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Executives

Jeffrey Yates - Chief Financial Officer, Principal Accounting Officer and Vice President

David Wentz - Chief Executive Officer

Fred Cooper - President and Chief Operating Officer

Riley Timmer - Vice President of Finance

Analysts

Scott Van Winkle - Canaccord Genuity

Rommel Dionisio - Wedbush Securities Inc.

Per Ostlund - Jefferies & Company, Inc.

Timothy Ramey - D.A. Davidson & Co.

John San Marco - Janney Montgomery Scott LLC

USANA Health Sciences (USNA) Q1 2011 Earnings Call April 27, 2011 11:00 AM ET

Operator

Welcome to the USANA Health Sciences First Quarter Earnings Conference Call on the 27th of April 2011. [Operator Instructions] I will now hand the conference over to Riley Timmer, Vice President of Finance. Please go ahead, sir.

Riley Timmer

Thank you. 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 risk and uncertainties that could cause actual results to differ, perhaps materially, from the 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.

Now I'm joined this morning by Fred Cooper, our President and Chief Operating Officer, and Jeff Yates, our Chief Financial Officer. We'll first hear from Jeff, who will discuss the financial results for this quarter. Then you will feel from Fred, who will discuss our business activities.

I'll now turn the call over to Jeff.

Jeffrey Yates

.

Thank you, Riley, and good morning, everyone. Once again, I am pleased to report that we completed another solid quarter of sales, coming in at $143.6 million. This represents a 20.6% increase when compared with the $119.1 million we reported for the first quarter of 2010.

This quarter's sales included $5.7 million from our Chinese subsidiary, BabyCare. Also, favorable changes in FX rates this quarter added nearly $4.2 million to our top line when comparing our results to the same period last year. We also realized approximately $3 million in incremental sales via Hong Kong Associates in anticipation of a price increase in that market. Additionally, sales from our Asia Pacific convention, which was held in March this year, added $3.1 million to sales during the first quarter. Remember that we held this event during the second quarter last year, so there is a timing difference on the year-over-year comparison.

Although sales were impressive during the quarter, we were disappointed with our Associate counts in many of our markets. Excluding the addition of BabyCare Associates, the overall number of active Associates decreased 1%. We believe that this is the result of many of our Associates being distracted by the acquisition of BabyCare in China, as many of our Associates are evaluating how to incorporate this new market into their businesses.

Looking at our results regionally. Sales in North America were essentially flat, coming in at $60 million, which is due to softer-than-anticipated Associate counts. Along with many other companies in our industry, we continue to see a soft consumer segment, which we believe is the result of a lingering tough economic environment.

Furthermore, our business model allows an Associate to build a business in any market where we have operations, with the exception of China. Currently, many of our North American leaders are focusing their efforts on growth opportunities throughout Asia. As a result of this, we continue to see disproportionate growth, especially in Greater China.

Consequently, in our Asia Pacific region, net sales for the quarter increased by $25 million, or 42.6%, compared to the first quarter of 2010. Net sales for this region totaled $84 million for the quarter, which represents 58.2% of our total sales. Sales growth in this region was primarily due to the 18.2% increase in the number of active Associates. The majority of this growth is in Hong Kong, where sales increased 82.7% over last year, and the number of active Associates increased 35.6%.

Notably, on a sequential-quarter basis, the number of active Associates decreased, which we believe is the result of unusually high enrollments during the fourth quarter of 2010 and softer-than-anticipated results in the first quarter, most likely from Chinese New Year. In addition to Hong Kong, we also experienced double-digit growth in the Philippines and South Korea, 2 relatively small but emerging markets.

Now shifting to the other major components of our P&L. Gross margin -- gross profit margin for the first quarter improved as a percentage of net sales to 82.1%, compared with 80.7% for the first quarter of 2010. This 140-basis-point increase was primarily due to benefits from changes in currency exchange rates, reduced freight costs, leverage gained on higher sales and lower overall cost of our raw materials. For the full year of 2011, we expect gross margins to be about 82% of sales.

Associate incentives expense for the quarter improved 30 basis points to 45.1% of sales compared to the first quarter of the prior year. This decrease was primarily due to the strategic changes implemented in 2010 to better align compensation with actual sales growth and the impact of a slightly lower payout rate through BabyCare.

SG&A in the first quarter increased to 25% of net sales compared to 23.1% last year and also increased 70 basis points compared with the fourth quarter. The higher SG&A expense was largely the result of the costs associated with the integration of BabyCare, higher relative wage and equity compensation expenses, costs associated with our AP Convention and expenses incurred in connection with our brand awareness campaigns. We expect that on a year-over-year basis, SG&A expenses will continue to be relatively higher for the next few quarters while we continue branding efforts and work to integrate and grow BabyCare.

Net earnings for the first quarter were $11.4 million, or $0.70 per share, compared with $9.6 million, or $0.62 per share, in the first quarter of the prior year. The diluted impact of BabyCare's operations for the first quarter was $0.08. The increase in net earnings and earnings per share this quarter resulted from improved gross profit margins, lower relative Associate incentive expense and a lower effective tax rate. These improvements were partially offset by higher relative SG&A costs. Additionally, EPS were negatively impacted by a higher average number of shares outstanding.

As noted in our release yesterday, we are reiterating our initial guidance. As we focus our efforts to grow China, we anticipate that sales in Hong Kong will decline beginning in the second quarter. Our estimates suggest that we will see meaningful growth in China by the end of 2011 as we introduce additional USANA products into that market and as our Associate leaders become more familiar with BabyCare. We continue to believe that China remains USANA's most significant growth opportunity.

As you consider our guidance, keep in mind that we have not modeled for a currency benefit in the coming quarters, nor will the revenue from our AP Convention recur in the coming quarters. Accordingly, we continue to project net sales for 2011 to be between $530 million and $550 million and estimate that earnings per share will be between $2.85 and $2.95.

I'll conclude by commenting on our balance sheet. Cash at the end of the first quarter was $32.7 million compared to $24.2 million at the end of 2010, and we continue to be debt free. Additionally, we repurchased 251,000 shares during the quarter for a total investment of $8.5 million, leaving $23 million still available under our current share purchase authorization. I am pleased with the strength of our balance sheet, which positions us well to make the necessary investments for sustainable, long-term growth.

And now the call to you, Fred.

Fred Cooper

Thanks, Jeff. Good morning, everyone. I'd like to begin by updating you on our efforts in China, and then we'll go to North America. In China, we continue to make the necessary investments to lay the foundation for what we believe will be a meaningful growth in the market. Our integration of BabyCare continues to move forward, and we're focusing on our efforts with the introduction of USANA products, obtaining additional provincial licenses, building stronger government relations and implementing a strategy specific to that market.

We believe the primary reason most Associates get involved with USANA and stay with us are the products. Simply put, our Associates know that in order to make a successful business in any of our markets, including China, they need USANA products and a rewarding compensation plan.

During the first quarter, we introduced the first of 3 phases for 2011. This will go towards our product strategy in China. Phase 1 included the rebranding of 4 high-quality BabyCare products that are now sold under the USANA label. This first step was announced by Dr. Wentz at our Asia Pacific Convention in March.

In Phase 2, we'll begin the introduction of our core 5 Sensé skin care products. We're currently on schedule and expect these products to be introduced by the end of the second quarter.

The Phase 3 of our product integration strategy will include the approval and introduction of 4 USANA core nutritional products. We expect that these products will be launched sometime during the fourth quarter of 2011. It's also important to note that we have events and other marketing activities scheduled around each of these phases to help build excitement and help motivate Associates to build their businesses through BabyCare in China.

Another important part of the China strategy involves obtaining additional provincial-level direct-selling licenses. We are currently in the process of obtaining 5 additional ones. As you know, this process is regulated by the Chinese government, and we have concerted efforts to build strong government relations going forward. This is an important factor, as we will do what we can to obtain these licenses as quickly as possible. Our plan is to obtain licenses first in these provinces, where we see greatest opportunity for growth.

Now let's discuss the growth strategy for China. Over the past few years, we've experienced very strong growth in our Hong Kong market, in part, due to our Associates' anticipation of our entry into China. As Jeff discussed a few minutes ago, now that we have entered into this market, some Associates will transition their business activity to BabyCare. We believe that this transition will impact our Hong Kong business, and I'd like to explain why.

First, we anticipate that many of our Associate leaders who are qualified to operate in both Hong Kong and China will change their focus from growing their Hong Kong business to growing through BabyCare in China. Second, we have a large group of Asian Associates who are involved with USANA only because of the products and are buying in Hong Kong for consumption only. We expect many of these consumers will begin purchasing USANA products through BabyCare and either remain consumers or become entrepreneurs and build a BabyCare business.

Finally, our estimates suggests that the average initial purchase per Associate in BabyCare is about 40% lower than in our other markets. So as a result, there will always be a natural sales decrease, at least early on, until our volume in this market increases.

Now turning to North America. Tough economic conditions, as Jeff said, continue to impact sales in the direct-selling industry in this region, and we're no exception. Although we've not seen any growth in North America, we also haven't experienced the dramatic declines that many other companies have experienced. Nevertheless, we're not satisfied with the level of performance that has now been delivered by this region for some time. We believe that it is impossible for -- that it is possible, rather, for us to regain momentum in North America, and we are committed to do so. Our primary management performance objectives and incentives for 2011 are tied to sales and Associate growth in North America.

Also, in an effort to regain momentum in this region, we've magnified our efforts to enhance our global brand. This includes additional sponsorships with high-profile athletes as well as advertising, and partnering with credible organizations.

A great example of this is our extended partnership with the Women's Tennis Association as its official health supplement supplier. This partnership now includes increased USANA branding and participation at WTA events over the next 3 years. We believe that strong partnerships with great organizations such as a WTA will help us to enhance our global brand, ultimately making USANA a more recognized name. In conjunction with these branding efforts, we are also offering contests and promotions targeted at increasing the number of Associates while maximizing our branding efforts.

Along this same line, in an effort to increase brand awareness, Dr. Wentz and Dave Wentz recently co-authored a New York Times best-selling book titled The Healthy Home. Dr. Wentz and Dave just completed a book tour that covered 17 cities in the U.S., Canada and Mexico, where they shared their vision for better health in the home. Many of our Associates have purchased the book to use as a marketing tool.

Although 2011 will be a transitional year for USANA, I am pleased with the underlying strength of our business, particularly in light of the current economy. We're excited about the opportunity for USANA in China and remain committed to improving our results in North America.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Tim Ramey from D. A. Davidson.

Timothy Ramey - D.A. Davidson & Co.

I'm just kind of trying to better understand the guidance. I do understand the pull-forward in sales relative to the Convention and, I guess, what amounts to maybe $8 million of sales that would've been non-organic in the first quarter. But the kind of the shape of the curve of transitioning people from sort of Hong Kong sources to Mainland China sources, or BabyCare sources, still is somewhat foggy to me. Can you talk a little bit about how you think that plays out with some kind of quarterly specific concepts? Is that -- I mean, do you think of this as a second quarter and third quarter phenomenon, and then by the time to get into the fourth quarter, you're starting to ramp that and see organic growth through the BabyCare organization?

Jeffrey Yates

Sure. Sure, it's a good question, Tim. Needless to say, it's a challenge to be able to forecast that customer behavior over the next couple of quarters. We've done a lot of work to communicate and to share the opportunity that is there and to train to our Associate leaders. We're counting on all the efforts that we've laid in the path ahead of us to be able to achieve a smooth transition for those who would do so and to attack that market aggressively and give opportunities to as many people as possible via the BabyCare model. It's difficult to predict, as I said, and to forecast what that will look like. We anticipate that during the second quarter, we'll start seeing an impact in Hong Kong as people evaluate the opportunity. During the third quarter, we'll be able to communicate with more and more people as the message spreads, and we'll start to see, obviously, some response to that as we anticipate into fourth quarter. I wish I had a crystal ball that was less foggy than yours. But we're trying to be careful with that plan, knowing that everybody who has entered into that market has had a challenging first few years. We think we'll accelerate that process, given the mechanism that we've created through the acquisition of BabyCare. We think we'll leapfrog a lot of those challenges. We've got a good management team in place. We've got events that we think will be exciting and attractive for people there, both in the peripheral markets as well as within Greater China. And we'll give you updates as we go.

Fred Cooper

Tim, if I could add a little to what Jeff said, too. This gets down to just kind of evaluating human behavior and the psyche of change and difference. Our China market is unique to us because the compensation plans are so different. The manufacturing processes and the rules are different. So trying to evaluate and predict people's adoption of that plan when they've already been accustomed to one paradigm and having to accommodate a second one is uncertainty. And uncertainty means that they're busy spending time trying to figure out what is going to happen in China, what they're going to do to build their business in China, rather than focusing on building the current business that they have. That's why we expect our guidance to not be as bullish towards the end of the second and in third quarter as this migration occurs.

Timothy Ramey - D.A. Davidson & Co.

Got you. And just if I could follow up on the focus on reinvigorating the North American Associate growth. You mentioned the WTA partnership, but surely, there are going to be other initiatives there. Do you envision other tweaks to the plan to kind of breathe new life into that organization? Or could you give us any more detail on that?

Fred Cooper

Yes. We're having everything put on the table for strategies that we can adopt that will help invigorate and then get the field fired up to grow their business again. So I would say nothing is off the table or on the table.

Operator

The next question comes from John San Marco from Janney.

John San Marco - Janney Montgomery Scott LLC

Yes. Thanks so much. Thank you for taking my questions. Could you clarify your comment related to the decline in Hong Kong? Specifically, are you saying that the Greater China reported segment will decline? And do you mean that sequentially, or on a year-over-year basis?

Jeffrey Yates

To clarify, we anticipate the specific market of Hong Kong will decline as people reevaluate where they do business with USANA. As Fred mentioned, there are leaders who are qualified to do business in Greater China, in Mainland China, who will likely be shifting. There are Associates who are consumers who acquire their products in Hong Kong, who will likely to be able to then acquire their products for consumption via the BabyCare distribution model. And we anticipate that, overall, the sales that are coming through the BabyCare model initially will be a little bit lower on an initial-purchase basis, but the volume will overcome that. So Greater China as a region we anticipate would have growth, combined with the 3 markets there. Did that help you?

John San Marco - Janney Montgomery Scott LLC

Got it. Yes, that's helpful. So at first, the BabyCare offset will just be less, and then by 3Q and 4Q, that BabyCare offset, the shift will -- you would expect to be greater than the Hong Kong impact?

David Wentz

And in the fourth quarter -- at the end of the fourth quarter, I'm sorry.

John San Marco - Janney Montgomery Scott LLC

By the end of the fourth quarter. Okay.

Fred Cooper

So we're getting a shift in the people count from and for the business activity that's being done lowering in Hong Kong. And then we expect an increase in China at the end of the fourth quarter.

John San Marco - Janney Montgomery Scott LLC

Do you think that that's the factor that explains the -- it was a pretty surprising sequential decline in Greater China, people count this quarter. Would you point to BabyCare?

Jeffrey Yates

Well, there are 2 factors, really. 1 is a little bit of a shift, but we had significant enrollments in the fourth quarter that we didn't match in the first quarter. So that would account for a little bit of the difference. And then as people are considering how to shift their business. For those who can, their attention has been focused on that rather than doing a lot of business-building in the first quarter. So we're are seeing a little bit of softening there for those reasons, but anticipate that, that will recover through Mainland China, as Fred described, later in the year.

John San Marco - Janney Montgomery Scott LLC

Got it. I hate to focus just on 1,000 people, but given how recently you did the BabyCare deal, I was wondering if you could comment on what appears to be about a 1,000-salesperson decline in the BabyCare system. How does that compare to your own expectations? And does that -- should we expect more bleeding in the coming quarters?

Jeffrey Yates

Don't expect more bleeding, we anticipate that it will go up. There's ebbs and flows in that. People are evaluating the compensation plan that they have there, and we wouldn't be surprised by this and anticipate that as we communicate the opportunity, people will light up again. We also had, during the first quarter, some lighter activity because of Chinese New Year. And in our market, particularly in that market that's significant for us now, the Chinese New Year has a pretty significant impact on our business during that time.

John San Marco - Janney Montgomery Scott LLC

Okay. Just one last one, please. I'm just looking at revenue per Associate and as well as per total membership. And the progress has been substantial the last 2 years. I know you guys have a pretty long track record of sort of driving that number higher, but the last 2 years, it's really jumped sharply. I know there's a lot of moving parts. I'm not asking you to break each one out individually, but I was hoping you could highlight what you think the biggest changes have been that have -- I mean, driven revenue per total active member about 30% higher the last 2 years. And then maybe if you could just comment on the sustainability of those gains?

Fred Cooper

Yes, I'll take an answer on that one, and it's basically twofold. The first one is compensation plan enhancements that we have made to the field over the last couple of years, so that's one. And the second is price increases.

Operator

The next question comes from Doug Lane from Jefferies.

Per Ostlund - Jefferies & Company, Inc.

This is actually Per Ostlund in for Doug. A couple of modeling questions for you, if I could, starting with the FX benefit on the top line. Jeff, I just want to make sure I interpreted your comment correctly, are you -- in your $530 million to $550 million sales outlook, is there actually no foreign currency benefit in that number?

Jeffrey Yates

Correct.

Per Ostlund - Jefferies & Company, Inc.

Okay. Is that just because you don't want to project it out, or is that because that's where you actually see currency shaping up?

Jeffrey Yates

Yes, don't know where it's going to go. We're using the Q1 numbers and forecasting those forward without knowing what direction it's going to go. So just going with what we know.

Per Ostlund - Jefferies & Company, Inc.

Okay, that's fair. I think last quarter, you provided an SG&A number sort of x the BabyCare. If you said it in prepared remarks, I missed it. Do you have that number handy?

Jeffrey Yates

Say again, I'm sorry.

Per Ostlund - Jefferies & Company, Inc.

The SG&A line sort of x BabyCare? I think you provided that on the fourth quarter call. I was just going to see if you might have that available this time around as well?

Jeffrey Yates

I don't have it immediately available to me right here. Sorry about that.

Per Ostlund - Jefferies & Company, Inc.

Okay, that's okay. I guess maybe on a different but related note, you mentioned an $0.08 impact from BabyCare. Sort of what are the pieces to that? How much of that's kind of an operating deficit, and how much of that would've been like the share count increase and that sort of thing?

Jeffrey Yates

Relative to BabyCare?

Per Ostlund - Jefferies & Company, Inc.

Yes. Because you had said, I think it was an $0.08 impact on the quarter from BabyCare dilution. And I just wanted to see how much of that was operational versus kind of that below-the-line share count issue, if you had it?

Jeffrey Yates

The shares had a $0.03 impact. The remainder of it was operating expenses.

Per Ostlund - Jefferies & Company, Inc.

Okay, that make sense. And maybe one last one, just as we're -- as I'm looking at that SG&A line, you parsed through some of the drivers of the increase in the quarter. Thinking about the Asia Pacific Convention specifically, since that would be the nonrecurring piece of the bunch. Do you know how much that expense was for the quarter?

Jeffrey Yates

Per, that was -- the convention expenses that hit Q1 were just a little less than $2 million, $1.6 million specifically, which will then not be comparative to the same relative expenses in Q2 last year.

Per Ostlund - Jefferies & Company, Inc.

Okay, okay. And then there's the convention in the States in the fourth quarter.

Jeffrey Yates

That 1 remains comparable at the end of August. That was [indiscernible], yes.

Operator

The next question comes from Rommel Dionisio from Wedbush Securities.

Rommel Dionisio - Wedbush Securities Inc.

You guys have sort of talked about the potential, just near-term impact on Hong Kong for opening up the China market, the Mainland China market. Do you expect anything to occur with regards to, say, the North American business? I remember a couple of years ago when you opened in the Philippines, it was some temporary distraction on the U.S. market. And would you expect any other markets other than Hong Kong to be impacted near term?

Jeffrey Yates

Yes. Actually, it's affecting most of our markets as people evaluate how they can grow their businesses throughout the Asian markets that we have, with the biggest single impact being a distraction towards Greater China. There are limiting factors for some of our Associates who are not allowed to operate businesses there, but for many of our Associates who can, that clearly is a significant distraction for them. But as people begin to figure out how to work their businesses in that arena, we believe that they'll refocus again in their home markets. It's just a cycle that we go through with new market openings. And then it [indiscernible] very similar to the other markets.

Rommel Dionisio - Wedbush Securities Inc.

Sure, understandable. And just one follow-up question. Is there anything you guys can share with us with regards to the Asia convention? Give us things that you -- some key takeaways you came away with, either positive or negative, that may have surprised you?

Fred Cooper

They're excited for the opportunity to do business in China. That's very apparent from that meeting. Number 2, the endorsement of Dr. Wentz for BabyCare and the company itself was very valuable. 3, the ongoing announcement of products that we will offer through BabyCare has a strong appeal to our Associates as well.

Operator

[Operator Instructions] The next question comes from Scott Van Winkle from Canaccord Genuity.

Scott Van Winkle - Canaccord Genuity

So I didn't miss anything you said about volume incentives. They were a little higher than I expected. I thought last year, you were talking about them trending lower, so can you refresh me?

Fred Cooper

Yes. We agree, on volume incentives, it is increased. The changes that we have implemented have definitely had the impact that we had anticipated on it. However, as our proportion of business grows in Asia specifically on the compensation plan and the way it's built over there, it continues to put upward pressure on that. But it's offset by the currency exchange rate on a weak dollar that we receive. As individuals transfer their business activities over to BabyCare and the disparity in the compensation plans in terms of what their pay method and style is compared to ours, we'll see a lowering of the compensation payout as the adoption increases.

Scott Van Winkle - Canaccord Genuity

Okay. So in the case of BabyCare, as that business grows and Hong Kong is offset, do we see SG&A trend higher as well as volume incentives trending a little lower because of the compensation plan there?

Fred Cooper

Well, the compensation plan at BabyCare and the compensation plan at USANA paid relatively the same. And so as a result of that, there are some leverage advantages that leaders can take advantage of in a binary that are unavailable to an Associate who is at BabyCare. And as a result, that's why you're going to see the decrease over time. And also, the exchange rate with the currency in China versus the U.S. dollar is a little more fixed, so we don't have that variability as well.

Scott Van Winkle - Canaccord Genuity

Okay. Then back to the comment about the net impact being pretty much unchanged when you consider the currency in Asia. So should we assume that, like, the contribution dollars on a sale are going to be the same, even though the volume incentive might be a little higher because of the currency?

Fred Cooper

I'm thinking on that question.

Scott Van Winkle - Canaccord Genuity

So for gross profit dollars less the volume incentive in dollars, the percentage contribution to USANA corporate might be a little lower, but the dollars are going to be about the same.

Fred Cooper

To answer your question as I understand it, I would say they are roughly the same.

Scott Van Winkle - Canaccord Genuity

Okay. Great. And then with your comment about the weak economy in the U.S., and this isn't something -- I've talked about a lot of direct sellers, because if you look at the supplement industry in the U.S., you've got growth in the mass market, growth in the specialty channel, growth in the practitioner channel, and the only place you're really seeing softness is in the direct selling channel. And if you look at direct selling more broadly beyond supplements, everybody's getting killed. Is it a function of the weak consumer, or is it a function that the consumer is not quite strong enough to where you're willing to ask your friend to buy something? Or in the case of the party-playing guys, you're willing to bring together 15 wives in the neighborhood and ask them to spend money on a party. Is it more a little bit of a stigma of asking your friends who maybe lost their job or aren't making as much money to get involved in a business more so than just maybe consumer spending?

Fred Cooper

I would definitely say there's a stigma associated with being concerned to ask friends for money. I don't think they're any less incented; in fact, probably more so, to go out and approach their friends. It's just the end consumer watches their dollars more closely. And acutely associated with USANA is the fact that we're a premium-priced nutritional product. So from that end, no. I don't think they're less enticed. They're just finding it more difficult to get people to pay the price for the nutritional vitamin.

Scott Van Winkle - Canaccord Genuity

Okay. And if we look at the product offerings, so you have a Hong Kong Associate consuming product who's going to transition their business to China, or they're buying product in Hong Kong. They're probably buying your premium multivitamin supplement of some kind. Is that same exact product -- I'm not saying exact, but is a similar product available today at BabyCare? Is BabyCare's lead product a multivitamin, multi-mineral supplement comparable to USANA in some way or another?

Fred Cooper

They are close. I can't say they are the same, because in China the regulations that they allow for minimums of each ingredient are different, just like they are across all different countries. So we have to go to the maximum that's allowed by law in China, but we hit those maximums, and then we try to get the governments to allow greater levels of particular vitamins that we have found to be more efficacious. So what you're kind of saying there, no, they're not the same. But they're the least -- the maximum allowed by law, and we're going to try to get them higher.

Scott Van Winkle - Canaccord Genuity

Okay. And then speaking on China. The timeline of the next phases -- are the Sensé products, are they approved today?

Fred Cooper

Yes.

Scott Van Winkle - Canaccord Genuity

Okay. And then you don't have approvals yet for the next wave of USANA supplements to go into China. How confident are you that you can make that by the fourth quarter? I mean, what I always hear is the benchmark is 2 years and $2 million to get a product approved for international direct sellers.

Fred Cooper

You're exactly right on that, but we already had an anticipation that we'd been going to China. So luckily, we had a head start on it. So we believe it'll be fourth quarter, that's our best estimate. So far we've hit the timelines on all our product registrations that we've had. So it's our best guess. We think we'll hit it.

Scott Van Winkle - Canaccord Genuity

Great. And then was the BabyCare management -- had they already made applications for the incremental 5 provincial licenses? Or is that something that occurred post-acquisition?

Jeffrey Yates

They began that process, Scott, immediately after acquisition, which happened immediately after they received their first license, which was the basing [ph] license, that was the premium license, and began the process of submitting applications for the next 5 immediately thereafter. So we're well into that curve right now.

Jeffrey Yates

One thing I'd like to clarify. I think Per raised the question on the dilution of BabyCare. We've just been able to put together the numbers to clarify that answer that I gave. There is a $0.03 dilution relative to the share count, a $0.02 dilution relative to equity compensation and $0.03 from operations. The $0.05 that I gave you on the other had those 2 components, equity and operations. I just wanted to make sure that, that was clear to close out the [ph] question.

Operator

There appears to be no further questions. I will now hand over to Riley. Please go ahead.

Riley Timmer

Thank you for your questions and for your participation today on our conference call. If you have any remaining questions, feel free to contact any of us, including Patrique Richards in Investor Relations, at (801) 954-7961. Thanks.

Operator

This concludes the USANA Health Sciences First Quarter earnings conference call. Thanks for participating. You may now disconnect.

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