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USANA Health Sciences Inc. (NYSE:USNA)

F4Q 07 Earnings Call

February 6, 2008; 11:00 am ET

Executives

Riley Timmer - Executive Director of Finance and IR

Gil Fuller - EVP and CFO

Dave Wentz - President

Mark Wilson - Executive Vice President of Customer Relations

Analysts

Tim Ramey - D.A. Davidson

Simeon Gutman - Goldman Sachs

Bill Leach - Neuberger Berman

Doug Lane - Jefferies & Co

Scott Van Winkle - Canaccord Adams

Mimi Noel - Sidoti & Co

Willis Taylor - Gagnon Securities

Operator

Ladies and gentlemen, thank you very much for standing by. Welcome to the USANA Health Sciences fourth quarter and year end earnings call. During today's presentation all parties will be in a listen-only mode and following the presentation, instructions will be given for the question and answer session. As a reminder this conference is being recorded Wednesday, February 6, 2008. I would now like to turn the conference over to Riley Timmer, Executive Director of Finance. Please go ahead.

Riley Timmer

Good morning everyone. We appreciate you joining us this morning to review our fourth quarter and our full year results. As a reminder, today's conference call is being broadcast live on our web-cast and can be accessed directly from our website at www.usanahealthsciences.com and a replay will be available on that site shortly after the call. Before I turn the call over to Gil, however I remind you that 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 our actual results to differ perhaps materially from the results projected in those forward-looking statements.

We caution you that these statements should be considered in conjunction with the disclosures including the specific risk factors and financial data contained in our most recent filings with the SEC. Also during this call, management will discuss non-GAAP information. We provide non-GAAP measures to assist investors in understanding our operating performance.

I will now turn the call over to Gil Fuller, Executive Vice President and CFO

Gil Fuller

Hi, thanks Riley and good morning and welcome everyone. I'm pleased this morning to be joined by Dave Wentz, our President, who you will hear from shortly. Also in attendance this morning are Mark Wilson, Executive Vice President of Customer Relations and Dan Macuga, Vice President of Field Development. This morning I plan to provide you with our fourth quarter and year end financial results. I will then talk about our guidance for the first quarter of 2008, as well as our updated forecast for the full year 2008.

Before I talk about our financial results I would like to speak briefly about the closure letter we received from the SEC regarding our informal inquiry. Since the beginning of the inquiry we had been in regular communication with the SEC and have cooperated fully with all of their requests. The company was advised by letter in early January that the SEC had completed its informal inquiry and is not recommending any enforcement action be taken. Obviously, we are pleased with this result and continue to believe in the integrity of our business model.

Another part of the development for us during the quarter was the dismissal of the shareholder derivative lawsuit. The plaintiff agreed to dismiss this case with prejudice after USANA and the other defendants filed a Motion to Dismiss. We think this is an important outcome and let me briefly say why. The class action and this derivative lawsuit each contain very similar allegations and claims. Our position has always been and continues to be that these allegations are false. We believe that the recent events support our position and in the light of these outcomes we are optimistic about our position with regard to the two remaining class action lawsuits.

Now to our financial results, net sales in the fourth quarter were a record $108.7 million an increase of 10.8% compared with $98.1 million reported in the fourth quarter of 2006. Net sales in the fourth quarter were in line with our guidance of $108 to $110 million. Excluding the impact of currency fluctuations sales would have increased by 5.6% on a year-over-year basis. Like other multi national companies, we are benefiting from stronger foreign currencies.

Net sales for the full year ended were $423.1 million, an increase of 15.9% compared with the year ended 2006 and in line with our guidance of $422 to $424 million. Excluding changes in foreign currency net sales for the full year 2007 would have increased by 12.9%. Net sales growth during the year was primarily driven by 15% increase in the number of active Associates compared with the same period last year.

Our monthly Auto Ship rate in the fourth quarter continued its consistent pace representing 52% of our total product sales. Earnings per share from continuing operations were $0.67 in the third quarter and fell within our guidance range of $0.66 to $0.68. This is an increase of 8.1% compared with $0.62 per share in the fourth quarter of 2006. For the full year, earnings per share from continuing operations were $2.67 and fell in our guidance range of $2.66 to $2.68. This is an increase of 18.7% compared with the $2.25 per share reported in 2006.

Let's now go through the major line items on the fourth quarter statement of earnings. Our gross margin in the fourth quarter of 2007 improved as a percentage of net sales to 78.9% compared with 77.7% in the fourth quarter of 2006. This 120 basis point improvement can be attributed to a reduced impact from success of home magazine sales that took place in the fourth quarter of 2006 and approved inventory efficiencies especially with regards to reduce the amount of scraped inventory by an amount of about $700,000.

Looking ahead to 2008 we believe that our consolidated gross profit margin would be approximately the same relative percent of sales as the fourth quarter of 2007. However in the fourth quarter we began operating a new high speed bottling line, which we are hopeful will provide modest production efficiency benefits during the second half of 2008. We are also planning to replace our shipping line with a new state of the art pick-to-light system that we also believe will improve our operating efficiencies and then increase our margins. We expect this to be in place by mid 2008.

Associate incentive expense in the fourth quarter of 2007 was 41% of sales compared with 40% in the fourth quarter the prior year. Incentives for the quarter were a bit higher than what we were expecting. The promotion that we offered during the quarter did not get us the desired results, we were hoping for in the top line. We didn't see the increase in sales but we did have an increase in the amount of commissions we paid. Frankly it did not generate the excitement in the field that we hoped that it would.

As we go forward however we expect our Associate incentive expense will be approximately 40.5% of sales in the first quarter of 2008. Selling, general and administrative expenses increased relative to net sales to 21.8% during the fourth quarter of 2007 compared with 19.6% in the fourth quarter the prior year. The year-over-year increased in SG&A was due primary to the following factors. An increase in spending to support growing sales and an increased customer base which included the expansion of several of our international offices.

Weight related increases including a strategic initiative to add bench strength in certain areas we are staffing both locally and internationally. An increase in depreciation expense relating to the capitalization of our newly expanded facilities in Salt Lake City and an increase in legal and other professional services of which just over $0.5 million related to our current and well chronicled lawsuits. We believe SG&A expenses in the first quarter of 2008 as a percent of net sales will increase compared to the fourth quarter 2007. We are expecting that G&A expense will be approximately 22% to 23% of sales in 2008. As we make the necessary investments to support the future growth of our company. In some ways 2008 will be at least initially a year of expense investing. We do expect however that in 2009, we will be able to generate operating leverage from these investments as we have proven in the past.

Okay, one quick note on other income. In the fourth quarter of 2006 we reported a fairly large one time benefit to this line item due to favorable foreign exchange gain. In the fourth quarter of 2007 we also received a benefit to this line item. This benefit relates to the GAAP requirement to capitalize interest relating to our construction projects and this added about $0.03 to earnings per share. Then in regards to the balance sheet, cash at the end of the fourth quarter was $12.9 million compared with $27 million at the end of 2006. Inventories at the end of the fourth quarter were down year-over-year to $19.4 million compared with $22.5 million at year end 2006. Capital expenditures for 2007 totaled about $26 million because of the facility expansion projects we have underway in the U.S., Australia, Singapore and Taiwan. Each of these projects were undertaken to catch up on our underline infrastructure to accommodate our fast growth and anticipate our future needs. While the increased depreciation did cause some near term expense pressures, we should realize future operating leverage as our sales growth continues. We anticipate capital expenditures in 2008 to be in the neighborhood of $15 to $20 million with further decreases likely in 2009.

Okay, now to update you on our share buyback program. During the fourth quarter, we didn't purchase any additional shares in the open market. However during the year we purchased approximately 1.9 million shares for an investment of about $80 million and currently we have $50.3 million available our share repurchase authorizations. Additionally we ended the year with a balance of $28 million on our $40 million line of credit.

Now before I turn the time over to Dave, I'll comment on our guidance. Yesterday in our press release we provided first quarter and full year guidance of 2008. Based on the current business trends, we believe that net sales for the first quarter of 2008 will be between $105 million and $109 million with earnings per share expected to be between $0.63 and $0.66 per share. For the full year 2008, the company is adjusting both its net sales and earnings per share guidance to 7% to 10% growth compared with the full year of 2007.

In 2008 we'll be talking a hard look at any potential opportunities that may result from the deteriorating economic condition in the U.S. We continue to believe that our home based business model offers us flexibility in both up and down markets. While declining disposable income spending may be impacting us in the near term as people initially tend to want to hang on to their money. We believe in the longer term, our direct selling opportunity will attract individuals as a way to supplement their income.

From an earnings standpoint, we also plan to continue to add key staff and complete our facility expansion initiatives during 2008 in preparation for our next phase of growth. We are confident that our business model remains among the most effective and transparent in the industry and we remain very optimistic about the future both for growth of sales and earnings in 2008.With that I will turn the time over to Dave to comment on our operating activities.

Dave Wentz

Good morning, everyone. Well, yesterday we reported our financial results for the fourth quarter and year end 2007. These results did not meet our expectations. Net sales during the fourth quarter in North America were up a modest 3.7% over last year. Sales in the U.S. were disappointing for us, down slightly on both the year-over-year and sequential quarter basis.

Mexico, however, continues to grow nicely and was up 11% over last year. In U.S., we faced some challenges. Some of which were our own fault. During the third quarter of this year, we held contests and promotions in North America that brought a significant member of new Associates into the business in an extremely short time, more than quadrupling our average weekly enrolments in one week.

I believe this activity hurt us in two ways; firstly, the incentives pushed leaders to bring in more people at one time, than they could reasonably expect to spend the appropriate time, training and supporting. And second, the Herculean effort of those leaders took a toll on our stamina to finish out the year on an aggressive note. We believe this led in part the decrease in our Associate accounts in North America as compared to the third quarter of 2007.

We are also faced with public relations challenges as the shot distort scheme ran through the media and on the Internet. These PR challenges have made it more time consuming for our Associates to bring in new customers as it takes longer to educate and dispel the rumors and myths that pervade the Internet. However, we believe these issues are old news and will be largely behind us in 2008. We are planning to implement several new Associate related initiatives that are specifically designed to regain our momentum in the U.S.

I'll discuss a few of these initiatives in a moment. Fortunately for us we have a good diversification of markets and during the fourth quarter of 2007, net sales in the Asia Pacific region increased by 25.1% to $40.8 million. The growth in this region was led by double digit year-over-year growth in Hong Kong, Australia, New Zealand and Japan. The number of active Associates in that Asia Pacific region increased by 28.8% to 76,000 compared with 59,000 in the fourth quarter of the prior year. This increase was primarily driven by the opening of Malaysia, which had 11,000 active Associates at the end of 2007. As it is typical with the new market, sales in Malaysia were $4.5 million for the fourth quarter, which is down from $4.9 million in the third quarter of 2007.

We were not surprised at all by this consecutive quarter decrease. It is often the case with new market openings that you will have two or three quarters of very fast growth followed by a recovery period as our Associate leaders from other markets return to their home markets, and pass the ranch, the new local leadership, to run the things. We fully expect future growth in this market. This year, our Asia Pacific convention will be held in Kuala Lumpur, Malaysia and should provide an additional boost to the market. This event will take place at the end of March.

Now back to our strategy to grow the U.S. and continue to grow our other markets. USANA is 100% focused on improving the quality of people's lives through our two founding principles; True Health and True Wealth. Our customers receiving the most tangible health benefits and our Associates are succeeding in the strongest residually focused business. We continually strive to build trust with our customers and associates and reward them for their affiliation. The key to building trust is meeting the expectations of our customers and associates. We accomplished this through operational excellence.

We are going to invest in the continued improvement of our infrastructure and services to make sure we are meeting their expectations for product quality and delivery, customer service, sales tool and training effectiveness, IT support systems and any other ways in which we touch our customers. This will continue to improve product royalty as well as support the success of those Associates who want to build up business of any size. We want to make it as easy and as simple as possible to do business with us. Operational excellence is critical to our goal of providing true health and true wealth.

Now I will review some of our strategies for improving our ability to provide true health in 2008. One goal is to make it easier for customers to order from us and to learn about the many products we carry which they have not tried yet. This will be accomplished with an improved shopping carton website, a PC catalog, free product samples and other targeted marketing and up selling promotions. We're also working on a preferred customer referral system. We have an untapped resource of approximately 80,000 preferred customers who may know how to build a business but we know from the success of referral programs in other industries that they will refer possible customers for other incentives such as free products.

We will also focus a lot of attention on MyHealthPak, which provides a completely personalized nutrition program in convenient AM and PM packets which even have the customers name on them. This is the future of supplementation and we'll also look to leverage our affiliation with alliance partners too at Oregon State University, to enhance existing products and develop new science based products that our customers want.

Now, on to true wealth strategies. Our goal is to simplify, support, and improve the efficiency of the entrepreneurs to share our products with others. One example of this is the enhancement of our business management tool which we call the Income Maximizer. This web based tool provides our Associates with a simple and convenient way to measure business. It will improve the system query times and capabilities and have made it more intuitive for the end user so they can more effectively and efficiently manage their business providing time for sharing the products and training the business.

Next we are also taking advantage of cost effective PR opportunities and credibility enhancing partnerships like the Women's Tennis Association, Linus Pauling Institute, many Olympic teams and to direct selling associations. To create a brand that is synonymous with quality products and a financially rewarding business opportunity. Creating more name recognition and ensuring that our name is associated with well respected organizations will peak curiosity and open doors for our Associates. Keep an eye out for some exciting coverage we will be receiving in the next six months.

We believe that USANA's compensation plan is the best way for an entrepreneur to create long-term residual income. As such, we must do, all we can to help our Associates find other entrepreneurial minded individuals and do a better job explaining the superiority of our compensation plan. To do this we are going to continue to enhance and improve our sales tools and target other entrepreneurial industries. These are just some of the investments and tactics we will be working on in 2008 to generate growth in order to reach more families and improve the quality of other lives. With that I'll now turn the call over to the operator to facilitate the Q&A session.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). First question comes from the line of Tim Ramey with D.A. Davidson. Please go ahead.

Tim Ramey - D.A. Davidson

Good morning. When you think about the slowdown in the U.S. business in particular, you certainly mentioned the reputational impact that you took, but can you see in your SKU’s for instance that there is economic sensitivity going on and are you seeing mix shifts occurring within the product mix that's selling or how do you kind of dive a little deeper into the assortment of selling right now?

Gil Fuller

You know that --I'll take a stab at it and Dave and Mark if they want to join in. We have not seen any significant mix shift in our product grouping Tim. It continues to be basically steady as she goes. We are seeing some up tick in MyHealthPak which we are very encouraged about. Dave I don't know if you….

Dave Wentz

I do think we may be seeing a little bit as people are joining because there is so much uncertainty with the economic situation in the U.S. How the media has created such a scary picture that people don't know for sure whether they want to invest in the new business whether they -- what the situation is going to be. I think if we get into a full recession it's definitely beneficial to us because of the downsizing the people are looking for supplement income always goes up in those situations and direct selling is a great alternative for people. So we are kind of stuck in that transition middle period where people don't know if the recession is coming or when it is coming and how they act accordingly. So they are kind of hesitant in limbo at the moment and soon as they see the swing I think we will see them respond appropriately.

Tim Ramey - D.A. Davidson

Sounds good. And would you comment on why you didn't repurchase stock in the 4Q?

Gil Fuller

We had and have two very large construction projects going on one in Australia, which is now well underway and a big one here in Salt Lake. We just absolutely had to add physical capacity both from the inventory and production standpoint as well as from the administrative standpoint. We've just been running so thin that any way we just really needed to add capacity and so with those large commitments and the timing of those been not always something you could manage exactly we got prudent to be on the side line where we get work to some of these things. Now that we have got our admin building here in Salt Lake about wrapped up and the warehouse and production side is getting pretty close I think if we can see little more clearly our cash flows and we would be taking a hard look at that.

Tim Ramey - D.A. Davidson

Thank you.

Operator

Thank you, sir. The next question comes from Simeon Gutman, with Goldman Sachs. Please go ahead.

Simeon Gutman - Goldman Sachs

Thanks. Implicit in the guidance the sale trajectory for the U.S. or for the overall business, looks to be improving a lot in the back half of the year and a question especially given your comments earlier that the incentives the promotions that you rant, the receptivity wasn't strong maybe because your distributor base was winded. Maybe because of the reputational challenges. So in light of that and the economy how do you get confident in that ramp up and yes you're doing initiatives but do those take a little time to set in?

Dave Wentz

Well, certainly yes we're working on some strategies that will take some time some will be implemented quicker than others. But it would be nice if the economy could figure itself out fairly soon the sooner the better. So it can help to make the decisions, and I think we'll be able to reenergize our field too. They worked really hard to fight through last year did some incredible efforts bringing in a lot of people and in some cases we formed contests that brought them in too short of a period rather than spreading them out, but they did a lot of work and I think they just kind of relaxed in the fourth quarter to catch their breaths and now we need to get them going again excited and now that they have enjoyed the holidays it's time to get back to work.

Simeon Gutman - Goldman Sachs

And do you have additional meetings indoor, not in the scale of conventions but can that be used as a tool as well?

Dave Wentz

Definitely, we have our four regional meetings coming up throughout Canada, U.S. and Mexico. We have just had meetings down in Australia and meetings -- we usually have some meetings to kick off the year in these markets and then after the Chinese New Year those markets start to kick it in, because their holidays are coming. Right about now, I believe this week. Chinese New Year will be affecting those markets and they will kick in kind of launch their year end of February, beginning of March as we have our Malaysia convention in Kuala Lumpur. We are excited about that, to get things back on track after the holidays. The Chinese New Year for them.

Simeon Gutman - Goldman Sachs

Well and then searching gives to that market I guess Singapore, Malaysia combined. Are you -- can you track on a regional level and yes, you can see in some of the numbers that some of the other regions may be got a little stronger on a sequential basis. But can you track at least at the distributor level, that there has been a migration back to as a home or origination country and that focus at least for Malaysia has just taken off for a temporary period?

Dave Wentz

I wouldn't say that we can track specifically; it’s more of just talking to the leaders. We have seen this with just about every market we've opened where the initial rush in disappointment and we kind to see a settlement into a certain area. And then they start to build again from there the new leaders start to take over and carry the next way of growth. We've seen it over and over and so we weren't surprised about it and we are extremely happy with the level it got to before this usual transition, as it was much higher then we have ever expected.

Simeon Gutman - Goldman Sachs

And you weren't surprised I know you mentioned it just wanted to hear it with the two to three quarters worth and then a sequential deceleration.

Gil Fuller

Not at all, Simeon I think as Dave said about the pattern and the some 13 markets that we have opened….

Dave Wentz

And look back at the financial (Cross Talk)

Simeon Gutman - Goldman Sachs

And then, Sorry go ahead.

Dave Wentz

The thing to keep in mind Simeon is, when you have a truly seamless global commission plan, you get those leaders over there and they go over there, and get started, and then pull back, as Dave mentioned in his comments, to their home markets, and leave it to the local leaders and there is some give and take, goes back and forth. But we're certainly enthused about that marker and pleased with where we are.

Simeon Gutman - Goldman Sachs

Okay. And then lastly, how would you characterize the success of last year's convention? And I'm curious if would have done anything different with regard to product launches?

Gil Fuller

I think, last year's convention we definitely didn't see the at-event sales. But, I'm so excited about what we did last year. That wasn't a product that drove people to buy immediately, because it was the same inventory that they have, the same products that they had. So, they would wait for their month's supply to run out, before they started purchasing. I'm very excited about the increases we're seeing with MyHealthPak, starting to pick up momentum, we're going to put a lot more attention and what we talk about, people focus on and so, we're very excited about the future of that. I think it'll be huge long term product for us and these – the one weekend sales are not that important in the grand scheme of things.

Simeon Gutman - Goldman Sachs

Thanks.

Operator

Thank you, sir. The next question comes from the line of Bill Leach with Neuberger Berman. Please go ahead.

Bill Leach - Neuberger Berman

Good morning.

Gil Fuller

Good morning, Bill.

Bill Leach - Neuberger Berman

Gil, I had a couple of questions. What would you estimate your extraordinary legal expenses were for the full year?

Gil Fuller

Something in the order of $2.5 million in costs.

Bill Leach - Neuberger Berman

Would you expect that to repeat this year or not?

Gil Fuller

You know, it is a hard thing to judge, we have factored in ongoing legal costs. In the fourth quarter, we were just over $0.5 million on those and we factored in our guidance to best of our judgment. That has continued, because we don't know the timing of when judges will rule on things, and if there are going to be depositions and so forth, it could jump all over the place. But we have factored that in there and hopefully, of course our hope is that like the (inaudible) lawsuits that both the other class-action lawsuits get thrown out and then we'd see a dramatic drop in those costs ongoing. That's certainly our hope.

Bill Leach - Neuberger Berman

Okay. And are you still pursuing your legal suit against Minkow.

Gil Fuller

Yes we are.

Bill Leach - Neuberger Berman

What's the status of that?

Gil Fuller

Right now, there is –it’s in the hands of the judge to determine some rulings on the issues that are raised in the case. We were granted as you may be aware some initial expedited discovery, in a very narrow question of who paid him to write this report and so, that deposition has taken place and then his lawyers filed a motion with the judge to, kind of a tit-for-tat, saying that if you gave it for on me then it should be perfect on and it is just sitting there, waiting for the judge to opine on that.

Bill Leach - Neuberger Berman

And in terms of you EPS guidance, are you assuming any share buybacks or you are just assuming that that’s go on the shares outstanding.

Dave Wentz

We are assuming some share buybacks. I mentioned in our prepared remarks that we have about $50.3 million and it wouldn’t surprise me to utilize that during 2008.

Bill Leach - Neuberger Berman

So, that – I mean I would. Thanks about 8% of your market caps, I mean, that would account for your entire EPS gain if you took that literally.

Gil Fuller

If we did nothing else but buy shares, you are probably right, Bill.

Bill Leach - Neuberger Berman

So, won't you think your guidance would be pretty conservative, if I you did that?

Gil Fuller

Again with guidance, you could certainly jump to that conclusion. It's always difficult when you look out there to know what the stock price is going to do and.

Bill Leach - Neuberger Berman

That’s for sure.

Gil Fuller

And know what our cash needs are, although I mentioned that our CapEx are going to be somewhat less, $5 million to $10 million less than in 2008, we believe.

Bill Leach - Neuberger Berman

Okay. And do you know what the option expensing charge was for the quarter and the year?

Gil Fuller

Yeah I do. In the quarter it was $1.3 million.

Bill Leach - Neuberger Berman

Okay.

Gil Fuller

By the way that was the same as it was in the third quarter.

Bill Leach - Neuberger Berman

Is that pretax?

Gil Fuller

That is pretax. And for the full year it was $6.1 million.

Bill Leach - Neuberger Berman

Have you given estimate for this year?

Gil Fuller

Well what we've build in there is just going to be about the same.

Bill Leach - Neuberger Berman

Okay.

Gil Fuller

Now that of course depends on what the Board does, in terms granting options, and what the share price does, both of those they are sometimes difficult to estimate with any great accuracy.

Bill Leach - Neuberger Berman

And last question. Do you see the tax rate about the same this year?

Dave Wentz

Yeah we see it about 36% in '08.

Bill Leach - Neuberger Berman

Okay. Very good, thanks a lot.

Operator

Thank you, sir. The next question comes from the line of Doug Lane with Jefferies & Co. Please go ahead.

Doug Lane - Jefferies & Co

Hi, good morning everybody.

Dave Wentz

Good morning, Doug.

Doug Lane - Jefferies & Co

You mentioned in the other income of $0.03 favorable item, some of it was capitalized interest. Was that in your original expectations?

Gil Fuller

Well we have been tracking that Doug, it really was, I mean we had been tracking it in the second and third quarters. We were really getting underway with the building project, but the amount was very, very nominal at that point. In the fourth quarter the amount reached the point where we went ahead and made the entry. As I mentioned in my prepared remarks this is a GAAP requirement, this isn't something that's optional for us to either do or not do. It's a requirement and there is likely to be some additional interest capitalization in the first two quarters of 2008 probably not to that magnitude.

Doug Lane - Jefferies & Co

Was I right that's a $0.03 benefit or $0.03 cost?

Gil Fuller

No. It's about a $2.50 benefit.

Doug Lane - Jefferies & Co

Okay. You talked about Associate incentives let me try not to miss anything of 40.5% in the first quarter. Did you mention a number for the full year?

Gil Fuller

For the full year, last year or this year we're expecting it to be 40.5%. This year meaning 2008.

Doug Lane - Jefferies & Co

For the full year?

Gil Fuller

For the full year. Yes.

Doug Lane - Jefferies & Co

Okay. Okay.

Gil Fuller

And it was 40.3% for the full year of '07.

Doug Lane - Jefferies & Co

Right. So that's only a modest step up. I mean, I guess what I would like to talk about is what you're going to do to try to jump start the U.S.? First of all with the average -- with the active Associates going down from 63,000 in September to 61,000 in December. Can you put little color on that is that from less new people coming in or less people ordering during the quarter? So is it more on a recruiting side or more on the retention side?

Dave Wentz

Definitely a combination of both. Definitely may be lower retention because we brought in so many people out once and they want be able to get the support they needed and the fatigue of the leaders out in the field taking a breather in the fourth quarter because we've been driving them so hard for five years now. They have been carrying it up and they took a breath and now we will be out on the road talking with them, motivating them, and finding out what they need to take it to the next level. What motivates them and we’re also going to be looking to do everything we can to make them more efficient. If they are more productive, if they can do more with less efforts, I think that’s a key and with technology and other things we can definitely help them become more productive.

Doug Lane - Jefferies & Co

I was looking back and the last time you went through sort of a retrenchment in the U.S. It was a long time ago it was late '01, early '02. Can you -- obviously you were lots more of a company then but it did turn around pretty quickly. What kind of -- what was the situation then and what did you do then and how can you apply or maybe you less than then to what you’re seeing today?

Dave Wentz

I think it was -- a large part was getting back and rebuilding the relationship with the field. Getting them onboard and then working together for common goals. We had a lot of meetings, a lot of serious talks with our leaders and they all stepped up and you’ve seen the run that came about that. It wasn't contest and promotions they got us that running start, it was leaders who wanted to get back to work and take their income up and they realized the power of the compensation plan. It pays them very well when they work hard. They don't need bonuses and contests to be receiving a very good income. We do those occasionally to help move the procrastinators along given the deadline. But as they climb the leisure brink their pay definitely increases greatly with every step and so they know the reward along the way.

So we will need to go back and talk about the tough year we had and talk about the future and get their mind set shifted to focusing on the future and how we can take advantage of our size and the new technology and resources we have available. The credibility associations etcetera to make our next run. Definitely, see this is a cyclical business and it's time for us to reinvent and reinvigorate and we will -- would be working on a lot of things in 2008 so that we get off to running again like we did back in 2002, like you said.

Doug Lane - Jefferies & Co

Have you been -- have you noticed has it been a material difference in the mood at the field with the events in January or is that just they don't really care and they just go back doing a day-to-day business and really where do you go from a motivation stand point to your leadership without the big increase in the promotions and Associates incentive spending and all the things you talked about?

Mark Wilson

This is Mark Wilson and just responding to that quickly. We've seen some great excitement here in 2008. We have had some great kick-offs in January and we are seeing some large meetings that have taken place and will take place in the upcoming several weeks. I think there is a new initiative to get back to work. It was a little bit as Dave and Gil diluted to a wait and see, with the negative propaganda as well as many of the other things that hit them and the fatigue Dave mentioned. We're feeling and seeing that there is an emphasis on getting back to work and getting out there and getting their teams moving again and I think we'll se that respond in 2008.

Doug Lane - Jefferies & Co

Okay Thank you.

Operator

Thank you sir. The next question comes from the line of Scott Van Winkle with Canaccord Adams, please go ahead.

Scott Van Winkle - Canaccord Adams

Hi everyone. Most of my questions have been asked, but Gill a question for you. If we look back at the third quarter when w started to see a little slowing in the distributed growth in the U.S., there was also lower revenue per distributor that quarter, I think about a 2% decline. I'm wondering if going forward as we look at trends in the distributed growth, it is a good indication to look at that revenue for distributor? May be if it's falling it shows an indication that there is a precursor of a slowing distributor growth. Am I thinking in the right way?

Dave Wentz

Well we do look at that Scott. Just looking at the numbers that did drop and it depends which market you're looking at too, but in the US it did drop from the second quarter to the third quarter. But we are pleased to see it rise in the fourth quarter again and overall, total company wise it did raise in the fourth quarter from both the second and the third quarter. So, it's something that we looked at, but it's not something that we consider a key element.

Scott Van Winkle - Canaccord Adams

Okay.

Dave Wentz

And then (Cross Talk) account is the key element.

Scott Van Winkle - Canaccord Adams

Right. And then speaking, in North America, the Canadian distributor growth on a year-over-year basis anyways been a little volatile, in the last couple of quarter it was up, I think over 20% and then up high single digits this quarter. Is there any co-relation with the US or is there something that was different in Canada?

Dave Wentz

You see a lot of similarity -- this market again between Canada and the US. A lot of our leaders work back and forth between those markets. But we were seeing actually an excitement in Canada, I know in January we had 18,000 people in a distributor led meeting in Montreal, Canada for example and as well as several of the other regions held some great kick off meetings. So, I think you will see some response there as well. But we've always worked very closely as in North Americas, so in US and Canada the border kind of gets a little fuzzy when we were out there and working and interacting.

Scott Van Winkle - Canaccord Adams

Great, and if you mentioned it then I apologies you Gil, I think you mentioned or was it Dave that mentioned the success building in the customized nutrition packages. Has there been any affect on the P&L in the form of our lower costs, better margin and anything like that?

Gil Fuller

Well, we are certainly happy with the margins on the MyHealthPak. I think we are still not completely down the learning curve --our equipment and packages. It’s fairly a complicated process, to have that custom interface, when you go online and drive your pills in and drop them in and so forth and then the machinery has to package that and seal the little envelopes and then put the customized nutritional statement on the box.

Dave Wentz

And we are very happy with the margin with MyHealthPak. We waited a quarter just to make sure that we weren't going to have any bugs in the new technology and new machinery. It's running smoothly, and we are ready to go gang busters on pushing that product and talk about every turn. So, we are excited about the feature of that product.

Scott Van Winkle - Canaccord Adams

And Dave one of the things that I assume, but I think you probably do as well, that people on the My HealthPak will have a higher retention rates. Is it too early you telling us that's the case?

Dave Wentz

It's pretty new --it’s pretty new. Yeah, it will be pretty hard to get any statistically significant information on whether they are staying longer with all the other factors that affect retentions. So, I won't say anything yet, but we are very hopeful of what we saw. I mean with the HealthPak, we saw a better compliance, people taking their products more regularly, you take it when you travel, you take it when you go to dinner, with the bottles it's a lot tougher. The MyHealthPak will just ensure that they are taking more of their tablets at those times, rather than just what was in the HealthPak. So the (inaudible) would come home from dinner and hopefully remember to take, we are not too worried about that anymore.

So, we believe product compliance will go up. So, they will be going through their products more regularly. Thus they auto ship will work better and that they won't have pills left over at the end of the month, because they forgot to take some here and there. So, we think it will help with retention. It will help with their product inventory and make sure that they are not getting a few tablets at the end of each month etcetera. So, we are very excited about the possibilities.

Scott Van Winkle - Canaccord Adams

Great, thank you.

Operator

Thank you, sir. The next question comes from the line of Mimi Noel with Sidoti & Co. Please go ahead.

Mimi Noel - Sidoti & Co

Thank you. Hi.

Dave Wentz

Hello.

Gil Fuller

Hi.

Mimi Noel - Sidoti & Co

Most of my questions have also already been answered, but Gil, I think I have first one for you. Have you seen any unusual changes in auto ship, meaning unusually high cancellations?

Gil Fuller

No. We haven't. Our Auto Ship number came in at the end of the quarter at 52%, consistent with the third quarter, and no, it's been steady.

Mimi Noel - Sidoti & Co

Okay. Can you comment on January or no?

Gil Fuller

No, it's just a little early.

Mimi Noel - Sidoti & Co

Alright. That's right. And then the other one, for Dave, if you can refresh my memory maybe in 2006, 2005, can you recall what was the pace of associate growth in the United States?, Because on the surface you were just about 10% in the first half of 2007., But relative to your overall pace of growth in sales over the last couple of years, it doesn't seem like that much of an acceleration or that would it be so much the existing distributors could not handle the growth. So, it surprises me that they would be so fatigued from such a hard work, because it doesn't look like they've brought in that many distributors over the year.

Dave Wentz

Well, I think the key is how they brought them in; they brought them in extremely short periods of time. So, there is a crunch, there is deadline with major incentive to bring them in at that time. They also have to spend more time with those people, because, as I said, they had to educate and dispel the rumors and myths and lot more, which would take longer to close the person. So, it was more effort during that time to get the person and they brought them all in at once and we weren't able to support them as well and so there was a little frustration, as they lost those people that they weren’t able to work with and take care of. So, it was a weird combination of events.

Mimi Noel - Sidoti & Co

Okay.

Dave Wentz

Where if we have a steady accumulation of those people, where'd have evenly brought in through the weeks and months, it's a much different work load.

Mimi Noel - Sidoti & Co

Okay.

Dave Wentz

Than tax season so to speak where all are crunched into one month. It’s spreading out over the year makes it much more effective, much more -- a better lifestyle so to speak as they are building their business.

Mimi Noel - Sidoti & Company

Could you also speculate perhaps that the existing distributors were maybe a little less selective and who they bring into the business than they have been previously because they were under such duress, call it, to get more individuals into the business?

Dave Wentz

I don’t see that. That doesn’t tend to happen with the numbers we are talking. I mean, maybe, there’s a few people out there that change their targets, but people usually, call that human nature, and do what they have been doing.

Mimi Noel - Sidoti & Company

Attracted to the same people as they always are. Okay

Dave Wentz

Yeah.

Mimi Noel - Sidoti & Company

Alright. That’s all I have. Thank you very much.

Dave Wentz

Thank you.

Operator

Thank you. Next question comes from the line of Willis Taylor with Gagnon Securities. Please go ahead.

Willis Taylor - Gagnon Securities

Hi, you mentioned at the beginning of the call, the end of the SEC investigation. Can you tell us of any other government entities are investigating or making enquiries into the company?

Dave Wentz

There are no other enquiries being made, I mean the typical thing that you get from time to time like a state sales tax auditor coming in and workers' comp -- I mean, just the normal kinds of things at this point.

Willis Taylor - Gagnon Securities

Okay, thank you.

Dave Wentz

Were you asking about any specific agency?

Willis Taylor - Gagnon Securities

No.

Dave Wentz

Okay.

Willis Taylor - Gagnon Securities

Unless there is a …

Dave Wentz

No

Willis Taylor - Gagnon Securities

Okay if the answer is no its no. On depreciation and amortization, it’s been trending down over the last two years and you have these two big projects that are going to come online .Can you tell us what we should expect depreciation and amortization to be after those two projects come online?

Gil Fuller

Depreciation. Let’s see depreciation for the full year 2007 was about $5 million.

Willis Taylor - Gagnon Securities

Okay

Gil Fuller

$5.3 million and that’s probably going to go up about $2 million

Willis Taylor - Gagnon Securities

Okay. Thank you very much

Operator

Thank you, sir. At this time, there are no further questions. Please go ahead.

Gil Fuller

Thank you for your questions. We continue to remain confident in the future outlook of USANA and the investment opportunity we provide. If you do have any remaining questions, please feel free to contact us at investor.relations@us.usana.com or call Riley Timmer, Executive Director of Finance at 801-954-7922.

We appreciate your interest in USANA and thank you again for joining us this morning.

Operator

Thank you. Ladies and gentlemen, this just concludes the USANA Health Sciences fourth quarter and year end earnings conference call. You may now disconnect and thank you for using ACT Teleconferencing.

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Source: USANA Health Sciences F4Q 07 Earnings Conference Call
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