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

Timothy Ramey - Pivotal Research Group Douglas Lane - Lane Research Frank Camma - Sidoti.

Good day and welcome to the USANA Health Sciences Second Quarter Conference Call. At this time, I would like to turn the conference over to Pat Richards. Please go ahead, sir..

Good morning. We appreciate you joining us this morning to review our second quarter results. Today's conference call is being broadcast live via webcast and can be accessed directly from our website at ir.usana.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 2018.

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 CEO, Kevin Guest; President and Chief Operating Officer, Jim Brown; and our Chief Financial Officer, Doug Hekking; as well as other executives here in the room with us.

Yesterday, after the market closed, we announced our second quarter results and posted our Management Commentary, Results and Outlook document on the Company's website. Before opening the call for questions, we will first hear brief remarks from Kevin..

Thanks, Patrique. Good morning and thank you for joining us to review our second quarter results. As reported yesterday, this was an exceptional quarter for USANA with record top and bottom-line results.

In addition to generating excellent operating results, we accomplished several initiatives during the quarter that are both exciting and important to our business. I will touch on some of these initiatives first and then review several growth strategies that we are excited about for the second half of the year.

First, we expanded our European region during the quarter with the opening of four new markets, Germany, Spain, Italy and Romania. The launch of these markets went very well and the initial operating results have been positive.

Although, the initial level of sales and customers we expect to gain from these markets is relatively small, it is helping to generate excitement within the region. As with our other European markets, we are leveraging the existing infrastructure of our regional headquarters in Paris, France to operate in these markets.

Additionally, we completed the initial phase of our WeChat platform during the quarter and recently rolled it out to our China customers. In the coming weeks, we will also make this platform available to the rest of our markets around the world.

Because many of customers around the world, outside of China, are Chinese, we expect this new platform to benefit customers in most of our markets. This new platform will make doing business with USANA much more convenient for our associates and customers and improve their overall experience with us.

Now, with respect to our strategies for the second half of the year, let’s start with our 26 Annual International Convention, that we will host in Salt Lake City in a few weeks.

This event always helps to generate energy amongst our sales force and provides an excellent venue for new products announcements, we believe this year we will be very successful. Following our International Convention, we plan to launch Celavive, our new skin care line in China, during the late third and early fourth quarter.

Celavive has been rolled out in all of our other markets and has been a hit with customers, so we are expecting a very successful launch in China. In addition to this China launch, we will also be rolling out additional complementary products under the Celavive line later this year.

Finally, we will host our Annual China national meeting during the fourth quarter and will be in Macaw this year. This event is very similar to our International Convention in the U.S. and will help generate excitement and momentum in China.

This year however, we are doing something new and selling product at the events which we believe will be very successful. In light of this, we are anticipating sales at this event to be between $8 million and $12 million which we have not had in past years.

In light of these strategies and our strong performance during the first six months of the year, we updated our 2018 outlook in our earnings release, issued yesterday after market close. Our outlook reflects our teams confidence in these strategies and the strength of our business around the world.

We look forward to delivering on these initiatives and generating another record year for USANA in 2018. With that, I will now ask the operator, to please open the lines for questions..

Thank you. [Operator Instructions] And we go to our first question from Tim Ramey..

Good morning and congratulations on just a blow out, it’s pretty impressive. I wanted to drill down on margins a little bit, because I looked back, I think these were the best quarterly EBIT margins that we have enjoyed in five years, I think it was second quarter 2013, when you were last at these levels.

See like there was expense control and associated incentive expense was lower than I thought it might be and decent leverage to the growth margin as well, I know you will enjoy less benefit at FX or you are projecting no benefit of FX in the second half, so how should we think about those margins rolling forward?.

Tim this is Doug. Yes, I mean, to your point it was just - is a perfect alignment of what we seen that was a great sales quarter. It’s just a timing of some of our expansions, just didn’t hit in Q2, we have lagged a little bit from our plan as far as our spending, and we expect to go back and spend some of that in the back half of the year.

Celavive added a little bit of incremental margin that a little bit above where we had anticipated originally. So those are a couple of things that really provide a lift there. In the back half, we are about a 15.2% operating margin which is still better than kind of what we have kind of communicated initially for the full-year.

But I think that lift that we see you know from the Celavive is just from a little bit higher top line provided some leverage benefits. Both currencies as you pointed out does provide a little bit of a headwind both on revenue and a little bit of compression on margins in the back half of the year..

And so should we think about that as - I mean I’m guessing that SG&A in dollar terms doesn’t vary a lot, but maybe there is a 3Q peak in that.

So this means maybe associate incentive expense does pick back up closer to historic levels in the second half ? Is that the way to think about it Doug?.

Yes, I think the back half of the year is going to look much more like the first quarter than the second quarter. So I think that is probably the easiest way to capitalize them..

And I know your tax rate is obviously your best estimate as the future, but I have been perhaps optimistically modeling that there would be some reduction in tax rates going forward as you address some of these initiatives to figure out where you recognize expenses in revenues around the world.

Is that just not going to be a 2018 kind of thing, am I just too optimistic on that?.

Yes , I think the 34% was really a anticipation of being able to go back and shift some of these costs.

Going forward I think there are some upsides, but you really got to go back and factor where we are paying tax and what the effective tax rates are in each of those regions generating the profits and a good portion of our business and profits are generated in China.

And when you look at the China tax rate along with the withholding tax is when we repatriate bonds. When you factor that in, it’s not too different than the rates that we are reporting..

And just its not the biggest thing, but relative to some of the balance sheet accounts and I noticed you know some compression in [PBT] (Ph) and also in goodwill accounts and everything moved a little bit down except inventories.

And should I think about that as the effect of currency translation of is there something else going on there?.

On goodwill, absolutely its currency, on PP&E we didn’t spend a level of plan in the first half on those type of activities, but currency definitely plays a role for where those assets are.

And when we built the plant and stop the plant in China with some meaningful expenditures on equipments we just changed the translation rate and it does effect with how you look at that on the balance sheet..

Okay, and my last one. Just I always ask this question, but carrying a lot of cash, no debt.

You have not been completely out of the market for the last year that the China investigation is being underway, but you haven’t been aggressive, is it a fair statement that the China investigation until that is resolved remains somewhat of an overhang on repurchasing shares?.

So Tim this is Josh and with respect to that we are not going to comment on how the investigation relates to the buyback program in any respect. And so we just can’t speak to that today..

Okay. Fair enough. Thanks for your help and amazing quarter. Thanks..

Thanks Tim..

Our next question comes from Doug Lane from Lane Research..

Hi good morning everybody. I would like to turn to the top-line, the top-line beat was pretty impressive in getting through it, at least relative to my numbers, the currency was about as expected and the leadership, the associate, customer numbers are about as expected.

So there was a big jump in productivity and I know in the first quarter we were talking about Celavive, but that wasn’t as much of an impact in the second quarter, and it’s widespread. I’m looking at each of the major regions, beginning on the top-line through better productivity.

So what sort of the back story company-wide that is showing driving the improved productivity?.

Yes, I would say the primary factor in that lift on constant currency basis was the Celavive and you saw. We ran several product promotions and we have been doing that, and that has definitely had a little bit of incremental spend there. We always go back and although very minor, we review our prices every January.

So year-on-year basis that is reflected but that is a very small part. There is really Celavive and these product promotions are really the driving force there..

When we talked about China promotions being much more successful lately, but again, are these promotions being run in the other regions similar? Can you may be give a little bit more color on what the promotions are outside of China and why they are being so successful?.

Yes, I think the China ran another one on Mother’s Day special in the second quarter that helped lift revenue by about six million in the quarter. The other markets are using this template, because they had been very successful on what we saw in China and it is really is a value offering.

We are offering some of our top selling products and it’s really free blocks on top of that, it seems to have filled quite a bit. So we are using that strategy in several of the markets and it seem to be relatively successful, it’s not to the magnitude that you see in China, but it’s still been I think well received..

Now the numbers fair that out, that is for sure. You mentioned you did seven million, I know you said that we had the pop in the first quarter from the launch and that we wouldn’t really see another kind of pop like that until it was launched in China which is end of third quarter, fourth quarter.

So where we sit, should we look for another kind of number in the third quarter similar to the second quarter for Celavive and then see the real growth in the fourth quarter?.

Yes, I think from a percentage of sales standpoint, I think that is a fair comment. I mean one of the comments we had that we would expect as we launch this to see a little of a spike, but then we expected the run rate to bill to about a 10% of sales by the end of the year.

And markets where Celavive was launched is averaging about 9.5% of sales and I think from that measure we are may be a little bit ahead of where we thought we would be at this stage..

Okay, good, good. And then just lastly, the associate incentives has come back from last year, I guess they are more in line with where they were two years ago.

Is that what we see in the back half or are we going to pretty much even out at this 45% for the rest of the year?.

Yes, I would be more in line with the first quarter, the second quarter didn’t have a little bit more of the promotional expense. So I think you probably add 20 basis points on top of your number and you are right in a relevant range what we would expect in the back half..

Okay. Got it. Thank you..

[Operator Instructions]. Your next question comes from Frank Camma of Sidoti..

Hey guys how are you doing. Just to follow-up on that last question, associate incentive. It sounded like, Doug you said its going to pick up, it sounds like more in line with Q1, but it sounds like you had more promotional activity in Q2.

Is that not accurate statement?.

Not from an incentive standpoint. When you look at some of the product specials and stuff, yes I think we have had a few more product specials and we have had at least on a year-on-year basis. But from a purely incentive type offering, we really didn’t have anything that was substantive.

If you look at the second quarter of last, we had something pretty significant that was on in China, and that is why the year-over-year comp looks quite a bit different, it’s gone from [26] (Ph) one down to 44. So that is not the common comparable and if we have one of those events we will make sure we spell it out [indiscernible]..

I think you mentioned this, the payout on Celavive is actually less, is that because the gross margin is less on the product, is that how you are doing it?.

Yes, it is and when we went through and we did a host of sales, we looked at the kind of the all the market information out there and so Celavive carried the lower gross margin with it and it also carries a lower incentive burden too. So we are somewhat margin neutral and what we would expect that from other categories..

Okay.

It is Celavive you don’t produce that in-house, correct?.

Correct..

Okay.

So that is all produce out-house and what you do in China your source in China as well?.

Yes..

Okay..

No, no we will build it in China at our plant..

Right, that. oh! You will be able to manufacture Chinese, the Chinese portion in your Chinese plant..

Yes, that is accurate..

Okay.

So would that mean that you get a better margin on the China stuff or is it too soon to tell, because you won’t be upscale?.

Yes, it’s probably twist and the tail, but I would expect maybe it would be a little bit better, their pricing structure is modestly different than the rest of the world, so..

Okay.

And then stand on Celavive, I guess is it too soon to make any comments about pre-order rates and what you are seeing there, just as far as given that I mean it’s a very competitive category obviously and just curious what customers are saying and how often they are reordering these products?.

So anecdotally speaking and what we are hearing from our customer base, this is Kevin. It’s being very, very well received. The reports coming back are extremely positive. It is too hard to quantify specifically. It’s too early to quantify it specifically.

One thing from our supplement side its based in a 28 day cycle incremental purchase and Celavive is a little bit different than that, because consumption varies based upon the user and it’s just which is a little too early to give you any kind of information that would be concrete other than just anecdotal that we are hearing that its being very, very well received..

I imagine it’s also a little bit harder or different because it’s kind of a sweeter products, right.

So to people pick and choose like what they want after the first order, you know what I’m saying like is there certain items in Celavive that they particularly like versus others or is that not the case, they kind of have to stay with their or whatever?.

Yes, so what we are seeing is that it looks like there are going to be a few flagship type products with Celavive that will have a larger percentages of the Celavive sales, but again we are watching how that mix plays itself out.

One thing I want to also bring up is that Celavive includes our InCelligence technology, which is a delivery on our personalization strategy, which differentiates this product from any others skin care product in the world and that message is resonating very well with our customer base around the world is they are out taking it to other people.

So we can’t lose that intelligence message is that the core part of what we are taking to the world right now in our flagship product in our cell essentials but it’s also the same technology that is in our skincare product..

Okay.

And are you seeing any like changes or improvements in like the type of demographic that would be or how can you I guess recruit new customers is what I would say or associates in a sales force? I mean I’m sure it’s kind of rejuvenated your existing sales force, but have you seen any and obviously you have had a growth in sales force, but as people said are choose to join USANA because they all had skincare or have you seen any of that standard?.

Well one of the areas where we have actually made a considerable investment is our technologies side which is our ability to use the social media, and social sharing aspects and some of you lends itself beautifully to that strategy and the investments we have made in technology, which lends itself to your question of a younger demographic who participates in social media.

And so again no hard numbers to give you, but to the activity we see from a social sharing perspective through technology would lead me to believe that yes we are seeing a younger demographic participate and be more excited from a product’s category perspective than we have seen traditionally..

Okay. And I guess the last question that I have is, do you think it would take to I mean you have done a lot of work on trying to turn and just talk specifically about U.S. numbers, turn U.S. numbers and obviously it doesn’t it has it where I take in beside I’m kind of real surprised by what do you think it’s going to take and turn those.

Is it just more of a reflection of direct sales kind of continuing to struggle in the U.S.

or is it more category or supplement, just wonder if you could make some comments?.

So if you look at quarter-over-quarter, we did see a lift in the U.S., which we saw some very positive signs of our strategies actually gaining some traction which for us….

Is that year-over-year or is that sequential?.

Sequential..

Okay..

And so I have great faith in our U.S. market and I do believe that we have seen a shift or not kind of we have seen a shift in the way people expect to do business with a company. They want it simple, they want it fast, they want it shop on the front door step and direct sales traditionally isn’t that.

So we are shifting from that perspective to interact with our customers in a way that they are saying they want to be interacted with and I think as we continue to execute our strategies that is something that is at the foremost of our mind is that interaction and so from a direct sales perspective, the key is figuring out how to crack that code and not compromise the distribution channel which we are committed to.

And we think we have made great strides and technology again plays a key role in that whole process and as we continued to deliver on our technology I think we will see the United States move more and more on a positive direction..

Okay, great. Thanks guys..

Thanks Frank..

At this time, we have no further questions in queue. And I would like to turn the conference back over to Patrique..

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..

Thank you ladies and gentlemen, this concludes today’s teleconference. You may now disconnect..