Patrique Richards - Investor Relations Kevin Guest - President Paul Jones - Chief Financial Officer.

Tim Ramey - Pivotal Research Group Scott Van Winkle - Canaccord Genuity Frank Camma - Sidoti & Company.

Good day everyone, and welcome to the USANA Health Sciences Fourth Quarter Conference Call. As a reminder, today's call 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 Fourth Quarter results. Today's conference call is being broadcast live via webcast and can 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. Now 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 Fourth Quarter results, posted Management Commentary, Results and Outlook on the company's website. Before opening the call for questions, well here first Kevin and Paul who have brief remarks regarding the quarter.

Kevin?.

Thanks, Patrique and good morning, everyone. The fourth quarter of 2014 was a solid quarter and capped off another year of record results for USANA. We're excited about the strength of our overall business and particularly the customer growth we generated in 2014.

We're also optimistic about our strategies for 2015 and look forward to talking with you this morning. Before we take questions, Paul will briefly address some of the factors that drove and impacted our results for the fourth quarter.

Paul?.

Thanks, Kevin. I'm glad to be on the call this morning to report on another very successful quarter and year for USANA. I want to quickly reiterate the most significant factors that impacted our results for the fourth quarter.

As we reported yesterday, net sales for the quarter increased by 22.3% on a year-over-year basis, while the number of active Associates increased 31% year-over-year and 20% sequentially. This is meaningful growth for USANA and the following factors played a key role in driving this growth.

First; during the quarter we offered a new incentive program which increased the compensation we pay for sales generated by new customers. This incentive was offered worldwide for 13 weeks and was more successful than we anticipated. This incentive also cost more than we initially anticipated, and I will address that in a moment.

Second; the fourth quarter included an extra week of sales which we estimate contributed an additional $16 million to net sales. Third; we held our national sales meeting in China during the quarter which had record attendance and created additional excitement in that market.

The excitement surrounding this meeting combined with the incentive we offered, accelerated our sales and customer growth in China during the quarter. Finally, we saw increasing currency headwinds during the quarter from a strengthening US dollar, which negatively impacted sales by approximately $6.3 million year-over-year.

Moving on to the bottomline, net earnings for the fourth quarter increased by 5% to $21.3 million compared to the prior-year period, while earnings per share increased by 17% to $1.65. Notably the extra week contributed an estimated $0.12 for the quarter, while the strengthening US dollar reduced EPS by approximately $0.05.

Now as I said a moment ago, the incentive we offered during the quarter was more expensive than we initially anticipated and consequently we saw a meaningful increase in our Associate incentives during the quarter. This increase was really the catalyst for us whipping on the bottomline.

Let me walk you through why our incentives came in higher than we anticipated. To begin with, this was the first time we’ve offered this incentive worldwide. While we’ve offered a similar promotion in certain markets in the past for shorter durations, we’ve never done it for this duration on a global basis.

Next, as you saw from our numbers for Associate growth 31% growth year-over-year and 20% growth sequentially, this incentive was very successful at driving sales to new customers. The magnitude of this success along with the number of Associates participating in and benefiting from this incentive was much greater than we anticipated.

Consequently, our payoff for this incentive and our Associate incentives expense as a whole was also meaningfully higher than we initially modeled into our estimates. Next, when we spoke to you in October, we planned to run this incentive for eight weeks.

Because of the strong response from our Associates, we extended the incentive to 13 weeks which generated incremental expenses that we did not initially model into our estimates.

Finally, due to the success of this incentive and the extended promotion period, our payout under our other parts of our compensation plan such as bonuses and incentive trips also increased and this generated incremental expense that we had not fully modeled into our estimates.

As a result of all of these factors, we underestimated our total Associate incentives expense for the quarter by about $5 million. Keep in mind that this was a short-term incentive that has now ended. Going forward, we anticipate Associate incentives to be around 44% of net sales in 2015 and we will manage this expense to this level.

Because a component of this incentive ran into February of this year, we expect incentives to be in the range of 45% of net sales for the first quarter. More importantly, the incentive we offered contributed to the strong momentum and excitement that we're seeing in our business.

This momentum has carried over into 2015 and is a key factor in our initial outlook that we issued yesterday. I believe this momentum along with the strategies we will execute in 2015 will position USANA for another record year in 2015 and for continued long-term growth. Now with that, I’ll ask the operator to please open the lines for questions. .

Question-and:.

[Operator Instructions]. We’ll take our first question from Tim Ramey with Pivotal Research Group. .

You know, I was really struck by the magnitude of the share repurchase for the year. It looks like you’ve repurchased about 13.5% of starting shares outstanding and spend you know, gosh over a $100 million, $130 million on the share repurchase. And yet ended up with you know no debt and a $111 million of cash. It was just a stunning share repurchase.

I’d like, you know I’d love for you to comment. I know you’ve only got you know $65 million or so left in the share repurchase. But I just can't remember another company taking that much shares out of their share base in a given year and at a very good price. So I think it was $72. .

Yeah, so that was part of the strategy early on. And as we’ve talked about in the past, our effort from a cash flow standpoint is to utilize cash per share repurchase at those times when we believe that the share is undervalued from a market standpoint, and it would provide a great return to the investors as we saw it do last year.

And you are right, we’ve about $61 million remaining on our share repurchases program. .

And just a follow-on on China, which also was stunning, up over I think 40% in the quarter. You know, you kind of have mentioned the Chinese New Year and other companies have called out that that might be a headwind that it ends at month end.

Do you see the Chinese New Year playing a role in first quarter sales? Should we expect a more moderated growth rate I assume in the 1Q? And any comments about you know the continuance of China’s torrential growth?.

Yes, as we’ve seen for the last several years anticipate a challenge due to Chinese New Year, and the greater that part becomes to our market. Not only in China, but in other markets around the world where we’ve a large group that celebrates the Chinese New Year. We anticipate that that will put some pressure on the top line in the first quarter.

And which will make our sequential and quarter-over-quarter comparisons very difficult. Also along with that, is the impact of the FX, the strengthening of the dollar. So that will also put some pressure in our comparatives.

As far as our outlook going forward in China, we still see strong momentum there and we believe that it will continue to build through the year and we anticipate that we’ll see strong double-digit growth again this year. .

And have you quantified or can you say what you’ve built in to the FX outlook for your guidance in terms of EPS impact?.

On a year-over-year comparison, we anticipate we’ll have about $34 million drag on the topline. .

Okay, any stab at what that means at the bottom line?.

It would be about the same percentage relative to the topline as it would be on the EPS. .

[Operator Instructions]. We’ll go next Scott Van Winkle with Canaccord Genuity. .

On the promotion that was done, you mentioned $5 million as kind of an estimate of incremental incentive expense.

Do you have an idea or can you put a dollar amount to what you think the boost was to the revenue?.

About $12 million. .

And when it runs higher than expected, well when the cost is higher from the promotion than you anticipate, is that because the incremental sales obviously had a higher incentive and then some portion of the sales growth, you’d have normally had had higher incentive? I am wondering how it just came in at a magnitude so much greater than you anticipated?.

Well, that's the correct. The few of the reasons we talked about, running it a little longer than we anticipated and the drag on each incremental sale created that challenge. .

Okay, and then on the China cost, all of you know this incremental promotion, you know commissions and what have you, is that all run through volume incentives or some of that went through SG&A?.

That's all through volume incentives. .

Okay, and then I’ll stick on China. You know you cycled through the change between Mainland and Hong Kong, what I guess 18 months ago. Hong Kong was still down year-over-year and obviously you expected that.

When should we expect to see kind of Hong Kong get back to kind of a normal you know either steady state or grow again et cetera?.

You know Scott, I think we're getting pretty close on that. We’ll see a little bit of pressure maybe in the first quarter, but I think we're getting close to where that run rate will be. .

Okay and then lastly on the US. Over the last four quarters, if I'm not mistaken you saw a boost in volume that didn’t offset the price investment.

I was kind of thinking this quarter that you know the volume growth might persist and with prices normalizing on a year-over-year basis, we might see the US business look a little bit better in net sales growth.

Can you talk about that and one, do I’ve my numbers right? Over the last year, was volume up before considering price in the US? And what are your thoughts on you know, why we didn’t kind of cycle through that and end up with a little bit of a boost?.

Well volume was up by about 26% year-over-year, as a company worldwide and some of that was unit volume. We do an annual price review every year about this time of the year and that certainly has some impact, which is you know driving that difference down. .

Okay, so if we look you know domestically in the US market, are prices still running kind of negative year-over-year?.

We're making some headway in our pricing there, but our unit volume is still down a little bit in the US. That's one of the markets impacting, in part that’s a part of what we are trying to inspire and drive with our incentive program in the fourth quarter. .

Great and then lastly, if you look at the guidance given for 2015, you know the revenue growth regionally should we think about maybe kind of an extrapolation of the trends we saw in Q4? And not necessarily the exact specific growth rate, but where the growth came from across Asia.

You know strong Korea results, are you anticipating that kind of trend continuing into your guidance for the next year as far as where the growth comes regionally?.

Yes, we're. Of course that's countered a little bit by the strengthening dollar, but yes from a trend standpoint that's where we would see the growth. .

[Operator Instructions]. Next we’ll go to Frank Camma with Sidoti. .

Obviously, you had the pressure on the margins from the selling expense, Associate selling expenses, but you know I think this is the highest your gross profit margin has been that I can remember.

Can you speak to that a little bit?.

Sure, some of that improvement year-over-year has been from a sales mix, where those sales are being generated. .

So it’s a regional issue?.

Yes. .

Okay, is that because, some of it also because dollar is strong and you are buying some of your cost-of-goods sold overseas, would you benefit from that?.

No actually, a part of that has to -- we buy, we manufacture all of our products here in the US with the exception of what we sell in China, which is manufactured in China. So that actually has a negative impact on the margins from that standpoint when the dollar strengthens.

However that negative was offset by the sales mix being strong in other regions such as Greater China. .

Okay so it’s purely a sales mix? Is it, I mean this level of 83.5%, is that sustainable? I mean would you expect that to kind of go down over time, I would assume?.

We just anticipate to see that around 83% going forward for this year. .

Okay, and you’ve made some pretty big progress in a couple of things that you’ve been focused on, like the Autoship and paying out more to you know a broader range of associates. Just wondering that Autoship is I guess right around 50% now.

Is that about as high as it can go and can you just talk about you know regionally, what challenges you’ve there? Because I think in the past you’ve said that you know Autoship is not as popular for example in China?.

Yeah, first of all we do believe that that's probably where we’ll see the numbers settle out. We think we're about there, but there is some regional areas where we can make some improvement in that still, such as China and the Philippines are some of those other areas. But we're probably there. .

Okay, and the last thing is just on the arrangement that you now have with The Dr. Oz Show.

And if I understand people can actually order via your website, is that correct?.

Well, they can order products if they go to a certain website, but it does not exclude our business model as it relates to our direct selling model. And they come into the business as a preferred customer within the model. And so we're not bypassing our direct selling model with our Associates and how we distribute the funds and so forth.

And so they cannot purchase the products cheaper through the Dr. Oz sites than they could purchase from a distributor. And we're in no way moving away from our model of direct selling. .

That was what I was getting at. Like if there are any conflict there and like, so if I -- let’s say I come in as a preferred customer through that program. Is there any credit given to someone above or is it just -- I mean how does that work. I'm just trying to figure that out logistically how that works. .

So we handle it just like a typical transaction would occur with if an Associate brings someone in. With the exception of, they don't see the name of the person who’s ordered the product for privacy reasons, unless they request for more information.

But again, the business model is still handed exactly the same way as if a normal product were purchased through a distributor. .

And how do you assign that to -- maybe this is a little too granular for this call, but how do you assign that to someone? I mean is it by geography or --?.

So we’ve a referral system in place. usana.com has millions of people visit it on a yearly basis. So we do receive referrals that are unsolicited directly from someone. And so we’ve a referral system in place and it's basically the same system that they fall into from a referral system.

And it’s computer functioning, it’s non-biased and we distribute those leads just as we would distribute anyone visiting usana.com. .

Okay and just a final question on that is, is there some sort of like revenue share agreement with The Dr.

Oz Show, or is it like a one-time fee that you pay them?.

There’s no revenue share. .

Oh but, so do you pay them like a sponsorship arrangement, is that how it works?.

Yeah, we’ve an annual fee that we're paying as we participate. .

And now we’ll go back to Tim Ramey with Pivotal Research Group for a follow-up question. .

Yeah, the new plant in China, I think you had mentioned that would be a cost of about $40 million. And I had modeled CapEx a little bit higher than it came in for 2014. I think you came in at around $23.5 million.

Do you’ve a sense of what CapEx will look like in ‘15 and can you comment on the progress and status of the Chinese facility?.

Absolutely, we're very excited about what's happening there. As we started out 2014, we anticipated it would be about $40 million on our CapEx. As you mentioned, that came in at about $23.5 million and some of it is just a timing issue. The difference between the 40 and the 23 really is being moved into 2015.

And we anticipate this year that it will be around $45 million in our CapEx. Roughly half of that will be associated with China, about $21 million associated specifically with the new manufacturing facility. And it's looking beautiful and we anticipate that they will be up and running as planned on target and available in the first quarter. .

And you mentioned in the release that there would be some CapEx for IT spending.

Is there anything specific that you would point to there or just you know general systems?.

Well, there are a couple of things. First of all, we recognize that IT in the world coming up is going to be one of the major differentiators for direct selling companies. And we’ve to make sure that our infrastructure, one that our base infrastructure is there. And quite frankly, we had been a little bit behind in that, so we're playing some catch up.

But also we’ve just launched what we call the hub, which is an ability for Associates to personalize their websites. And we're getting the kinks out of that and getting that to a point where it really can make a difference for our Associates. And then in general, just continuing to increase the infrastructure around IT. .

You know, I am going to jump in here just to further on what Paul said. In our business, the easier we can make it for people to do business with USANA, the better it is for all of us, and for them especially. And from an IT perspective, we're moving into a mobile world where people literally run their business from their phone.

And as we head into it from a technological perspective, as we head into those waters our focus is to make it easier and easier to do business with USANA on a global basis, and that requires a sizeable investment from an IT perspective. And that's our focus and our direction is to make things easier using technology to do business with the company. .

Great, and just a follow-up on tax rate.

Any thoughts about what the changing business mix will do to the rate in ‘15 versus ‘14?.

I anticipate it will around a 34% on considering our business mix and everything. It will continue to be around that 34%. .

And there are no further questions at this time. So I’d like to turn the call back over to Mr. Richards for any additional or closing remarks. .

Well we thank you for your questions and for your participation on today's conference call. If you’ve any remaining questions, please free to contact Investor Relations at 801-954-7961. .

And that does conclude today's call. We thank everyone again for their participation..