Patrique Richards - IR Kevin Guest - Co-CEO Paul Jones - CFO.

Tim Ramey - Pivotal Research Group Frank Camma - Sidoti Scott Van Winkle - Canaccord Genuity Eric Gottlieb - D.A. Davidson.

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 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 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 our 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. All right. I am joined this morning by Kevin Guest and Paul Jones.

Yesterday, after the market closed, we announced our third quarter results and posted our Management Commentary, Results and Outlook document on our website. Before we open the call for questions, we will hear first from Kevin, who will briefly review the quarter’s highlights.

Kevin?.

Thanks, Patrique and good morning everyone. The third quarter was another excellent quarter for USANA with strong results on both the top and bottom line. We are excited about the continued momentum we are seeing in our worldwide business, particularly with the continued customer growth around the world.

Let me highlight a few things before we move on to questions. First, during the quarter, we held our Annual International Convention in Salt Lake City, where a record number of Associates were in attendance. We are happy with the overwhelming success of our convention and the momentum we’ve continued to see following the event.

At convention, we introduced USANA’s new MySmart Foods line of products, which continues our strategy of personalization by allowing our customers to personalize these products according to their own specific needs, tastes and desires. Looking forward, we have several exciting events and announcements ahead of us.

Next week, we will hold our National China Meeting, which will be another sold out event with record attendance. This event has always generated a lot of excitement and momentum, and we expect this year to be the same. Next on November 16, we will officially open Indonesia.

As the fourth most populous country with the fifth fastest growing economy, this new market will be a great fit for our business and we are optimistic about our long-term growth potential there. Next we're looking forward to opening our new state-of-the-art facility in Beijing during the first part of 2016.

We are excited about this facility and the capacity it will give us for continued growth in China. Finally, while it is still early, I will say that we plan to make several exciting announcements and product introductions during the upcoming year, which we believe will keep USANA at the forefront of the industry.

With that I’ll ask the operator to please open the lines for questions. .

[Operator Instructions] The first question will come from Tim Ramey with Pivotal Research Group. Please go ahead. .

Good morning and congratulations on another outstanding quarter. Several questions. I don’t think I noted it anywhere in the release that you have to know what the FX impact is for the full year topline based on your guidance that would be helpful to know. .

Yes, year-to-date we had about a $38 million drag on the topline from FX. .

Okay.

And do we have a forecast for the fourth quarter, just sort of consistent with the first three?.

We anticipate we’ll have just around $15 million on headwind in the fourth quarter. .

Okay. And relative to the two events you just mentioned opening Indonesia and the Mainland China event, would it be reasonable to assume that SG&A is going to be a little bit higher for the fourth quarter as a percentage of sales? And I assume there is some discrete costs associated with that. .

There are some minor costs associated with it, and opening of Indonesia, for example, we have already seen a lot of those costs getting that set up and we shouldn’t see any much extra drag on that. Certainly, we anticipate it would start to be offset by the revenues coming in. So no real concern on that one.

The international or the National Convention in China is something that is relative to the sales that we gain from ticket sales et cetera. We don’t except a whole lot of drag on that either. So not at all a real impact, meaningful impact on SG&A from either of those two. .

Okay. And I was surprised that you didn’t repurchase shares in the third quarter given – you probably have been one of the best repurchasers of shares of any company I have ever followed, just historically shrinking your cap and the strong balance sheet.

Were you conflicted out from possession of some information or was it just a choice that you made?.

No, really more just a choice that we made. We have a – our capital expenditures in China that we’ve been looking at as far as our new facility and just looking at our internal metrics, it makes the most sense to do that share repurchase.

But that’s certainly something we are constantly looking at and we’ll continue to be a very important part of our way of returning shareholder value. So it’s certainly something that we consider very strongly. .

Okay. And then finally on promotions, your sales line has been remarkably not lumpy and you have ran a series a promotions.

Can you give us any kind of color what those promotions looking like or kind of how you’re continuing to consistently breed life into the sales process?.

Yeah, we do have some promotions planned in the fourth quarter and we’re certainly working our promotions for next year to help stimulate growth and motivate and excite our sales field and continue the opportunity for them to share and acquire new customers in their business from a product perspective. We do have a strategy in place.

So one of the areas we are moving into is the notion of a centralized approach from a promotional perspective versus a decentralized approach in allowing our individual markets to allow their culture to speak more to the promotions and we’re in the midst that plan right now.

We believe that as we grow and continue to grow more internationally that that international flair and focus is critical. And so as we move forward into the future, we’re going to see more localized contest or promotions versus a centralized one promotion for the entire world.

As we’ve studied our past promotions, we’ve seen certainly where some areas they work beautifully and other areas that’s just a flash of money frankly. And so our strategy is to continue promotions to continue to grow the business so that will continue in the fourth quarter and in the next year.

But we are going to proceed in a more localized fashion as we continue to grow. .

Okay.

I mean, recall that the fourth quarter really benefited from promotions last year, should we be thinking that’s a tough comp? I mean, obviously you’ve sustained growth starting with that quarter, but how should we think about that? And I know it’s a shorter quarter, one week less, that will play a role?.

You pointed out something important, because a lot of – I think a lot of people missed the fact that last year we had a 14 week quarter. So, if you look at that year over year comp, if you take out that 14-week we would be at a 211 million in revenues in 2014 for the quarter.

And so, if you look at the impact in 2015 from FX of about $15 million down, you're really looking at about $248 million comparison. So it's pretty, again reached growth year over year and so the momentum continues..

Good, thanks so much..

Your next question will come from Frank Camma with Sidoti. Please go ahead..

Could you obviously China, I mean the numbers were amazing, but could you just talk a little more color on what you're saying from you guys on the ground there in respect of what impact the whole economic disruption is causing?.

We still see the momentum in the business there and while as we talked in the past that this industry and this business tends to be less affected by macro events than others. In fact, we can sometimes see positive growth in our industry when macro business starts to struggle a little bit.

So we’re not seeing a huge impact still from there on our micro look at the economy. So, we are excited still and enthusiastic about China and we’re looking forward to the national convention that’s coming up here in a week..

Yeah speaking of that, you said its record numbers, can you just give us a sense of how big in thousands?.

There are pretty strong limits around how big those can be.

So we’ll have a convention that will have around 8,500 to 9,000 but the thing sells out in a couple of weeks, months in advance, which makes it challenging, but what we then are able to is, is on the heels of that go out do regionalize meetings where we’ll have very large meetings in several regions around China which creates some real enthusiasm and excitement..

Now correct me if I’m wrong but that’s the 8,500 to 9,000 level is roughly in line with your Salt Lake City convention, is it not?.

Correct..

And just staying on China.

So, baby care just to talk about that for a second, is there any opportunity to take advantage of the fact that initially the company sold products related towards obviously infants, any plans there or would be able to leverage that with the fact that obviously the loosening their policies?.

Well, as far as -- within China sale or --.

Yes, within China specifically..

There is still as far as new projects are still rigorous amount of regulations around that, but as we go to the fact that the policy on -- where was a single child now you got a two child policy and we hope to see some advantage and take advantage of that. Certainly there was a strong.

That will over time ramp up a little bit, but I think the large amount of growth you'll still see will be from the philosophy being able to take care of the individual from health standpoint from prior diverse [indiscernible] 110 years old. That's really the emphasis and the focus. So, we're looking at a lifelong approach..

Okay, and just to round it out.

I think you explained but I just want to make sure I understand this, obviously it was pretty big build and inventory is that related to the factory switchovers, if you can go into detail on that?.

Yeah, so we it's really two things. One of them is our sales certainly had continued to grow and so to sustain that and making sure that we're not having any mark outs, et cetera. We've grown that relative to the sales but also we're planning on that transition in China.

We are doing a build up there to make sure that as we move the equipment from the one facility to the new facility that we have plenty of inventory. So you will see that come down even still, where we at we’re maintaining the same terms in our inventory that we typically seen in the past.

You'll see that continue to grow through the full first quarter and then it will come down towards the end of the first quarter, second quarter back to a more normalized level for our level of sales..

Your next question will come from Scott Van Winkle with Canaccord Genuity. Please go ahead..

Following up on that last one, how much of that inventory is in China?.

Roughly about -- I don't have that number right in front me, we’ll get that real quick..

The majority of the build has been there I assume..

Well, if you look at the increase, yeah 90% of the increase is in China. If you're looking at total inventory, I need to pull that number out but the build 90% of that build is in China..

Perfect, perfect.

And then apologies, I missed the first few minutes and then I caught a comment that if you just last year for the extra week and then I think you were adjusting currency this year, you come up with like a guidance compare like 248 versus 211, did I get those numbers right or am I way off?.

That's correct..

Okay, so that's obviously good numbers 15% growth. I would assume with the strong growth you see in all your markets.

You’re just assuming, the law of large numbers takes into effect here in China going up against a tough compare and we’re not going to see kind of 90% growth in Mainland China, is that a expectation?.

That's a fair comparison. Again, we anticipate, we’ll give guidance for the 2016 in our next meeting but we would anticipate still strong growth, but if you're not going to see the triple digit growth. I don't believe that we've seen -- but still very positive and bullish on that..

And then, if you look at the China numbers again, you reported I’m just going to round numbers, 45% growth for Greater China, 90% for Mainland. I would have assumed by now that more than half of that Greater China business is Mainland. So are we seeing you now the shrinkage still in Hong Kong.

I mean, it looks like Taiwan was probably pretty good, given the currency impact you talked about.

I mean the Taiwan dollar has been the one that's been most impacted from the standpoint of currency?.

Yeah, we have seen Hong Kong really level out with fairly consistent now, we think we've found where our market is in Hong Kong, and we anticipate that we will now start to see that grow like any of our markets would and that China is growing..

And Taiwan would be the one that's most impacted by currency, obviously the yuan was down 1% year over year, but is that fair, I mean Taiwan is where we’re seeing the real impact on currency?.

There was some impact of about $2 million from China just because of the adjustment. I believe it was around $2 million in the third quarter..

And as we start thinking about Chinese currency risk with little more of a floating methodology there, how much of your cost of goods sold in China is coming from China.

I mean, obviously your manufacturing there but is everything being sourced in that market, should we consider a good match of cost of sales, if were to see any volatility incremental volatility in the RMB?.

Virtually, almost all of that is in China, so it's matching currency to currency. So we have -- we have the natural hedge over there with the fact that you have raw materials and product being sourced and manufactured in China and sold in China..

And then with a market like Indonesia, where would those products be produced, is that something that would come out of China, do have capacity or is that something that’s coming from the US?.

While we have capacity, we will not do that. One of our competitive advantages is shipping product from the US to the rest of world with the exception of China. And so the product for Indonesia will definitely come out the US..

Okay. And a couple more on the incentives line being down a little bit, I guess it was down just a touch sequentially certainly off that 46% level in Q1.

Is the variance there really just being driven by promotions or should we consider periods of really exceptional growth that there is little higher incentive rate or is it purely the promotions that kind of drive the changes in that line?.

One of the beauties of this model is that it really is a pay-for-performance and so it doesn't vary – it really is given by promotions. That’s the difference. It’s the level and expense that we're putting into the promotions.

As you look at our year-over-year customer growth, you can see that we’ve been very successful in growing in all of our regions and markets year-over-year our customer growth. And so there hasn't been the same need or emphasis to put a lot of money into the promotions.

As Kevin said, that’s still something we're going to do, but we've been able to see those incentive lines come down a little bit just strictly due to promotions grant..

Okay. And then, really pleased to see the US market posting growth year-over-year. It’s probably been a question I’ve had in the call for the last many, many quarters.

Any commentary you would add on that US business to grow, what you are seeing there, what’s the catalyst for change, something like that?.

Yeah, a few things. One we’ve allocated a few more resources from a human resources perspective in our field development group in North America and one of those areas is for our Hispanic market and Hispanic initiatives. We're seeing some traction there with some expected great results relatively speaking over the next year.

And so we see that as an opportunity for us. We're going to continue to pursue a strategy to help us more or less open a new country within country which is the Hispanic market. We’ve also taken that approach in the United States from a Chinese perspective. As you know, there are millions of Chinese in the United States and the Filipinos as well.

There are a few other demographics like that that really love our products. And we're seeing some traction in those areas. Lastly, we’ve seen a reengagement with some of our top leaders who've been with the business for years and years and years and years who are outgrowing and building.

And as we all know, this is a momentum business and if we can get our leaders to really be reengaged which they are through our field development group and through meetings that we're holding just the fundamentals of the business where we're seeing it work. We are seeing traction and we are excited.

But I love the strategy of the notion of opening markets within markets. It's very cost effective and then the last part is our strategy of personalization is also an area where we're differentiating ourselves from the rest of the pack.

And truly able to deliver personalization just not only from a product perspective, but how they are handled when they call in to how we deal with them on a day-to-day basis and so forth and so on. And so we're seeing the strategies that we've put in place for the last few years starting to move the needle which is exciting. .

Well, and Scott, if I can add to that, you look at all of our mature markets, not just the US, but you look at Canada, which had a 20% year-over-year growth in active customer account, you look at Australia, New Zealand which was at 16% growth year-over-year.

We’ve just had some tremendous growth in our mature markets and so I want to point out that again showing the momentum of this business and China’s growth is certainly overshadow of it, but I think it's a very good indicator of the exceptional products and the personalization, all that things that Kevin alluded to.

So I think that’s an important thing to not to be missed..

Thanks. And then I will squeeze one more in if I could. The Smart Foods launch, I didn’t get a chance to 10-year convention. Can you expand a little bit on it? Is it something that like the reset launch several years ago on weight loss? I know you tried the high antioxidant bar one time.

Is this weight loss focused, what do you think this kind of brings to the distributor toolkit so to speak?.

So the focus is lifestyle, it's not weight loss. We have surging groups from gen y all the way to baby boomers and they all have different and various needs. And so the MySmart Foods is a way for them to customize or personalize their products based upon their individual needs, for instance, how much protein they may need in their diet.

That changes based upon where you're at in your age and so forth and so on. The other issue is we now have the ability to customize flavors. So in Hong Kong the flavor preference is much different than it is here in the United States.

We've been able to centralize a formula as a product base, have more of a centralized worldwide global formula and then we have flavor packs that go with it. So it helps from an economies of scale perspective, but also helps customize by region on a global business that supply it out of Salt Lake City on the personalization side.

But again it’s the lifestyle that we're approaching and it’s not a focus on weight loss, although there is a weight loss component and we haven't taken away the reset with MySmart products and we will still have a very similar program that they can use as they consume the MySmart products.

Lastly, we feel like we've made a very, very good step in the direction of health. USANA is a health company. The vision of the company is health and these products have reduced the amount of sugar that we delivering in the products. We have incorporated coconut oil which is a healthy saturated fat.

And we believe that this new launch is further delivering on our mission or our vision of a health company delivering the healthiest products on the planet to customize your lifestyle. So in a nutshell, that’s the MySmart Food s’ information..

Thanks.

And do you produce powders and bars or is that a third party?.

We have some supply agreements with third party on both of those and so one of the uses of capital is to make sure we're locking down supply agreements and our cost structure. So we, on the food, it’s because of the volume it makes most sense to partner with an external supply on it..

Great. Thank you very much. .

Thank you..

Your next question will come from Eric Gottlieb with D.A. Davidson. Please go ahead..

Good morning and congratulations on the great quarter..

Thank you, Eric..

I want to talk a little bit more on FX.

When do we start to lap some of the major impacts assuming that there is no further changes from here?.

Boy, if I had the answer to that, we could get together and make a lot of money, but just if there's no further changes from here, we would think in the first quarter you're going to start to see some of the change.

That's when the bulk of those things really – the dollar started to strengthen, but even into the third quarter this year with China's move on their currency we had some impact. And because of the percent of business we have over there that will continue to impact us for four quarters until we cross over the third quarter next year..

Right. Do you have like a – looking at FX for '16, do you have any expectations? I mean, we were 18 in the third, in this quarter, and then 15 for the fourth quarter.

Are we expected to see that trickle down as we go through the year or what's your expectation?.

We really will analyze that and look at that as we go through this quarter and then we’ll talk about that in the call next quarter with our guidance for 2016..

Got it. And to counter some of the FX, I think now might be a decent time for putting in some price increases. I know you do that, I think, once a year in January if I'm not mistaken.

Would they be larger this year? Would you run the risk of losing volume and recouping more of the FX or would you account an associate growth and volume to help you through that and not offset all that much?.

There are several components to that and one of them is the associate incentive, one of them is the pricing of course and the cost structure going into the product. So we’ll analyze all of that and we’re certainly very sensitive to not want to damage our momentum because of an excessive price increase.

So we’ll look at all of those factors and typically yes, we’ll make those determinations in the first half of the year -- right around the first quarter. So those are all the factors we’ll be considering, but we’ll be very careful to do everything we can not to hurt our moment in the process..

Got it, okay.

And then Smart Food, since you’re using third-party suppliers, will you have to sell that in China?.

No, that's not a product that we have -- that will be introduced in China in the near-term..

Got it, okay. And then I was extremely encouraged by the US and Americas, particularly Canada, Mexico and also the US.

I know you touched on it a little bit with regard to the US, but could you give a little bit more color on Canadian and Mexican trends?.

Well, I think we’re seeing the same kinds of things happened and they are somewhat interconnected, for instance, with Mexico, seeing some of our leaders in Mexico come into the United States and work and build our Hispanic market. We have incredible leadership in Mexico that continues to help lead the charge of a growing business in Mexico.

In Canada, Canada has always been a market that is very product driven and our products speak to that marketplace as we continue to grow. Our product inception, customer acquisition of those who are taking our products has really been fueling what's driving up in Canada.

And we have another resurgence, which is part of our strategy when we opened France several years ago, such a strong market in Quebec area, our French and Quebec and many have been working France, but it's got them off the dime, again back in Quebec and we’re seeing a resurgence there in that region, which has been a lot of fun..

That's great. Lastly, you're sitting on a huge cash balance that continues to grow and we've been waiting to see that being put to good use. I'm wondering if you had any thoughts on uses of cash going forward..

Yes. As we continue to talk about, share repurchases continue to be a part of our strategy and we’ll continue to look at that going forward when the conditions meet what we believe is the best interest of the shareholders. We still anticipate the CapEx that we talked about earlier.

We had looked at -- we talked about 45 million in the year, all of that will still happen, there may be some timing of some of that moving into the next year, which will be on top of anything we do in 2016, but that's the next priority.

The priorities beyond that would be looking at infrastructure, continuing looking at infrastructure in China and continuing to invest in as we grow as quickly as we’re growing, we need to continue to keep up with all of our systems, so you'll continue to see our investment into IT and some of those key infrastructures for us.

So -- and then we’re always looking for strategic opportunities from a merger and acquisition if anything comes up and make sense, similar to what we've done either to bring in supply chain or to look at something like a baby care in another market. Those are the types of things that strategically we would look at..

Okay, great. And then lastly on Indonesia and then I’ll pass it on.

If you have a certain timetable on expectations for associate account at certain point or revenue contributions?.

We certainly have some internal goals and expectations, but I would just say that we would anticipate a similar experience to what we've seen in the Philippines. The first quarter, our plan is to open it up on the 16th is when we are opening that up in November.

There will be some impact in the fourth quarter, but we would anticipate over the first year, that's going to grow steadily and then within two to three years, we would anticipate that providing some meaningful sales into our business, but I would look at really what happened in the Philippines, that's kind of what we are anticipating..

Got it. Okay, thanks so much. I'll pass it on..

Right. Thank you..

[Operator Instructions] We’ll now take our next question from Tim Ramey with Pivotal Research Group. Please go ahead..

Hi, thanks for the follow-up.

Just on MySmart Foods, how broadly or how many markets will that be available in, in 2016 or fourth quarter, however you want to quantify it?.

It will be available probably and just to my mind, I don’t have it in front of me, but I'm guessing for sure the majority of our markets and it will probably be maybe 17 out of 20..

Okay.

And in the other income line, was there anything like currency hedging gains there or was that just interest income?.

Yeah.

The majority of that was in interest income that we were able to generate in some of our investments around the world, primarily some of the cash that we are holding in China to be able to help with our CapEx and et cetera over there and so we've seen better rates there than we've seen here, not great rates anywhere, but that's primarily what that is..

Okay.

And any thoughts on how the tax rate finishes up for the year?.

Well, I think we’ll be, some of it depends on the US government and they’re holding out to the last hour on approving the manufacturing, the R&D exemptions, but we would anticipate maybe dropping 30 basis points or so from where we’re at..

So something like 33 flat?.

33.7, I think we’re at about 34 right now. So 33.7 right in there..

Okay, terrific. Thanks..

Thank you..

And Mr. Richards, that does conclude the Q&A session for today. There are nobody else in queue. I will leave the call up to you for additional comments or closing remarks..

Great, thanks, Ron and 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..

Ladies and gentlemen, this does conclude the conference call for today. Thank you for participating. You may now disconnect your lines..