Patrique Richards - Investor Relations Kevin Guest - Chief Executive Officer Josh Foukas - Executive Vice President of Legal Jim Brown - President and Chief Operating Officer.

Timothy Ramey - Pivotal Research Group Frank Camma - Sidoti & Company, LLC.

Good day, everyone, 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 Mr. Patrique Richards. Please go ahead, sir..

Thank you, Denise. 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 our outlook for fiscal year 2017.

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 our Chief Executive Officer, Kevin Guest; our President, Jim Brown; our Chief Financial Officer, Doug Hekking; and other executives. Yesterday, after the market close, we announced our first quarter results and we posted our management commentary, results, and outlook document on the company's website.

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

Kevin?.

Thanks, Pat. And thank you, everyone, for joining us to review our first quarter performance. I'm pleased with our first quarter results, which excluding some incremental expenses were essentially in line with our top and bottom line expectations.

Importantly, our total customer base continues to grow, which remains our highest priority and the focus of our 2017 growth strategies. Accordingly, our fiscal year 2017 outlook remained unchanged. Next, I'd like to welcome Doug Hekking, who as we announced yesterday has been appointed CFO.

Most of you are familiar with Doug and know that he has been with USANA since inception and has played a big part in our success over the years. He served in several management roles over the years, including a brief tenure as CFO. And we're pleased to have him step in once again. I'd also like to thank Paul Jones for his years of service as CFO.

For some time now, he's been fulfilling both the CFO role and his role as Chief Leadership Development Officer. He will now be able to entirely focus on this important role going forward. Now, before opening the call for questions, I'd like to comment on the anonymous short seller blog-post made last week.

Typically, we don't respond to short seller reports, particularly anonymous ones. We felt however, in this case, it was prudent to provide clarification. The blog-post contains distortions of fact which lead to misleading conclusions.

While we have no intention of responding to each of the various claims contained in the blog, we cite several examples of distortion in our management commentary, results and outlook document, which we posted on our website after market close yesterday and subsequently filed with the SEC.

The most important clarification is that our China business continues to operate as it has historically and in the ordinary course of business. BabyCare's Associates are buying and selling products as well as enrolling new customers.

As we reported yesterday, BabyCare generated 21% constant currency sales growth and 80% total active customer growth year-over-year for the first quarter.

Additionally, BabyCare is not subject to any new regulatory mandates or decrees from the Chinese government and the Chinese government has not imposed any new restrictions on BabyCare's cash and liquidity or its ability to repatriate cash to the U.S.

With that, I'll finish by telling you that I'm confident in the strength of our business in China and all around the world. We are pleased with the continued advancement of our technology and science, which is helping us to further personalize our products as well as the overall experience of our customers that that they have with USANA.

We look forward to making additional exciting announcements later this year and believe that we are on track to producing another record year for USANA. Now, I'll ask the operator to please open the lines for questions..

Thank you. [Operator Instructions] Our first question comes from Tim Ramey with Pivotal Research Group..

I wonder if you can give us any update on the status of the internal investigation, any timeline including that. And I know you self-reported to the SEC and I believe with the DOJ as well.

Has there been an active SEC investigation launched into the activities in China?.

Good morning, Tim. This is Josh. So with respect to the internal investigation, we can't provide further comment at this point, especially substantive comments. The investigation is proceeding according to our schedule.

And we will have a disclosure that appears in the 10-Q that we'll file shortly after this call, particularly on the internal controls and what we're doing there. But aside from that, we can't comment further right now on that..

Okay. And I was just wondering about the reclassification of actives to preferreds in the U.S.

Can you speak a little bit more about what was the impetus for doing that? And is there any plan to do that in other regions?.

Well, the answer to that is, yes, we've always had a focus on customer, customer acquisition and that area of our business.

The ability for us to further communicate more effectively to those who are classified as customers helps us service them better, helps us to be better in our communications and strategically we want to continue to increase our focus and strategies on customer acquisition along with our focus on associate growth.

So, yes, we're going to continue to roll that out and continue to grow and take that globally..

Tim, I think it's also fair to say that we've been looking at this data for several years now, and really trying to make sure that we understand some amount of detail. And I think that from the data we see it's pretty clear that we're just having these customers get classified in the appropriate customer bucket..

Sounds good. And in the document you filed last night, there was some discussion of the strong gross margin being related to some specific FX. But that was kind of the biggest moving part in the report. I wonder if you think that looks sustainable for modeling purposes or is it just too hard to say on a currency basis..

No, I think the first quarter is definitely lower than what we'd expect for the rest of the year. I think we'd reiterate what we said at yearend, that we'd expect gross margins to be pretty similar in 2017 to what they were in 2016. It's just some timing - go ahead..

So the gross margin would be lower, expenses would be higher, am I understanding it correctly?.

Correct. Yes, yes, yes, so the gross margin to be in line with what we saw for 2016, yes..

Okay. All right. And you didn't buy back stock.

I'm assuming that's because of the internal investigation, is that a policy decision that you've taken to extend the share repurchase while the investigation is under way?.

So, Tim, this is Josh again. Yes, we - the share buyback is something we will continue to evaluate. But, again, as it relates to the internal investigation, not going to comment on that right now and with respect to the buyback..

Okay. Thanks so much..

Our next question comes from Frank Camma with Sidoti..

Hey, good morning, guys..

Good morning..

Hey, can you update us on the factory in China? Is that fully up? I know you had the grand opening and everything, but is that fully operational producing all the SKUs you want there?.

Yes, this is Jim Brown. It is fully operational. Like you said, we had a grand opening ceremony beginning of the year. We're up. We've seen improvements in operations over. We really started that in the end of last year. But we're fully functional now. We have the products in that facility now and up and running..

Okay. And a related question to that, given the fact that the factory is open and looks like the China sales numbers are pretty strong. What accounts for - the inventory was a little higher than I would have thought. I thought you would have kind of bled some of that off. It's actually crept up from the end of the year.

And I was just wondering what's driving that?.

Yes, Tim, with the promotion that we ran in the tail end of 2016, that triggers some flags in our forecasting system. And so, we bought on those forecasting signal, so it's probably a little bit higher than what we'd like to see. But you'll see it come down pretty normalized fashion as the year goes on..

Okay, so you didn't run - that actually was another question.

So you didn't run any promotions in that market, then it sounds like or nothing meaningful that would have led to the sales or [do the same things] [ph]?.

We did in the fourth quarter 2016. We did not in the first quarter of 2017..

Okay. And then, I guess, my last question is just, if you could make any comments on your build-out, because I know you've been making some investments on the tech side. And I think you actually called somehow continued investment.

But like specifically as it relates to addressing a stronger way to use - for your Associates I should say, to use social media in selling the products..

Yes, this is Kevin. We see technology as an opportunity area for us here at USANA and we continue to invest. From a technology perspective, the world is moving more and more to mobile, operating on their phones. In China, WeChat is a way of life. We're seeing other markets around the world incorporate other forms of social media.

So our investment continues to move forward in technology. And where we're focusing is simplicity to simplify business, to simplify purchasing products from the company to simplify the ease of doing business with USANA through technology, through social media.

And then, also helping our customers and our Associates manage their product as well as their business usage through technology. So we're continuing to invest in those areas. We will launch a few new platforms this years in those areas as we stated in our documents, that we believe will have an impact on the business in a very positive way..

Okay. Last question if I could is just on specifically the U.S. market. I was wondering - obviously like direct selling overall has kind of been challenged over the last couple of years in U.S. specifically.

But I was wondering if you were forced to kind of - because at the same time sales in multivitamins, at least interest from consumers, it seems like have - I don't want to say declined significantly, but the interest level has perhaps gone down a little bit versus maybe like a specialty supplement.

Do you think it was either - could you point to whether which was like the greater cause for the decline over the last year, like was it direct selling perhaps or was it sort of the category, just trying to parse that?.

Well, as you stated, the United States, the U.S. is a struggle for many of those in our category, in our space. We still see a very heightened enthusiasm for the products that we offer.

Strategically in the U.S., we started implementing what we talked about last quarter, which is to look at our three different segments, market segments, which will be Chinese, Hispanic and English speaking.

And really focus on those three groups and speak to them in a different way with a different approach and a different cultural approach to how we present the products and the business to them. We believe that we are beginning to see some very early positive signs of that strategy, having a positive effect in the United States.

And as we look at North America, yes, we look at multivitamins in and of itself as a challenge, as an overall category. And where we're headed is more of a lifestyle perspective and a holistic approach to health overall, because the notion of health and leading a healthy lifestyle is not declining.

And as we leverage the sweet spot with USANA with relationship to our vision of the healthiest family on earth, we believe that we will see some positive moves in those areas..

Okay. Great. Thanks, guys..

Thanks, Frank..

And there appear to be no further questions in the queue at this time. Mr. Richards, I'd like to turn the conference back over to you for any additional or closing remarks..

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

Ladies and gentlemen, that does conclude today's presentation. Thank you for your participation. You may now disconnect..