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 Patrick Richards. Please go ahead. .

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. Shortly following the call, a replay will be available on our website. .

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 fiscal year 2016.

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 our Chief Executive Officers, Dave Wentz and Kevin Guest; as well as Paul Jones, the company's Chief Financial Officer. .

Yesterday, after the market closed, we announced our first quarter results and posted Management Commentary, Results and Outlook on the company's website..

Before opening the call for questions, we'll hear first from Dave, who will briefly review the quarter's highlights.

Dave?.

Thanks, Pat. Good morning, everyone. We're pleased to be with you this morning to review our first quarter results. I'll keep my comments brief, and then we'll open up the call for questions. .

First quarter was certainly a great start to another exciting year for USANA. We generated top line growth of 9.6% and reported record net sales, which are particularly impressive, given the tough year-over-year comparable and continued headwinds from a strengthening U.S. dollar that reduced net sales by more than $14 million. .

On a constant currency basis, net sales for the quarter increased 16%. On the bottom line, EPS grew 18% compared to a year ago. Excluding the currency impact, earnings per share would have increased an estimated 38% year-over-year. .

More importantly, we ended the quarter with a record number of Associates and Preferred Customers. In fact, our total active Associate base is up by more than 16% from a year ago, ending the second quarter at 437,000 active Associates.

This is a significant accomplishment as our primary goal remains to improve the health and nutrition of as many families and individuals as possible. .

During the quarter, we also continued preparing to move to our new manufacturing facility in Beijing. This new building is a state-of-the-art and significantly increases our manufacturing capacity and office space in China.

To manage inventory and help ensure a smooth transition, we did not offer any sales incentives or promotions in China during the quarter. We are on schedule to begin shifting production to this new facility later this year and are prepared with sufficient inventory and headcount to make the transition in the coming months. .

Most recently, we introduced our new MySmart Foods product line to a record number of Associates and customers at our Asia Pacific Convention in Singapore last week. These products will be launched in the U.S. and Canada markets this month and many other markets throughout the remainder of 2016.

Additionally, we're especially looking forward to making another new and exciting product line announcement later this year, which we believe will take USANA's products to the next level and keep USANA at the forefront of nutritional supplementation. .

Finally, we are reiterating our guidance. This guidance represents solid top line growth in the range of 11% to 14%. And given the strategic investments we're making during 2016 to accomplish several key initiatives, we expect EPS growth of 6% to 13%. .

I'll finish by telling you that I'm confident in the strength of USANA's business around the world and excited about the product launches we will make in the coming months. .

Now I'll ask the operator to please open the line for questions. .

[Operator Instructions] We'll go first to Tim Ramey with Pivotal Research Group. .

I was curious, Nu Skin reported last week and made a change to their guidance based on sort of stabilizing FX, and it would appear that you would have the same sorts of benefits. I didn't see any call out in terms of what your thoughts were in terms of changes in FX for the remainder of the year.

Would you have a moment to talk about that?.

Sure. Thanks, Tim. As we look at the first quarter, we certainly saw some modest improvements in what we had projected, but not enough of an improvement over our projections to cause us to go outside of where we originally guided. .

Okay. And obviously, everybody is watching China. China performed very well.

Can you talk about what's driving that? Is it the number of products that are authorized in China? Is it more geographic reach? Is it presumably, there's some lever that is -- you're pulling that continues to give you great performance there?.

China continues to grow organically. As we mentioned, we're not putting fuel in the fire. We're not doing a lot of promotions and contests and other incentives right now just due to the transition to the new manufacturing facility and wanting to maintain good customer service. We're also working really hard to build up our management team.

We've grown from a $15 million to a $370 million company over there extremely fast and trying to put the infrastructure and people in place to manage this new size business.

So we want to make sure that we're able to continue great customer service, great product supply, not any back orders or create anything that would get in the way of our distributors when we do start to run again. So we're just watching it grow organically, adding more families, adding thousands of new families in China every week.

And it's just a very organic growth with no push or influence from us, which is very nice to see that, that's a baseline-type growth, not once we get the manufacturing and infrastructure and management team developed more this year where we can hopefully then turn up the volume a little bit there and get it going a little faster, knowing that we can sustain that growth.

.

So not particularly related to number of products authorized? How many products do you... .

No, no, I don't think it has anything to do with the number of products that we have. I mean, we do have -- we do offer, I think, more products in just about any company over there registered nutritional products.

And so we're very proud of our science focus in China and our ability to have a wide variety of products over there, which I think attracts customers to us. But it's not product launches or new products that are driving this growth. It's -- They're taking the existing business, the existing products and taking it to more people. .

Great.

And just finally, on the change in accounting that impacted the tax rate, is that a one-off impact to the tax rate, or should we expect tax rate to be maybe a point lower than previous thoughts?.

So on the new accounting standard, traditionally, what's happened there is that we would do an estimate of what those expenses would be using the Black-Scholes model, and those would be expensed through the income statement. But any variance from that would be written off through the equity statement on the balance sheet.

And so you would never really see the volatility in the expense to that, because it would go directly to the balance sheet. This change that will become mandatory that all companies adopt at the end for 2017 now requires that, that variance in expense gets adjusted to the income statement in the form of tax adjustment to the tax line.

And so by nature of that pronouncement, that standard, we will see volatility in the earnings per share based on fluctuation and the actual expense versus the projected expense using the Black-Scholes model. .

So higher stock price equals higher tax rate in a given quarter?.

Actually just the opposite. A higher -- so if the stock price is higher than what was anticipated with the Black-Scholes projection and it gets exercised at that point, there would be a tax benefit to the company; whereas if it were just the opposite, if it gets exercised below what that Black-Scholes estimated for the cost, you would see a tax hit.

And so that -- we will see some volatility. We chose to adopt that early for a couple of reasons. One is to keep it simple. It really had a neutral effect on our EPS in the first quarter. And everybody's going -- mandatorily, we'll be putting that in place in 2017.

And would then be required to retroactively relook at those numbers for 2016 to have an equitable comparison. And so rather than do that, we just adopted early. .

We'll go next to Eric Gottlieb with D.A. Davidson. .

I do have a few of them. So MySmart Foods, I guess, I'll start there.

Do you have any internal sales projections?.

I do not have any front of me. We are looking for this to be an enhancement to the formulations we had. We'll hope to continue to drive the foods line harder going forward. But no, I don't have any projections, I apologize. .

Are these going to be in addition to or instead of certain existing SKUs? Are you adding to it or taking some out?.

We're replacing our shakes and bars with new formulas of shakes and bars. .

Got it, okay.

The launch later this year that you alluded to, is that going to be a food item as well, or you're not conveying that?.

Did you sense the silence?.

Yes. .

We're looking forward to bringing that exciting surprise news to all of our distributors and the public at our convention in August. So... .

Okay, fair enough.

And then scope, as much as you can tell me, is this going to be larger or smaller than the MyFoods -- MySmart Foods initiative?.

Much larger initiative for us. .

Okay.

And in China as well or just in the U.S., or we're just worldwide?.

We're going to take it worldwide as fast as possible. China, of course, is the most difficult with the 3- to 5-year lead time on all new products. That's the time required to go through the registration product of a new -- registration of a new product.

And so China is a different animal for us, and we will be bringing new products to China that we've had in the works for years. And we can take these upgrades and new products there as soon as we can, but that takes a long time, so it's a huge delay in between. Maybe when the U.S. will launch and then China will launch. .

Fair enough.

And you had said that you held off on promotions in China due to -- is there any timetable for those picking up?.

We're just -- we want to wait to make sure the manufacturing is transferred over. We believe we know the timeframes that would take to get permits and products registered and all that. But with the governments, we don't want to be too presumptive, and there could be delays. And so we hope to get those permits started toward the end of this quarter.

But does it take the 1 to 2 months we think or does it take 6 to 9 months, you just -- you don't know with the Chinese government. And so we're going to wait. As soon as we get everything switched over, we'll begin pushing, but we're not going to guess exactly when that'll happen. .

Got it. And as far as the percentage of Associate Incentives, I didn't really see any material difference, and we didn't have China promos there.

Is there anything going on? Can you give more color?.

Yes, we had estimated that we'd be between 44%, 44.5% on our Associate Incentives line. And as you see, we're a little bit higher than that. We're -- so we would anticipate it will continue to be around the 44.3% to 44.5% through the year. Of course, it ebbs and flows a little bit. We are watching that very closely.

We have had some increases to some of our incentive trips and some of those things simply due to productivity and the success of our Associates around the world. So we're watching closely, but that's what we'd anticipate being. .

Okay, great.

And then the $66 million on the line of credit, how much interest are you paying, and how long do you think it'll stay there?.

It's -- the interest rate is... .

Is this about $0.5 million in other income?.

It's about 1.4% that we're paying on that. And as far as how long we'll be on that, it's really a timing issue as you look at our cash flow. Obviously, cash from China is a little bit delayed as we look at the way we bring that back. And so it's a timing issue.

And we would see or anticipate being able to move off of that line as we are able to bring some of that cash back. .

So the rationale was moving cash back from China to the rest of the business, it takes some time and you need to -- and this was to basically get in front of that. Is that right, or is it too... .

Right, exactly. .

Okay. I think that's it for me. I appreciate the color. One other thing, sorry, and then I'll leave you. The guidance range, $0.55 is a spread between the top and the bottom. Historically, you've done anywhere from $0.20 to $0.35 rough estimates. Now that they're -- we're one quarter in, we're still at a $0.55 range, and I'm wondering why the variability.

What's different about this year that makes you even with one quarter in?.

Well, we still look at the fact that we have a wide -- some speculation in our FX. We're looking at the impact that -- the change the top line on that. And so as we tighten and see what we're doing on the top line, we'll see that bottom line tighten up as well.

But a lot of that has to do just with the leverage in sales and understanding what will happen there. .

Yes, the big question is FX, but also as is there with China, how soon can we begin pushing again there is a big question for us. The manufacturing facility is going to be done in the next couple of weeks, but it's just that permitting process of when we can actually start utilizing that. That's the big question. .

It's likely, John, those -- that if we want to make sure we can tighten that top range to make sure we know where the leverage will be on the earnings per share. .

And inventory being high again, that's because of a new plant in China?.

Absolutely. That's a factory, making sure we're in place for the transition. .

We'll go next to Frank Camma with Sidoti & Company. .

So can you -- you spoke last time about the various initiatives that you're doing for this year. I was just wondering if you could drill down a little more on sort of what the additional -- you called out some specific cost with FX.

But I'm talking about the actual R&D spend, the things that you might have spent on that you weren't able to spend last year, like your IT spending.

Is there any way you can give us more color on like how much you spent in the quarter on those types of things for future revenue growth?.

Go ahead, Doug. .

Yes, Frank, so most of the lift that you saw on our year-over-year on our SG&A was related to those events. Obviously, the IT, I think, we'd get bodies in place as soon as we can. It's just -- it's tough to find good resources out there, so we're actively looking at that.

We're -- we've been more active in our R&D recently here with some of these product promotions coming out and some of our marketing spend, so right in line with those bullets you had on the MCRO. We're following that path. But that lift that you saw in year-over-year spend was primarily attributed to those activities we outlined. .

Okay.

And what do you think now that the China factor is basically over, as Dave said, what do you think your total -- still the same number in your total CapEx spend for the year?.

Yes. I think we said $30 million to $35 million at year-end, in that range. .

All right. And wanted to ask, was there any obviously big revenue growth here.

But how much of that was from pricing, because you typically do pricing at the beginning of the year, right?.

Yes, we typically do and very little. We had a modest increase of around 2%. So it was not a huge impact to the overall sales. .

And no price increases in China. .

Correct. .

Okay, that's good. I mean, important to know. So the Chinese economy, obviously, not really having any slowdown on your company.

So I was wondering, Dave, what's the biggest thing that kind of keeps you up at night on that business since it is obviously your biggest market?.

With China, I'm more optimistic and excited than ever. We've brought in a new President for the future, who was -- who came into operations as a VP. And it was so fantastic, we promoted them to President, when was it, beginning of the April.

And we are just -- the communication, the understanding of the business, the understanding of this individual, of the industry has us very excited. And he's assembling a big -- a professional team that can handle a business of this size, and we're excited about the people that he's bringing in.

We're excited about his relationship with the field, his understanding of the business plus operations since that's why we brought him. He's a got a full understanding of the business, and we are getting more and more excited about what will be accomplished as we transition more from the old culture to our culture over there.

And we expect to see great things. China always worries us, because it's unknown, but it's now known to us more than ever before and we have a better understanding of what challenges and where to work and feel more confident now with the understanding.

And we're talking more to other players in our industry and comparing notes and understanding where we stand and feel better, I think, than we ever have in the last 6 years about China and knowing how to manage it and how to work within that culture and that system. So I'm extremely excited Sid [ph] is going to do a fantastic job for us.

And I have a lot less concerns about China than I did, say, a year ago. .

Great, great. All right, final question, just a follow-up on the inventory level, although you've been pretty clear about that.

But assuming the factory comes online by the end of this quarter, end of June or so, how long does it take, do you think, to kind of -- to normalize the inventory level?.

I'll turn it over to Jim Brown to answer that. .

Yes. There's going to be a transition that goes over months between the 2 factories. We will see some positive gains by year-end, but it will go into the first quarter of 2017 before we get more to a normalized state and we feel comfortable with that. .

And we'll take a follow-up from Tim Ramey with Pivotal Research Group. .

Just a couple of more points.

On the new guy in China, did he come from another MLM, or where did he come from?.

Yes, he was at a non-MLM when we got him, but he had worked in the industry prior, has a lot of contacts and completely understands the industry and wanted to get back into it, especially with USANA. When he saw that opportunity, he knew it was the company he wanted to get back into the industry with.

So he understands the business inside and out and has fantastic relationships with people he worked with in the past, other companies. So he'll bring a lot of experience there along with a great communication between Salt Lake and Beijing that we're now seeing. .

Can you say where he came from?.

He was with T. Shanonoe[indiscernible] and now Mirinda. .

And you alluded to the cash being tied up in China.

What percentage of cash, I think there's $150 million on the balance sheet right now, would be free to use in the U.S.? What percent is perhaps stranded -- or not stranded, but offshore that isn't yet repatriated?.

We have about 2/3 of what's shown there in China, and it's not stranded in any way. It's just a matter of timing on it. In most countries, we can repatriate much quicker there. It would be a 12- to 18-month lag on getting that back. But yes, currently, what you're looking at, about 2/3 of that would be in China. .

Okay. And there were some new rules that were promulgated in China on supplements. And just wondering what color you can give us on in terms of how they're impacting the types of products or just the ability to register products in China. .

Well, we continue to work very closely with the CFDA and all the regulators over there. And it's a moving target a little bit, and we continue to stay close and enforce and comply with everything as it's interpreted and enforced.

We're continuingly to look at the product formulations to make sure that they're in compliance and in line with what is expected and what those new changes have been. In some respects, they're not really even new. They're just now saying we're going to enforce them differently than we have in the past. And so again, that's how things move over there.

And we're constantly working on that and have a full team fully engaged in that. .

And China's had more new product launches than any other market over the last couple of years. And so they're good for a while. I believe throwing more and more items just confuses and makes more complicated when the main goal is to get them on our essentials. And if they add a few extra supplemental products on top of that, that's great.

But the essentials are the base, and that's where we're adding new families and giving on those products. So they've had a lot of great products launches and excitement created there that we don't need to launch new products there for a while. .

And if you had to say what are the Chinese focusing on in terms of the formulations, is there anything specific you can point to?.

USANA just has a very good reputation for quality products manufactured to the highest standards. We've -- the facility that we're building over in China is as good, if not better, than here in Salt Lake. And we have the best in the world here in Salt Lake.

So they know that the quality of the products is something they can trust, and it will be the most beneficial to the cells of their body that they can possibly be.

And just that reputation and confidence that allows them to share it with people around them allows them to keep spreading the word of these products to everyone they meet and a lot of people over there to meet. .

Yes, no doubt. You're very well known to have very high manufacturing standards.

It's -- I guess, what I was just focusing on is what are the bad actors if they're looking at doing that would be kind of a bright line?.

I don't understand the question exactly. .

Well, obviously, there's greater focus on formulations, and they're looking for something. They're not looking for -- yes, I would acknowledge I would guess that your formulations are very clean. But there's -- there must be some -- something thematically that they're looking at that says, "Hey, we don't want an etc.

or we don't want this or that or is there anything you can point to? Or is it just stricter regulation?.

Yes, Tim, I think in general, they're trying to clean up an image as a country of trying to make sure that the products and things that are manufactured in country are of a quality standard. And so I believe that the safety issue is a huge issue for them over there.

And we actually -- I think, it lends very well for us in our desire to have top quality. I think this in the end really helps us, because if they'll be consistent in applying those standards across the board, we're going -- we believe we'll do very well in that and it'll continue to differentiate us with safety and quality. .

And the Beijing facility, I assume, will have a similar -- I mean, I think in the U.S., you talked about holding yourself to pharmaceutical-grade manufacturing standards. I'm sure there's different kind of... .

Yes, absolutely. Absolutely. We're getting the latest and greatest equipment, the newest technology. This thing is built perfectly for our business, designed around what we've learned over the last 23 years here in Salt Lake.

And so as I said, the products in China will be manufactured as well as Salt Lake, if not even better, due to the new equipment technology that we were able to start with over there. So you wouldn't be able to tell the difference in quality at all between a tablet that came out of the plant here and a plant there.

You would have no idea on geography based on the protocols that we're following and the testing -- the rigorous testing over and over throughout the process that we do on both places. We're very confident.

Our million-dollar guarantee for athletes is something that we don't think twice about, because we have no concerns whatsoever about the quality or the cleanliness of our products. We know exactly what's in them. .

At this time, I turn the call back over to Patrique Richards for any additional or closing remarks. .

Well, we thank you all 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. Have a great day. .

That does conclude today's conference. We thank you for your participation..