Patrique Richards - IR Kevin Guest - President Paul Jones - CFO.

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

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

Good morning, everyone. We appreciate you joining us this morning to review our first 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 2015.

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

Yesterday after the market closed, we announced our first quarter results, and posted management commentary, results and outlook document on the Company's website. Before opening the call for questions, we'll hear first from Kevin, who will briefly review the quarter results. Go ahead Kevin..

Thanks, Patrique and good morning, everyone. This first quarter was an excellent start to what we expect to be another record year for USANA. We are excited about the overall results our business produced during the quarter, particularly the better-than-expected sales results we look forward to talking with you this morning.

Before we talk to all of you and take your questions, let me briefly review a few factors that had an impact on the quarter. First, when we talked with you a few months ago, we noted that the incentive program that we offered during the fourth quarter of 2014 would carry over several weeks into the first quarter of 2015 in China.

This incentive continued to generate significant momentum for us during the quarter and helped offset the seasonality we typically see during Chinese New Year.

While this incentive was very successful, it also generated additional associated incentive expense and it’s the primary reason we reported higher than anticipated incentives expense of 46.2% for the quarter. I think it's important to note that this incentive contributed to the strong active Associate growth during the quarter.

With the conclusion of this incentive, we expect our incentives expense to trend down over the next several quarters to a run rate of approximately 44.0% to 44.5% of net sales for the remainder of 2015.

Second, net sales for the quarter were positively impacted by incremental sales that occurred ahead of price increases announced in China during the quarter. This contributed to approximately $12 million. Third, we experienced a more favorable operating environment in China during the first quarter of 2015 compared to the prior year period.

The improved operating environment allowed our Associates to share our products at business opportunity with potential customers with a higher level of success.

Additionally, the improvements we have made and are continuing to make to our business systems and infrastructure in China has meaningfully improved the experience of doing business with USANA in China.

The completion of our branch remodels and state-of-the-art manufacturing facility will only continue to improve our customer's experience with USANA going forward.

Fourth, while the factors I just mentioned help explain our strong results in China, I want to point out that USANA generated sales and customer growth in most -- all of our markets during the quarter. We generated double-digit sales and customer growth in each region in Asia-Pacific.

Additionally, the Americas and Europe region had several markets that experienced meaningful growth, notably Mexico and Canada. We generated worldwide growth notwithstanding continued pressure from currency fluctuations, which negatively impacted sales by approximately $9.2 million year-over-year.

We expect currency to continue to impact our year-over-year results through 2015. Finally, please remember when considering our sequential quarter results that the fourth quarter of 2014 included an extra week of sales which we estimate contributed an additional $16 million to net sales during that quarter.

In line with our first quarter results and the general momentum we are seeing in our business, we have increased our top and bottom line outlook for fiscal year 2015 as noted in the release and management commentary we issued yesterday afternoon.

This updated outlook reflects the strength of our worldwide business as well as our confidence in the strategies we plan on pursuing in 2015. I believe we are uniquely portion for continued growth and to report another record year for USANA in 2015. With that, I’ll ask the operator to please open the lines for questions..

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

Good morning and congratulations on just an outstanding number. The Chinese performance was stunning in a lot of ways and I guess it raises some levels of concern, both in terms of wrapping against that promotion as we go into next year as well as kind of the sustainability of the average actives into the next couple of quarters.

How do you think about that? I mean, is it reasonable to think that some of that growth ebbs away in 2Q and 3Q and then maybe builds back in the 4Q or how are you thinking about that?.

Well, we certainly, as we look at that first quarter, had stronger than expected, slightly stronger than expected participation in the promotion that we ran, very excited about that and it did accomplish what we were hoping to and as we mentioned, the 12 million buy ahead in terms of the price changes that we announced and so we saw that happen.

But if you back that out, we still anticipate seeing some good growth through the year in that market and continue to see positive things happening through the end of the year..

I mean, it seems obvious that there will be growth, but sequentially, would we be prudent to kind of think of, I mean the 2Q being down versus the 1Q, it almost seems like a lock to me, but I’d love to hear your thoughts on that? I mean relative to China alone..

Yeah, well China, we still anticipate some strong growth, we have some things that we’ll be introducing in there over the next several quarters, but I think if you back some of those things out that we've talked about, then you can look at a consistent strong run rate as we go through the end of those two quarters.

We’ll see a $5 million carry forward from that buy ahead that will go into the second quarter. So, there will be some impact there. And then, you will see a further consistent growth forward..

Right. And then just one more if I could. No share repurchase in the current quarter. Obviously, that was brilliant last year, I mean, just extraordinary to have bought back so much stock at an average price of whatever it was, $77, $78.

Any thoughts on why you weren’t active in the 1Q?.

Certainly, we still have around $61 million on our authorization for share repurchase. But as we analyze and look at that with the capital expenditures we have this year and looking at share price and where we’re being valued, we determine for that reason that it made sense to hold off and we’ll continue to evaluate it in the same way going forward..

Are you still expecting CapEx to be in the 40-ish range this year?.

We anticipate that that’s around where we’ll be this year..

Okay, thank you..

You bet. Thank you, too..

And the next question is from Scott Van Winkle with Canaccord Genuity..

Hi, thanks. Congratulations on a good quarter.

Can you explain the $6 million deferred revenue benefit during Q2 from China and the mechanics of that? Is this like kind of like the breakage you had a few quarters ago with product that hadn’t been picked up and deferred revenue was realized?.

No, not at all. This is strictly tied to the timing of the price change that we put into place in China. Last year, we did our price changes a couple of weeks later into the second quarter. This year, we made that effective right at the quarter end.

And it was about a 5% increase and we gave a little bit more notice than we have in the past and so that purchase was right up in the last two weeks and so, the deferral was really dealing with the timing of the delivery on the product..

Got you.

So, orders that were placed ahead of the price increase, but not delivered until after the quarter close and therefore, it’s deferred revenue, is that right?.

Exactly, that is correct. And just a note on that, we didn’t see a meaningful difference in our run rate following that. So, as you’re thinking of your model looking at a pull forward, there really wasn’t -- didn’t appear to be much of a pull forward because we went right back to what our run rates had tended to be prior.

So, keep that in mind as you look forward..

Okay. And then, the North Asian number surprised me positively.

Is this Korea, I mean, is something kind of caught hold there and kind of turned that market up?.

Yeah. We are thrilled of what we’re seeing in Korea. We have made -- I don’t know, I guess over the last year to little over a year some significant changes from management perspective and that has made a dramatic impact on the market there. And we are excited but Korea has definitely been a bright spot for us and we continue to see it grow and grow.

We just finished our Asia Pacific convention few weeks ago in Singapore. It was sold out and the excitement for USANA in our Asia and Pacific markets is just continuing to grow. The strategies that we have in place from our personalization strategies and others are taking hold and resonating in those areas of the world and so very, very positive. .

And should I assume it's more Korea than Japan?.

Yes, that's correct..

Okay. And then what are the expectations on Indonesia? I could think back years and years ago where you had market entries that really took off from day one and then Europe, the most recent entry sound like it didn't take off quite as fast.

What are your expectations as you enter that market later in the year?.

Well, we are excited about the market. Indonesia is the fourth fastest growing market for direct selling right now and we believe we have a good team being put into place over there.

I think that you will see as something similar to what we saw in the Philippines is what we're anticipating that you will see some initial excitement and then it will ramp up over the next year to be a very healthy market for us..

Just as a side note on Indonesia, we have how some expertise there going into that marketplace. For instance, our General Manager in the Philippines who has helped drive that great growth in the Philippines has years of experience in Indonesia in helping that market as a direct sales market.

And we are going to take that expertise and help build the same sort of model in Indonesia. So we are very optimistic..

Okay. And then a couple more if I could.

So the associate incentive expense, talking about it coming down, but not coming down towards historical levels is not necessarily the same promotion that was done at the end of Q4 into Q1, but are there more of these sales promotions kind of above what the historical run rate would be planned out for the remainder of the year to keep the momentum going?.

On the associate incentive line, due to sales mix we are seeing about a 50 basis point increase in that from what we anticipated, again primarily due to sales mix. Some elements of our program we talked about our incentive program, we talked about a couple of years where we went to a different form of matching bonus.

And we anticipated that we would see a little bit of growth in that and I think we are right where we would anticipate from that. So that's why we are looking at run rate of about between 44% to 44.5% going forward..

Keep in mind, we made some significant changes at the end of 2013 in our pay plan and so it's a little tough comparison historically when you are looking at the percentages because we made some conscientious decisions to fuel the business which would have an effect on our pay plan. .

Okay.

And then as we look into the Americas, if you try to pull out strong markets like Mexico and Canada in the quarter and we kind of looked into the US, it would seem like the active associate numbers are pretty good in the US and it would seem like the preferred customer numbers are probably pretty good in the US, but it doesn't seem like the revenue is growing in the US.

One, am I kind of getting to that number right? And then if you had anything else you want to add to that would be great..

So the revenue number is up year-over-year..

Quarterly..

Quarter-over-quarter, I am sorry. And as we look at the US, we do feel like there is very positive momentum taking place.

If you compare USANA versus reports that have been published by the Direct Selling Association as to the activity that’s happening in the United States, we are actually doing very well in the United States, but we are not where we want to be obviously.

But we see the correlation, especially quarter-over-quarter in increased sales, as we see our active customer count and preferred customer count stay strong, but again that’s an area of focus for us here in how do we regain momentum in this great market. .

Okay, so you’re up quarter-over-quarter and it sounds like the sales growth might be consistent with the preferred customer in distributor figures?.

Yeah, it’s very close. .

Excellent. Thank you very much..

The next question is Frank Camma with Sidoti..

Good morning, guys..

Good morning..

Good morning, Frank..

Is China the only market you had price increases?.

No..

No, we will do annual price increases in all of our markets and we will look at that based on what’s happening in the cost structure, we’ll look at the competitiveness of the product in the market and we’ll work with local management as well as local associates to determine and to get thoughts on where that should be.

So we’ll do a thorough analysis and then we’ll make those changes worldwide market-by-market. .

Okay, got you.

And did you say 5% was the price increase, the average price increase or did I get that wrong?.

Well, that’s a little bit – just a little bit below 5% and that was only in China. Each market will vary depending on those factors that we just discussed. .

Okay, got you.

Do you feel the incentives, I mean, obviously very successful with attracting new associates, do you think I guess, maybe it’s too hard to tell in the short-term, but is it the same level of quality that you’ve seen in the past as far as the associates go or does it attract an associate that tend to be shorter term with the company, just wondering if you could share any thoughts on that.

.

What we’re seeing is that it’s really similar to what we have seen in the past, there is no – there is a strong – they’re following the same trends that we have seen in the past, they’re good strong customers.

And part of the incentive tied to a continual use of the products, so it wasn’t – while we are trying to reward for new customer growth, we also tie to that the need to continue on the product to get the benefits of the product. So it was – we’re seeing similar trends to what we’ve seen in the past. .

Okay, great.

And the last question is, if you can talk about any new products that might be coming up and how you would stage that?.

We haven’t publicly spoken about any of our new products as it relates to – specifically, we do have an R&D department that is very active and we’re excited about what the future holds from a product perspective.

But we always tell our associates first and we generally do that at our international convention or an event where our sales force is there from an excitement level. So this wouldn’t be the time for us to talk about new products..

Okay, great. Thanks guys..

Thank you..

It appears there are no further questions at this time. I would like to turn the conference back to today’s speakers for any additional remarks. .

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

This concludes today’s call. Thank you for your participation..