahealthsciences.com. A replay will be available on our website shortly following the call.

As a reminder, during the course of this conference call, management will make forward-looking statements regarding future events or the future financial performance of our company.

Those statements involve risks and uncertainties that could cause actual results to differ, perhaps materially, from the results projected in such forward-looking statements. Examples of these statements include those regarding our strategies and outlook for 2014.

We caution you that these statements should be considered in conjunction with disclosures, including specific risk factors and financial data contained in our most recent filings with the SEC. I'm joined this morning by Kevin Guest, our President; and Paul Jones, our Chief Financial Officer.

Yesterday after the market closed, we announced our third quarter results and posted a new document titled Management Commentary, Results and Outlook on the company's website.

This new document is designed to provide the most efficient method of communicating our earnings results and allow time for the most meaningful question-and-answer period on this morning's call. With that, Kevin will briefly review the quarter and then we will open the call for your questions.

Kevin?.

one, simplification of our pricing structure, including an additional 10% discount for products purchased on our Auto Order program; secondly, a new initial reward based on the amount of customer's initial product order; and third, increased payout under the simplification of our Associate Compensation Plan.

As we mark the 1-year anniversary of these improvements, we remain encouraged by the results they are producing. Customer growth remains our highest priority as we seek to do our part in improving the overall health and nutrition of individuals and families around the world.

We recently held our 2014 Annual International Convention and announced new enhancements to our business, which continue to build on the success of our 2013 improvements.

These new enhancements included an all-new digital marketing suite for our worldwide Associate base, which should significantly enhance our Associates' ability to manage and build their USANA business.

At our 2014 convention, we also announced a strategic change in our approach to incentives and promotions, namely, we are now offering market-specific incentives and promotions to further accelerate growth. The first incentive became effective at the August convention and we have additional incentives and promotions planned for 2015.

Consistent with our primary goal, these incentives are all intended to generate long-term customer growth. Turning to our financial outlook. As we head into the final quarter of 2014, we're tightening our guidance range for the top line and raising our outlook for EPS.

Accordingly, we now anticipate consolidated net sales between $780 million and $790 million versus the previous outlook of between $770 million and $790 million. Earnings per share between $5.85 and $5.95 versus the previous outlook of between $5.50 and $5.65.

Our outlook for earnings per share does not reflect any share buyback activity in the fourth quarter. To conclude, we are confident in the strategies that we have in place and expect USANA to deliver another year of record results for our shareholders in 2014, while building momentum into 2015. Operator, please open the lines now for questions..

[Operator Instructions] And we'll take our first question from Tim Ramey with Pivotal Research Group..

Can you give us a little more color on the deferred revenue in Hong Kong? Why was that deferred in the first place? What triggered the recognition there?.

Yes. We see some small amounts of deferred revenue in our markets where it's primarily a will call. It's not uncommon. It's very small. In Hong Kong, due to the size of sales, the amount of sales, we saw that growing over time, and in particular, in 2013, when we made the policy change.

Prior to that, you would see individuals that were allowed to do purchases not for resale from China, ordering that over the phone or through Internet -- online. And as we made that policy change, we saw that start to grow. Primarily before that, it was really a timing issue. Most of it was a short term. You'd see it turn over quarterly.

As we got to that policy change, the age of that started to grow and we've analyzed it over the last year. And so it became apparent that it was the right thing to recognize, that deferred revenue is $3.1 million, that really accumulated over several years. It's something that we looked at over the last year.

We've been looking for the trends, and so that's where that came from..

Okay.

So would that have been in -- would that have been in, let's say, contra revenue account? It's other current assets? Or what was that -- where did that live prior to this?.

It would be in a current liability that was there. And consequently, going forward, we anticipate there, again, like we see in other markets, it would be very minimal going forward. It wouldn't be anything significant..

And just a point of interest, what was the ending shares outstanding, if you know that, just so we can better model for the fourth quarter?.

Tim, are you talking from actual shares outstanding?.

If, I mean, if you knew ending fully diluted, I just -- I know what average was, but I don't know the timing of the share repurchases during the quarter. So even ending as in primary shares would be helpful..

It's at 12,370,000 as of the end of the quarter would be actual shares outstanding..

Okay, terrific. And I guess just, if I can one more, and then I'll get back in the queue. The market specific initiatives, which is an innovation for you. You've, I think, done global initiatives before. What is that about? Is any of it focused on the U.S.

where you've talked about stabilizing the business for a while, but haven't been very successful doing that? What -- where do we -- what exactly are these market-specific initiatives?.

Well, as we pointed out, we made some significant changes to our compensation plan in 2013. And so we needed to let the dust settle to see actually where our numbers are going to fall out with relationship to the overall business model. We have visibility on what has occurred in that area.

And so with that, we identified areas where we could utilize some capital to invest in these promotions and incentives. The current promotion incentive that's underway is not U.S.-specific. It is a worldwide promotion. And to our - we're happy to see that in the United States, it is responding very effectively to this promotion.

We feel like that it has been somewhat of a drag in the market in the United States for us to not have contest or promotions and we're seeing the U.S. respond very positively. We are going to continue this strategically throughout the next year. We're going to shift more to regional-specific promotions versus worldwide.

We decided to do the first one worldwide so that we'd have a comparable as it relates to our various markets for a ROI, quite frankly, to see how the return on the investment would be handled because our markets are so different.

The promotions are very driven to get people to get out and talk to other people and help them to grow our customer base and grow long-term customers.

So there's an element which includes the retention element to incentivize people to stay longer as they purchase our products and incentives to become lifetime product users, and we're seeing an uptick in that area which is a very critical success point for us here at USANA..

[Operator Instructions] We'll take our next question from Scott Van Winkle with Cannacord Genuity..

First, just a follow-up on that deferred revenue question for Tim. I want to go in a little more.

You said distributors will buy or Associates will buy product on will call, is the reason you count that as deferred revenue because they don't pick up the product?.

Yes, that's correct. And primarily it had to do with individuals that purchased it and then travel at some distance to pick it up on that. Yes, and [indiscernible] to pick it up. Yes..

So then when they ultimately pick up the product, you reverse the accrual, I assume, right?.

Exactly..

So this quarter, did they pick up $3 million worth of product to cause the reversal of the accrual or is it just they ordered the product, they paid you 9 months ago and they never picked it up and, well, you got the money.

It's ultimately a sale?.

No. It's really a matter of timing. We look at it as that ages and then we're talking 2 or 3 years, several years of accumulation and we looked at the trends in that. And so anything that's a couple of years old or older, we really caught up and wrote off.

And we discussed this in the Qs from the first and second quarter of this year that we were looking at it, and so this is just a true-up of that..

Got you, got you.

So it's more a test of kind of like the aging of receivables or something like that rather than specific items being picked up and kind of gets accounted for item by item?.

That's exactly it. And it goes to the accounting principle of breakage and that's really exactly what we're looking at..

Perfect. Thank you. So -- and then the stick over in Asia. Can you talk a little bit more about Korea? That was a nice jump sequentially for North Asia. It looks like -- I didn't have it broken out every quarter in the past, but it looks Korea is accelerating.

Is there anything going on over there?.

Well, we've had a shift in our management over there.

As you're very well aware, we're in the people business and we had a circumstance in Korea where we needed to make some shifts, which we have done, which have invigorated our top leadership in Korea and really excited them and got them working again versus being focused on human resources issues and so forth that we have taken corrective action for.

And so the largest thing I can attribute Korea growth to is the fact that we've had a change in leadership there locally, which is leading our field leaders to get out and build and grow and bring more customers into the business..

Okay, great.

And then on Greater China, can we -- can you talk a little bit about the differential between associate growth and revenue growth and is that a function of Hong Kong declining and China growing? Is there a difference between the 2 markets on productivity or just kind of help me put those 2 together?.

Yes. There is -- it is a difference between the Hong Kong -- we've seen over the years some significant decline there. Anticipate we'll see over the next couple quarters still some additional decline as we see Mainland China continue to grow and anticipate some healthy growth there as well going forward. And there are some differences in productivity.

And if you look at our overall productivity company-wide, you'll notice that it's down a little bit. But that really doesn't -- what that's meaning is we're having greater volume of sales in China, and China in particular is a market you'll see a lower productivity rate per active customer. It's about 2/3 of what you'd see in the rest of the world.

And so that is some of the drag on it..

Is there a reason why that's the case? Is that the different product mix in that market?.

Not so much. Product mix may have something to do with it. But really, I think, it has more to do with just the social economic of the [indiscernible] , the market conditions. Their buying patterns are different..

Okay, great. And then I think I got this correct out of the commentary that unit volume was up 12% or a little over 12% company-wide in Q3 and revenue dollars were up 11%.

If I look at the Auto Order rate going from 30% something to almost 50% and assume that a 10% lower average price because it's Auto Order, I would have thought there been more disparity between the unit growth and dollar growth, meaning a lot higher unit growth or lower dollar growth.

I hope I'm not making it too complicated, but can you -- why wouldn't we see more of a delta between unit and dollar given the amount of Auto Order growth?.

A lot of that can be explained with the price changes, the price increases we made in the first quarter of last year, so -- of 2014. So some of that gap was made up there, quite a bit of it was made up through that piece..

Okay.

So pricing offsets the discount associated with the Auto Order?.

Correct..

Okay. And then the last one for me, a follow-up on the share count question, just to make sure I got that.

So Doug, did you say it was 12.3 million ending share count on a diluted basis? So I assume that means the share count for Q4 that you're using in guidance is like 12.2 million since you bought back 100,000 since the end of the quarter?.

No. The actual share count at the end of the quarter was 12,370,000. The diluted was 13,964,000..

Okay.

Diluted was 13,964,000 at the end of Q3?.

For the year, sorry. For the end of Q3, it was 13,263,000. The diluted share count at the end of Q3 was 13,263,000. For the year it was 13,964,000..

Right. And so I'm just -- I guess what I'm asking is, when you gave guidance for the full year, you obviously had some implied Q4 number.

I'm wondering what kind of share count you're using for Q4, would it be kind of 13 -- I'm sorry I said 12.2 -- but 13.2 million, is that what's implied in your guidance?.

Guidance going forward, we didn't build any of this in the guidance, but we're looking at 12.7 million. Yes. Right around the building, the guidance going forward..

Okay. 12.7 million is what's built in the guidance. Sorry, I messed up those numbers. I made that harder than it should have been. Okay.

So no additional share repurchases other than what you've done to date that's in your guidance?.

Correct..

And we'll take our next question from Frank Camma with Sidoti..

Hey, I was wondering if you could talk a little bit about the FX trends. It doesn't seem like they had much impact in this quarter, but you had called out some last quarter and obviously the dollar has been stronger here. I just wonder if you could talk about that for a second..

Yes. It really had minimal impact. It was about a $250,000 impact, negative impact or positive impact this year or this quarter. So fairly minimal impact..

And why would that -- last quarter, it was actually negative.

Is that correct?.

That's correct..

So what -- can you just explain like what drove....

And Frank, this quarter was -- the Q3, it was a negative $250,000 and it was a little more than that in Q2. The strengthening of the dollars impacting us and so those are the trends that have the biggest impact on us..

Frank, this is Doug. The simple way that we look at it, if you use the exchange rates that were implied, the third quarter of last year, we'd use the same exchange rate this year and then compare those to what we report in USD. And that's how we come to that figure. So some of the strengthening of the U.S.

dollar you've seen recently in all the markets really wasn't shown that much in Q3. That's more of a recent phenomenon..

So it may affect Q4 numbers is what you're saying?.

Yes. I think I'd be looking more towards 2015 than Q4, but yes..

Okay. Later, okay.

And would it have much of a negative impact if the rates stay where they're at?.

No. It would be something roughly in line. No..

Okay, all right. Question on the -- obviously, you've become more aggressive on buying back shares here. So -- and you even have taken on some debt here which seemed to be almost a huge change for you philosophically.

Can you talk about that as to why you decided to take on debt at this point?.

Yes. First of all, we don't anticipate that the debt will be a long-term issue. It's really more of a timing from a cash flow standpoint with the valuation of the shares and the value of money. It made sense to return some shareholder value through that repurchase. And going forward, we'll do what we've done in the past.

We'll look at the valuation of the stock. We'll look at the performance of the company and make a determination whether it makes sense to return shareholder value through repurchase. Again, it's really, on the line of credit, it's really a cash flow timing issue. I would not see that as a long-term extension of line of credit for that..

Sorry about that siren. We're not under attack. It's just our fire alarm being tested..

Well, we're glad that, that's the case..

So as far as that goes, would you expect to pay out the line of credit over the next quarter or 2? What's the expectation on the payback?.

Yes, next quarter or 2. Again, timing, but I wouldn't see it going beyond the next couple of quarters..

Okay.

And I guess final question then is just -- does that speak to where you currently domicile the cash? And any -- is there any taxation issues if you were to bring -- repatriate that tax -- that cash? Or can you speak to that a little bit?.

Sure. It really does have to do a little bit with where the cash is generated and domiciled, but there would be no tax implications for pulling it out of whatever market we intend to pay that down. So no tax implication..

[Operator Instructions] And we'll take our next question, a follow-up question from Tim Ramey with Pivotal Research Group..

The follow-up. Just a couple of questions regarding China. You alluded to your China, upcoming China convention.

Can you talk a little bit about what that will entail? Where it's going to be held, I'm sorry, I don't know, and what we should expect out of that? Is that a meaningful 4Q SG&A expense? Is there a meaningful revenue associated with the convention?.

The convention actually will be taking place in Nanjing. It will be sold out. We anticipate around 8,500 people at that convention. And there's a lot of momentum and excitement about -- amongst the associates about those conventions. So looking for recognition in all those kinds of things. So we see great momentum from that.

We're also seeing a lot of training meetings and pulling people together to talk about the business opportunity and the products and educate them over there. So we're seeing a lot of momentum from that. So yes, as far as the expenses for that, it's less expensive than our other conventions.

It's a National Sales Meeting as opposed to an international-flavored convention. So costs are not a huge factor in comparison to the benefit that we gain..

And as I recall, this can have some issues like getting a lot of people into one building.

And so how have you thought about that and implications for your relationship with the government?.

Yes. Our China management team is very close with their government regulators and there's constantly discussion about those types of things, making sure that all of our meetings are registered and looked at prior and there are certain restrictions and regulations that they have for that. And so we work very closely with them to follow that.

And I think in time, in China, the indications that you'll see the government being more clear on some of their expectations on how big those meetings can be and what those meetings are about. But we're staying -- our China management team is staying very close on with the SAIC and regulators regarding that..

Great. And then just a question on Hong Kong. It'll be pretty interesting when Hong Kong kind of finds its bottom and stops deluding the great growth rate in Greater China.

Do you have any thoughts on when that occurs, when Hong Kong kind of gets to a stable level of sales that reflect just ongoing operations in Hong Kong?.

Yes. We believe that, over the next couple of quarters, we'll really see that find its place..

Okay. And then just a follow on the question on the debt. I kind of had in my mind that $60 million in cash would be a level where you would start to feel like you needed the liquidity from the line of credit. And you pulled that with a little over $80 million in cash at the end of the 3Q.

Can you comment on that, or again, I think you said earlier, it was a timing issue, but is the $60 million in cash a legitimate kind of number of operating cash that you feel to run the business or should I be thinking about that differently?.

No. I think $60 million is the right place. We have really a timing issue on there. We have cash reserves build up very, very significant as we talked about last time in China, primarily as we anticipate the expenses for the new facility, the CapEx and the new facility that we're building over there. So it's really a timing issue..

We'll take a follow-up question from Scott Van Winkle with Canaccord Genuity..

Yes. Just quickly on new market. Anything we should think about in the future around new markets? I guess it was a couple of years ago, you entered Thailand and a couple of European markets.

Should we think about geographical growth going forward?.

We are looking at new markets. Our strategy is not changing overall. We're not looking as opening new markets as our fundamental growth strategy. We don't feel like that's sustainable, but we will be looking at new markets.

We're going to look at opening a new market in 2015 and our plan is at that point in time to have other markets in the queue as we move forward in growing this company. But we're spending our time, efforts and energy in solidifying China and our operations there.

We're solidifying and working on and very confident in our progress in the United States in those markets that are more mature that really need our focus and effort.

As we stabilize in those areas, we feel like that's a more solid long-term growth strategy for a long-term business building customers than it is to continually open new markets and then tout that as our growth and our growth strategy. So the answer is yes, we are looking at markets, we'll have a new market in 2015.

But we're going to stay more on the conservative side and realize the great opportunities we have in the current markets where we're at as we solidify in those areas..

Thanks.

And then Paul, that extra week in Q4, is that -- is it just as simple as saying multiply it, times '14 instead of '13, or should we think about that week being a little more, a little less productive than the average week?.

Okay, it really is -- it's as simple as -- it's an extra week at the same run rate that we're experiencing. So that's really how we're looking at it. And keep in mind that as we discussed -- as we look at first quarter 2015, the comparables will be a little bit challenging because you've got the excitement of the China National Meeting.

You've got a 14-week quarter and then in the first quarter, we're going into Chinese New Year. So of course, we'll build that all into guidance for 2015 and we'll talk about that when we come together in the next quarter release. But keep in mind that, that sequential comparison will be challenging..

Yes.

And then with that National Sales Meeting in China, is there anything out there that happens around, like a new product being made available or anything of that nature? Are there big product sales that occur at the event? Or is the driver of revenue really just a bunch of motivated associates getting around sales meeting?.

Yes. It's really the latter, the education and the motivation that occurs in that setting has a profound impact on that market..

And we'll take our next question from John Chapman with Chapman Capital..

Matthew [ph], I know a brother of mine. It's actually Bob Chapman..

He is [indiscernible]..

Looks are not a strong point in our family but we'll move on to financials. So it was -- first of all, it's good to hear Tim Ramey on the call again. It's nice to have him back on the sell side.

If 70% of your sales this quarter, net sales were in APAC, and essentially you're an Asian company at this point, yet your headquarters is in Salt Lake City and I just hypothetically wonder what circumstance could arise where essentially the United States business becomes mature/saturated, slowing down and maybe even there's a regulatory change that makes the U.S.

business less attractive. Does USANA as just an Asian company would just sort of just primarily, if not entirely Asian operations, operated out of Asia.

Is that something that's possible or sort of the head of this company being in the United States and it being orchestrated from Salt Lake City, is that really important that it be based here? And could you actually sort of carve off Asia and run Asia on a standalone basis without the headquarter support being in the United States.

I'm trying to get a sense for the interaction between sort of Salt Lake City U.S.

HQ and the Asian operation, which really -- of the company's business?.

Well, as I listen to your question, thoughts going through my mind. First and foremost is we haven't and are not giving up on our other markets and in the United States. And with some of the strategies we have in place for 2015, I'm confident that we're going to see a resurgence as we continue to be more relevant in a market that is ever changing.

It is true that in Asia, especially with direct sales, that it lends itself very nicely to our business model and business culture because they work typically within their families. Direct sales is very natural for them in that culture and that's why it takes off so well.

There is some appeal, great appeal in Asia actually for products that are manufactured in the United States as we operate and function here. And as we look at what's happening around the world, we attribute some of the allure, or I should say, the success to us is that we are and manufacture out of the United States.

And you'll see other companies, multibillion dollar companies that have a base of operations in the United States that do a huge significant amount of business overseas, and we are not dissimilar.

Although, as that market grows and specifically China becomes its own animal, and becomes bigger and bigger, a bigger force, we are certainly open to looking at China becoming more of its directional entity, meaning not one-size-fits-all.

So as we do our worldwide promotion, maybe China would have different sales strategies in place as it relates to China, specifically Mainland China being its own operation. We've moved somewhat in that direction, obviously, with the facility that we're building in Beijing right now, a large manufacturing facility.

I don't foresee in the future, and I haven't, that we have had these discussions with the Board of Directors, but I don't foresee USANA moving its headquarters and operations outside of the United States. And I think it only lends to our strength in other countries around the world..

So if Philip Morris had a Philip Morris International then Philip Morris Domestic and some of that split came from the regulatory changes that occurred with the FDA and other entities here in the United States. In a theoretical or hypothetical, I suppose, circumstance where the regulatory environments become disparate, domestically versus in APAC.

Can you see that being something that would work or would there be difficulty in sort of separating the company, splitting the baby, is that difficult or is it something that could be feasible should the need or desire arise?.

Well, I think it's certainly possible in today's marketplace and in today's world, we -- that is certainly a possibility and we certainly could function in that way.

And structurally, we could certainly function in that way and we are -- one of the discussions in the board meetings that we just held was beginning to put a structure in place for a multibillion dollar company, looking forward into many years into the future.

And those are issues that we are discussing as a team and it's certainly doable, but something we are not planning at this point in time..

And this does conclude today's question-and-answer session. At this time, I would like to turn the conference back to our speakers for any additional or closing remarks..

Right. Well, thank you for your questions and for your participation on today's conference call. If you have any remaining questions, please feel free to contact Investor Relations at (801) 954-7961..

And again, this does conclude today's USANA Health Sciences Third Quarter 2014. And again, this does conclude the conference call. Thank you, again, for your participation. And you may now disconnect..