USANA Health Sciences Q2 2009 Earnings Transcript

Jul.29.09 | About: USANA Health (USNA)

USANA Health Sciences, Inc (NYSE:USNA)

Q2 2009 Earnings Call

July 29, 2009 11.00 AM ET

Executives

Riley Timmer - Vice President of Finance

Fred Cooper, Ph.D. - President and Chief Operating Officer

Jeff Yates - Vice President and Chief Financial Officer

Fred Cooper

Analysts

Timothy Ramey - D.A. Davidson

Scott Van Winkle - Canaccord Adams

Rommel Dionisio - Wedbush Morgan

Mimi Sokolowski - Sidoti & Company

Operator

Good morning, ladies and gentlemen. Thank you for standing-by. Welcome to the USANA Health Sciences Second Quarter Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Wednesday, July 29, 2009.

I would now like to turn the conference over to Riley Timmer. Please go ahead, sir.

Riley Timmer

Hi. Good morning, every one. Today's conference call is being broadcast live via webcast and can be accessed directly from our website at www.usanahealthsciences.com. Surely following the call, a replay will be available on our website. As a reminder, during the course of this conference call, the management will make forward-looking statements regarding future events for the future financial performance of the company. Those statements involve risks and uncertainties that could cause actual result to differ perhaps materially in your results projected in such forward-looking statements. 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.

With that, I'll turn the call over to Fred Cooper, our President and Chief Operating Officer.

Fred Cooper, Ph.D.

Thanks, Riley. Good morning, everybody. It's a pleasure to be here this morning to report a fantastic quarter for USANA. These calls are always more enjoyable for me when we're reporting good news and record setting results. Let me quickly take you through the highlights of our quarter before I turn the call over to Jeff Yates, who is our Chief Financial Officer to go through the details with you.

During the second quarter, USANA reported a record quarter in terms of sales at a 112.1 million and a record increase in the number of active associates. This number grew by 18.3% to 200,000. These records were achieved notwithstanding the current economic recession and negative impact of currency exchange rates.

As you saw in the press release, excluding currency, sales would have been as high as 121.2 million for this quarter. These figures indicate that our two primary associated incentive programs, the Elite Bonus and Matching Bonus are working as intended.

During the second quarter, we reduced the amount of spent on SG&A when compared to either last year at this time or our first quarter.

I feel this decrease demonstrates our ability and our commitment to manage cost and SG&A expenses. So with that, I've like to turn the time over to Jeff to provide you with the financial details for the quarter.

Jeff Yates

Thank you, Fred and good morning, everyone. As Fred indicated, the second quarter was a great quarter for USANA. I am personally pleased with our financial results past with the performance of the company in light of the challenges that Fred has mentioned.

As what indicated, we are reporting record numbers in both sales and asset associate accounts. Net sales for the second quarter reached a $112.1 million, which is an increase of 2.6% when compared with a $109.2 million reported for the second quarter of 2008. That growth in net sales would have been higher had currency exchange rates remained at the same levels as in the second quarter of last year.

As you are well aware, the U.S. dollar has strengthened significantly since then. Consequently, our net sales for the second quarter of 2009 were reduced by 7.5% or $9.1 million. As Fred mentioned, excluding the impact of currency, net sales for the quarter would have been just over $121 million.

We have mentioned before the significant impact, unfavorable exchange rates has on our top-line, through the first six months of 2009, this has reduced our net sales by almost $20 million. For the balance of the year, we are modeling for currency to negatively effect net sales by an additional $4.5 million.

In the fourth quarter, however, we expect that the currency comparison for most of our markets will be about even or slightly favorable. I'll totally expect the full year impact on sales from the stronger U.S. dollar to be about $24 million. Of course and importantly these estimates are based on exchange rates as of the end of the second quarter.

Now, let's cover the second quarter regional results. Net sales for the second quarter in North America decreased by 4.8% or $3.2 million to 67, excuse me 62.7 million compared with the prior year. Once again, negative changes in exchange rates with a primary cause of this decrease reducing sales by $4.2 million. Excluding the currency effect, net sales in North America increased by 1.6%.

Notably, excuse me, local currency sales increased 29.5% in Mexico. Well sales in Canada decreased by 3% and sales in the U.S. remain relatively flat decreasing by only 0.5%.

Active associates in this region increased year-over-year by 10.4% to a 106,000. I must say, I am most pleased with this performance as growth in active associates is a leading indicator of our momentum.

Sequential quarter net sales in North America, increased 12.2% and active associates increased 9.3%. Most of this growth came in the U.S. where net sales increased 9.4% and active associates increased by 7,000.

Once again, we're delighted to see this increase in active associates which can be primarily attributed to the recent compensation plan enhancements.

Now turning to our Asia-Pacific region. For the second quarter, net sales in Asia-Pacific increased just over $6 million or 14% to $49.4 million, excluding the impact of foreign currency, sales in Asia-Pacific increased by 25.2%.

This increase was due primarily to double-digit growth in Hong Kong, South Korea, Malaysia and Japan. Sales in the Philippines, during the second quarter, totaled $1.6 million. The number of active associates in Asia-Pacific increased almost 29% to 94,000, that's up from 73,000 during the same period in 2008.

Once again Hong Kong, Malaysia and South Korea were the main contributors to this growth. The Philippines also added 5,000 new associates. Sequential quarter, net sales results in Asia-Pacific were also impressive increasing 19.2%. Additionally active associates were up 8% on a sequential quarter basis. Clearly this region is continuing the set the pace for growth for our company.

Earnings per share for the second quarter were $0.57, a decrease of $0.04 compared with the second quarter of 2008. As with net sales, EPS was impacted negatively by a stronger U.S. dollar, in fact we estimate that currency fluctuations reduced EPS by approximately $0.14 for the second quarter.

Additionally higher associates incentives and a lower gross margin contributed to the decrease in EPS and this decrease was partially offset by lower absolute and relative SG&A costs. A $0.04 benefit due to fewer diluted shares outstanding and we benefited by $0.02 from a lower affected tax rate.

Now looking through the major line items on the income statement, you'll see that gross margins for the second quarter decreased as a percentage of net sales to 78.8% compared with 80% for the second quarter of 2008.

This decline of a 120 basis points can be attributed to the negative impact of currency changes coupled with the slight increase in product costs. And this decrease was partially offset by price increases on a few of our products mostly in Asia-Pacific and lower freight cost.

Associate incentives for the second quarter of 2009 were 44 -- 44.9% of sales compared with 41.8% for the second quarter of last year. This increase was due to the two compensation plan enhancements introduced in August of 2008, which were designed to drive top-line growth and as we can see are effectively doing just that.

Selling general and administrative expenses, relative to net sales decreased to 22.1% for the second quarter of 2009 compared with 23.6% for the second quarter of the prior year. On an absolute basis this represents a decrease of about $1 million dollars. The year-over-year decrease in SG&A was due mainly to a decrease in legal and other professional services, lower promotional expenses and a decrease in rent, travel and wage related expenses.

Partially offsetting these decreases and SG&A were an increase in equity compensation expense and maintenance and depreciation expenses. The effective tax rate for the quarter was 34.5% representing a 220 basis point improvement from a year ago, and we are modeling for a 34.5% tax rate for the full year of 2009.

Now regarding the balance sheet, cash at the end of the second quarter was $11.2 million compared with $13.3 million at the end of 2008. And during the quarter we used our excess cash to pay down the balance on our line and we did not repurchase any shares this quarter.

We finished the quarter with inventories of $24.7 million compared with $23.9 million at the end of 2008. Capital expenditures for the second quarter totaled about $940,000. We still expect CapEx to be less than $6 million for the entire year.

Finally in our press release yesterday, we updated guidance for the full year of 2009 and once again we are optimistic about our second quarter results and are raising our financial guidance for the year. We anticipate however continued headwinds from unfavorable currency exchange rates and difficult economic conditions, particularly in North America. Accordingly, we now project consolidated net sales for 2009 to be between 415 million and $425 million, although we anticipate local currency sales growth in most markets during the year, we do expect unfavorable currency exchange rates to reduce sales, as I mentioned by as much as $24 million on the year.

We now estimate earnings per share for 2009 to be between $1.95 and $2. Notably, this projection reflects a reduction in EPS of as much as $0.24, as a result of currency.

All right Fred now, back to you.

Fred Cooper, Ph.D.

Thank you, Jeff. You know it's positive you saw in I'm responsible for the sales and growth of those sales. And as Chief Operating Officer, I'm obviously responsible for operations and delivering efficiencies in that area. So, I'd like to take a few minutes and discuss these areas of jurisdiction. And I'll begin with sales. Now we reported that sales in all of our markets were up sequentially, except for two of our smaller markets, the Philippines and Japan.

The Philippines which is our newest market, is delivering a similar pattern which we anticipated based on past market openings. When the new market opens, in this case the Philippines, the announcement of the new market produces a immediate interest from our worldwide associates, who have family and connections in that market. Once the market is officially open for business, this queue of individuals waiting to join and travel to the Philippines to build the business, causes an initial spike in both enrollment and sales.

This spike is also followed by a period of lower sales and enrollment, as the queue is eliminated and associates worldwide return home. We expect sales and associate growth, to begin to trend upward in this market, as our native associate leadership now establishes itself in the Philippines and that market begins to mature on its own.

As for Japan, it's the second largest direct selling market in the world. That's one of the main reasons why we are so committed to trying to make that market work. USANA has averaged a new General Manager in that market every year and half, since we entered the market as we've tried to fill this world with an experienced individual. This turnover has created unrest in the minds of our associates there in Japan. We've recently hired a new General Manager, who had excellent leadership skills and he's assembling a strong management team, which we believe will bring stability to the market.

Given the U.S. is our largest market, I should note that second quarter sales were basically flat, decreasing only 0.5% compared with the prior year. However, sales were up an impressive 9.4% from the first quarter. Active associates had a corresponding increase of 14% over last year and are up 12.1% from our first quarter. The increase in both sales and associates is encouraging because the U.S. is the market's hardest hit by the current economic recession. We believe this closed stems from the introduction of our two new compensation plan enhancement and I'm going to address both of those enhancements momentarily.

These results indicate that interest in USANA's products and its home based business model remains high. However, the fact that our sales growth is lagging associate growth indicates that new associates are spending a little less when making their initial purchase with us. We believe this is related to the difficult economic environment they find themselves in. We're pleased to see the number of preferred customers increase on sequential quarter basis.

These are loyal customers who play an important role in our business, and who are simply consumers of our products. Over the last couple of quarters, we've experienced the decline in the number of VP orders from these preferred customers and hence the decline in the number of preferred customers. Again, we believe this also is a reflection of the tough economic times.

To address this issue during the second quarter, we implemented new initiatives to keep these customers consistently purchasing our products. Additionally, we're incorporating targeted marketing campaigns that are designed to entice individuals to purchase on a more regular basis. Again, we are pleased to see that our PC count increase is over the first quarter.

Now, in other markets not only did sales grow though we report double-digit sales and associate growth in many of our markets. This growth is in large part due to the compensation plan enhancements that I've noted earlier, specifically the Elite Bonus and the Matching Bonus. We have spent the last few quarters educating and training our associates on these enhancements, and we are now seeing these enhancements produce the intended results. Overall sales and associate growth.

The Elite Bonus was developed to drive sales growth from our best leaders through a sizable bonus. This result is the Elite Bonus doing exactly what we anticipated it to do. It is promoting competition among our very best leaders and driving growth as they strive to qualify for the bonus. Because the bonus is only paid to the top 25 leaders in any one quarter, room at the top is limited and leaders are extremely motivated to continually grow their organizations to participate in this tool.

We think that this bonus is a paid for performance mentality. The associates who take initiative and grow their business and deliver sales will move into a top 25 position and receive a portion of this significant incentive pay.

Matching Bonus is the other key driver in our sales and associate growth. This new bonus pays additional commissions to associates who begin building their business relatively quickly within a deadline of six weeks after joining USANA. Based on their initial and subsequent efforts, associates can receive a Matching Bonus up to an amount equal to commissions earned by individuals they introduce to USANA.

Individuals who are eligible for an equal or a 100% match from associate stage sponsor are called platinum pay setters. Those attained in the status is up in all markets, an average of 250% since we introduced the program.

Now I'm sure many of you are wondering about the increase to the associate incentive line which is the result of the two bonuses that I've just described. We recognized that this expense is now higher than our historical incentive payout. But believe me that it was important to increase this investment in our associate. USANA competes in our industry as well as any independent business owner industry for the very best talent.

To attract talent, we must offer the most competitive compensation plan for an individual, who wants to own their own business. These new incentives in addition to our existing program is in my opinion, the most rewarding in the industry and having the most rewarding plan entails expense.

This expense however is manageable and let me assure you; we watched the associate incentive line very carefully and manage that line depending on sales results. For the next couple of quarters, we believe associate incentives as a percentage of net sales, will remain at about 45%, as we continue to leverage the compensation plan enhancement, to drive top-line growth. After that however, we expect this expense to trend downward somewhat as we manage this incentive to balance the compensation we pay to our sales force, with a value, we return to our shareholders. I am committed to continue to look for ways, to gain operational efficiency through improved gross margins and to the tight management of SG&A expenses.

Regarding our focus for the remainder of 2009, our key long-term drivers remain. We're going to continue to promote USANA's outstanding home based business opportunity including the benefits of the new Elite and Matching Bonus. We're going to continue to help associates build their USANA business by enhancing their experience with us in utilizing business building tools. We're going to introduce a broader spectrum of products into markets, where only a limited number of products are currently offered. And we will continue to evaluate new market opportunities.

Keep in mind, that in the third quarter, we will be hosting our annual international convention here in Salt Lake City. This event always helps to build excitement among our associates. We spend four days training and motivating, celebrating and recognizing them for their efforts. As always, we will also be making several exciting new announcements at this event which we believe will have a meaningful and positive impact on USANA and our associates going forward.

We work hard to keep these announcements a surprise for the event goers, so I can't share the details with you at this time, but we will look forward to a great convention this year.

With that, I'll now ask the operator to open the lines to facilitate the question-and-answer session.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from the line of Tim Ramey with D.A. Davidson. Please go ahead.

Timothy Ramey - D.A. Davidson

Good morning, guys. Congratulations on some good results.

Jeff Yates

Thank you, Tim.

Fred Cooper, Ph.D.

Thank you.

Timothy Ramey - D.A. Davidson

I guess to congratulate you and then take a little shot. We call down guidance just I guess 90 days ago and that makes me worry about your level of visibility as a business. Can you talk a little bit about your visibility and whether we should just be taking guidance with the grand result at this point or whether there was, I do know of course with the currency change quite a bit during the quarter and that probably had a meaningful contributing effect. Could you discuss that a little bit?

Jeff Yates

Of course, Tim. Thank you for the questions. I think you nailed it. Currency is a significant factor and played well into the guidance that we provided in the first quarter, needless to say we've had a nice improvement sequentially from Q1 to Q2, we're reflecting that but given those fluctuations its hard to predict what's going to happen in Q3 and Q4 and we've tried to take that into consideration. But we've also had a nice growth in our associate counts and that reflects the impact of that going forward.

Timothy Ramey - D.A. Davidson

Thanks for that. And would you expect the associate growth to start to more closely or sorry, say it the other way. Sales growth to more start -- start to more closely near the associate growth. In the years past, they were a pretty good mirror of each other but there has been some disconnect here recently.

Fred Cooper, Ph.D.

This is Fred and yes. We would expect that those two numbers will align better going forward.

Timothy Ramey - D.A. Davidson

Thanks so much guys.

Fred Cooper, Ph.D.

Yes.

Operator

Thank you. (Operator Instructions). And your next question comes from the line of Scott Van Winkle with Canaccord Adams. Please go ahead.

Scott Winkle - Canaccord Adams

Hey guys. Congratulations as well.

Jeff Yates

Thank you, Scott. Welcome.

Scott Winkle - Canaccord Adams

Okay. First question, on distributors, and I don't know how you answer this because it's not a metric, you do know the path. How much of the distributor growth sequential, was new distributors coming in, rather than, and here's my thinking, my thinking is that some distributors just didn't purchase in the first quarter because of the economy, and I would assume that some of those people have become active again, are back in the second quarter, and that drove a good chunk of that distributor total at the end of the quarter and I think you see where I'm going with this, is how much of it was kind of new distributors, new to the system, driven by recruiting that we kind of see that momentum and new distributors continue to work? How much of it was kind of a catch up from the first quarter, may people just kind of sat on their hands.

Fred Cooper, Ph.D.

While it's true, we have being doing targeted campaigns, with a big emphasis on preferred customers and so naturally we're going pickup some buyers, who don't buy on a quite -- as regular basis as we prefer. But as you can see the growth line of our enrollment is greater than our growth line of sales, so a big pickup on that in momentum is the enrollment activity, that we are seeing from our associates.

Scott Winkle - Canaccord Adams

Okay so, am I completely wrong in assuming that there might been a lot of active distributors in the fourth quarter of last year that just went inactive in the first quarter and is that in a normally or am I way out in this. I have to assume that would have been the case to some extent.

And I don't mean preferred customers, I mean people who are in the comp plan, driving business in the fourth quarter of last year that maybe just fell off because the economy and now they're back, they're active again, they're back in the comp plan. Not so much of preferred customer kind of moving up, but more so just kind of a last quarter in there for some distributors who maybe just kind of panic with the market.

Fred Cooper, Ph.D.

Certainly your statement is true and there are some individuals that do that and we don't have that exact number of the number of, we call that a win back of individuals that have done that in the fourth quarter and first quarter. So I wouldn't argue with your statement, but I would try to temper that statement with the majority of that coming from new growth.

Scott Winkle - Canaccord Adams

Okay. Thank you. And then on the volume incentive line, maybe I missed it. Did you mentioned currency driving some of that growth as a percentage of sales year-over-year as well?

Jeff Yates

Not year-over-year. Year-over-year we had still a compression, it was $9.1 million but sequentially we were up almost four.

Scott Winkle - Canaccord Adams

In absolute dollars in the volume incentives? I'm sorry, I was thinking volume incentives as a percentage of sales rose and maybe I just misread that but...

Jeff Yates

That the associate incentive increase was due to the two compensation plan enhancements.

Scott Winkle - Canaccord Adams

But there is no impact in currency, in the last quarter we talked about how you're still paying out at the same rate, despite currency and in some cases it's kind of going against you or is it a benefit?

Jeff Yates

The FX impact on that Scott, is negligible.

Scott Winkle - Canaccord Adams

Okay, great. And what specifically was in those kind of buckets of SG&A control you talked about. You talked about legal obviously we can see that pretty easy. But you mentioned some salary based type of items. You didn't change staffing. What type of SG&A control did you do in the quarter and how reputable was that going forward?

Jeff Yates

Yeah, overall the lower promotional expenses; keep in mind that our focused motivate an incentive yield is about -- is focused on these bonuses, the add hard one-time special type of promotions we've backed up significantly because those enhancements are driving that growth adequately and in fact famously for us. Otherwise, the overall effort to reduce SG&A just as an operating model, we're seeing benefits across the board including rent and travel and some wage related expenses, we're managing health plans better and so forth.

Scott Winkle - Canaccord Adams

Okay. So would it be fair to say in time looking forward into the future that as long as the higher volume incentives translate into stronger sales, the promotions that would normally flow into SG&A are going to be tempered, and maybe that picks back up if the revenue growth doesn't continue to be driven so well by that compensation plan changes.

Jeff Yates

Yeah, you know how well the leverage works for our model Scott and that's what we anticipate. Our effort is to continue to manage those costs, we believe we run a very lean and efficient organization, we anticipate doing so going forward, and reaping the benefit of that leverage.

Scott Winkle - Canaccord Adams

And on that note, for years, you saw -- kind of led the industry, at least among the public companies, as far as the profitability levels, operating margins and such. Do you look at the new model now with incentives where they are and you know, maybe you don't get back to an 18% margin, but have you kind of changed what you -- long-term what you think the profitability level as a percentage of sales, can be in the business because of these top-line changes?

Fred Cooper, Ph.D.

I'd take that question, I'd say no. I believe its still stepped and there is still room to improve that on operating leverage, its just in an economic time, where you're competing for a new associate, you're going to spend a little more to make sure you get those. But gross margins still have room that we can improve on some pricing strategies that we're putting in the place still improve and there's still room on SG&A. So nope, I still think we can be the most operationally efficient as well.

Scott Winkle - Canaccord Adams

Okay. And, probably tough question to answer, but is there any impact from all this marketing by Amway Global, I mean its just an odd amount -- historically I've never seen anything like it, traditional advertising Amway -- has it -- is there a talk about it in distributor force, what's been your perception or impact?

Jeff Yates

As one who gets out in the field quite a bit and travel across the world, I don't believe I have ever had anyone in five years tell me Amway is pushing hard and is a competitor to them in their region, ever.

Scott Winkle - Canaccord Adams

Okay. Fair enough. And then kind of a big picture question for you. One of a remarkably strong consumer categories at retail is an interesting supplement industry.

You know 18 yields, ROI reporting 10% type of growth, in the mass market is, do you have any opinion on that. Do you think maybe there is some kind of trading down from some of the more premium price channels towards the mass or are you kind of getting even in your customer and distributor force that supplements are just kind of involved or are just not being impacted by the economy. Its a remarkable growth we're seeing in the industry, I'm just wonder what you're thoughts are.

Fred Cooper, Ph.D.

Speaking to that end, I don't believe a premium product in terms of quality and potency is ever going to go out vogue to the mass. It will always be a market that attracts a significant portion of individuals, in fact in our targeted win back campaigns, if that statement were -- I kind of towards with demise of USANA because everyone is going to mass purchasing vitamins and nutritional supplements.

We wouldn't had such an affective impact on our win back campaign. USANA enjoys an excellent reputation as the finest nutritional supplement in the industry. We have a slogan that we use that's called in good company with many, many endorsements that are unpaid or solicited for the use of our products and nutritional vitamins.

So I think the growth is just in the industrial as a whole, and awareness for the need for nutritional supplementation. Those that can only afford mid range quality purchase that. But as a whole everyone is starting to have a better appreciation for the need of nutritional supplementation.

Scott Winkle - Canaccord Adams

Okay. And just a last question, progress so many. Was there anything specifically done to target preferred customers from the win back or did you target them differently obviously no comp plan changes are going to effect the preferred customers or unless it's effecting distributors who driving those customers. Is there anything specifically done towards those customers?

Fred Cooper, Ph.D.

Yes. We actually look at how long ago they had purchased, what items that they had purchased, what items we believe they would have an interest in and then targeted them with e-mails, flyers and catalogs to see which class and substrata of the target market would be the most receptive to sending back that information to them and we are very persistent (ph) in keeping track of which campaigns are the most effectives and which ones aren't, so that we can further refine our target market.

Scott Winkle - Canaccord Adams

Great. Thanks very much.

Fred Cooper, Ph.D.

You're welcome.

Operator

Thank you and our next question comes from the line of Rommel Dionisio with Wedbush Morgan. Please go ahead.

Rommel Dionisio - Wedbush Morgan

Yeah. Good morning. A question on the gross margins, I think in your prepared comments, you talked about how there was a slight increase in product cost. From other companies are recording the sector, I think we've noticed that some of them are saying they see the civilization of product loan. That's just a function of bringing out some over inventory that was at higher cost, is there something unusual, I understand every company is a little different, but could you just talk to that point?

Jeff Yates

No, generally speaking we've had just several product cost increases depending on the product that we're talking about and keep in mind that we're sourcing some of the finest quality product in the entire world. And most of those product costs have been subtle not significant with -- the increase is mostly attributable to the FX impact.

Rommel Dionisio - Wedbush Morgan

Okay. thanks. Seems we are not talking of the major magnitudes?

Jeff Yates

Oh no, no.

Rommel Dionisio - Wedbush Morgan

Yeah. Okay, fair enough that's all I had. Congratulations on the quarter again.

Jeff Yates

Thank you very much.

Fred Cooper, Ph.D.

Thank you.

Jeff Yates

Thank you for calling in.

Operator

Thank you. And our next question comes from the line of Mimi Sokolowski with Sidoti & Company. Please go ahead.

Mimi Sokolowski - Sidoti & Company

Thank you, good morning. Sir, I think I have just have two for you. If you can disclose between the new compensation plans, the bonus and the Matching, which of the two was more important to total revenue in the quarter?

Jeff Yates

The Matching Bonus.

Mimi Sokolowski - Sidoti & Company

The matching okay. Then that's makes sense. Now as I think of getting greater leverage out of those bonus programs, why would I assume that particularly since most of the benefits extends from the matching without taking that away and just realizing some lagging benefit, how can you actually leverage that cost better, I understand on the Elite side perhaps the competition for that intensifies, as more people try to attain that goal but on the managing side I'm having a difficult time seeing how that expense ratio will come down.

Fred Cooper, Ph.D.

Oh, the Matching Bonus is limited to 32 weeks.

Mimi Sokolowski - Sidoti & Company

Okay.

Fred Cooper, Ph.D.

So, that will answer your question.

Mimi Sokolowski - Sidoti & Company

Alright.

Fred Cooper, Ph.D.

So as a result right, as we get more individuals attain the rank of Platinum Pacesetter status, especially because its new, people will gravitate towards that status, then they go for 32 weeks getting bonuses on the individual say introduce to USANA and then as those people drop off their match payroll if you will, they have to bring new individuals into USANA to maintain that same level.

Mimi Sokolowski - Sidoti & Company

Okay, okay, I think that's clear. Thank you for fighting on that.

Operator

Thank you and gentlemen at this time there are no further questions.

Fred Cooper, Ph.D.

Okay, well everybody thank you for your questions. If you have any remaining questions, please feel free to contact Patrick Richard, Richards is in Investor Relations, and his phone number is 801-954-7961.

Operator

Thank you ladies and gentlemen. This concludes the USANA Health Science second quarter conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3030 or 1800-406-7325 using the access code 4116100 pound. ECT will like to thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!