USANA Health Sciences Inc (USNA) 2005 Q3 法說會逐字稿

Good morning and welcome to the USANA Health Sciences Inc. third-quarter 2005 earnings conference call. At this time I would like to inform you that all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions and answers after the presentation.

I will now turn the conference over to your host for today's conference, Mr. Riley Timmer. Please go ahead, sir.

Good morning everyone. We appreciate you joining us today to discuss our results for the third-quarter. Today's conference call is being broadcast live via webcast and can be accessed directly from our website at www.usanahealthsciences.com. On the call a replay will be available on our website.

Before we begin as a reminder, during the course of this conference call management will make forward-looking statements regarding future events or the future financial performance of our Company. Those statements involve risks and uncertainties that could cause actual results to differ perhaps materially from the results projected in such forward-looking statements. 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.

During the course of this call, management will discuss non-GAAP information. An example of a non-GAAP measure we provide is customer count data. We provide this and other non-GAAP measures to assist investors in understanding our operating performance.

I will now turn the call over to our President, Mr. Dave Wentz.

Good morning everyone. On behalf of the 127,000 associates of USANA and as well as our 750 employees, I'm delighted to report that our Company had another outstanding quarter. We continued to build positive sales and earnings growth during the third quarter.

Looking at the individual markets, Australia and New Zealand continue to be strong performers with sales growth of over 25% versus last year. Singapore continues to be a strong market with sales up 37.4% over last year while sales in Taiwan increased over 25%. Sales in the U.S. were also very strong, up 22% compared with last year's third quarter. This growth was driven by the strength of our Annual International Convention held in Salt Lake City in September. The sold out convention was attended by thousands of our associates from all of our markets around the world.

During the convention, we introduced several new products and sales tools. We announced and introduced our new RESET Weight Management Program. The RESET kit is conveniently packaged in a self-contained box with everything you need for five days to be in kicking carbohydrate and sugar cravings. The RESET kit includes new and improved Nutrimeal flavors introduced during the convention. The new Nutrimeals now come in single serving pouches that can be used for sampling or convenience.

We also added individual labeling to our Lemon Fibergy bar and Peanut Butter bar so these can now be used for sampling. In addition to RESET, we also made changes to a couple of our more popular training and prospecting DVDs. We believe these DVDs will help our associates be more successful in building their business.

As Gil will mention, we are increasing associate commissions by offering different programs and incentives to help associates grow their businesses. Let me first clear up any potential confusion. The additional incentives are in no way, shape or form a structural change to our compensation plan. We are simply adding additional opportunities to earn commissions and reward those associates who choose to build their businesses at a faster rate. The vision of Dr. Wentz is to get our products to as many people around the world as possible. Part of that vision is creating wealth for associates by helping them build their home based businesses.

USANA is doing well and believe in returning value to all of the stakeholders including associates. We continue to wait final business license approval to open our next market which we still anticipate will take place in the fourth quarter. We will provide an announcement as soon as we receive our final approval.

Finally, we have included Bradford Richardson on our call today to talk about China as he will be leading our efforts for entering into that new market. I will now turn the call over to him. Bradford?

Thanks, Dave, and good morning everyone. As many of you know, we recently acquired a small personal care manufacturing facility in China. We acquired this facility to produce our products that will be sold in the Chinese market. This state-of-the-art facility contains a purified air and water system, has its own quality assurance program and operates its own microbiology testing for finished products. We will manufacture the same high-quality standards in China as we do at our facility in Salt Lake City.

We're also very excited about the local management team that has significant experience producing high-quality skincare products and have previously built and managed manufacturing facilities for U.S. and European companies operating in China. The facility also features expansion capabilities that will give us the ability to produce our nutritional supplements in country as well. We will look for future opportunities to service other Asian markets through this facility.

We continue to take a deliberate approach with regard to our entry into China. The initial drafts with the Direct Selling Legislation have been issued but there is still considerable negotiation being carried out with regard to the final regulations. Through our lobbying efforts with the Direct Selling Association and the U.S. Government, we hope to see a further liberalization of the market in China for direct selling.

Regardless of the outcome of these efforts, USANA believes there is an opportunity to be successful in China due to our strong product focus and success in other markets with large ethnic and Chinese concentrations. We will make the changes required in our business model to enter the China market and continue to be open to any future liberalization which allows us to operate in a manner consistent with our global model.

With that, I will turn the call over to Gil Fuller to review our operating results.

Thanks, Bradford, and good morning everyone. This morning I plan to update you on our record financial results and the operational progress that we've achieved in the third quarter. I'll also provide an update to our guidance for the fourth quarter and give a first look at our initial expectations for 2006.

In terms of third-quarter results, net sales for the quarter came in about where we expected. We were pleased to report record net sales of $82.2 million, an increase of 20% compared with the $68.7 million reported in the third quarter of 2004. If you looked only at the direct selling segment of our business, net sales were up 22% compared to last year's third quarter.

Our sales growth in the quarter was driven by a 14.4% increase in the number of active associates and strong net sales growth in the U.S. resulting from record attendance at the September International Convention held here in Salt Lake City. We are also pleased to report year-over-year growth in all of our markets except Korea.

Additionally sales were positively impacted by foreign currency which added about $2.6 million to our third-quarter revenue when compared with last year. The monthly auto ship order rate continued its consistent pace representing 54% of our total product sales during the third quarter. Earnings per share for the third quarter increased to $0.51 compared with $0.39 per share in the third quarter of 2004.

During the third quarter, the estimated tax rate was adjusted to 34% for the year which is lower than the 35% tax rate we had previously estimated for the full year. Therefore with respect to guidance, this tax adjustment had a positive earnings per share impact of approximately $0.02. However on a year-over-year basis, the effective tax rate was 90 basis points higher in 2005 than 2004. We were once again pleased with the operating leverage that we achieved during the third quarter which allowed us to reach year-over-year EPS growth of 31%.

Let's now turn to P&L operating lines. Our gross margin in the third quarter of 2005 improved as a percentage of net sales to 76%, an increase of 40 basis points compared with the 75.6% in the third quarter of 2004. The year-over-year improvement in our gross margin was due in great part to the contract manufacturing segment becoming a smaller portion of our overall business. Looking forward we expect gross margin in the fourth quarter of 2005 as a percentage of net sales to modestly improve on a sequential basis.

Associate incentive expense in the third quarter was 40.4% of direct selling revenue compared with 39.8% of direct selling revenue in the third quarter of last year. We expect associates incentive expense to be up modestly in the fourth quarter as we continue to focus on driving the top line by rewarding our associates for increased activity in sales results.

Selling, general and administrative spending decreased relative to net sales to 17.9% during the third quarter of 2005, compared with 19.1% in the prior year third quarter. The year-over-year quarterly improvement can be attributed to the operating leverage gain from our growing (ph) sales base. We expect SG&A in the fourth quarter as a percent of net sales to be higher than the third quarter due to additional spending related to our planned new market opening and some increased costs related to China as we begin the effort to create the infrastructure necessary to support this market.

Third-quarter operating income was 17.8% of net sales which was modestly better than the 17.7% for the third quarter of 2004. Overall our operating margin continues to be very strong. For the nine-month period ending October 1, 2005, net sales were $240.8 million, an increase of 21.8% compared with $197.7 million in the first nine months of 2004. Earnings from operations for the first nine months of 2005 were $42.9 million, an increase of 31.5% compared with the $32.6 million for the same period in 2004.

The Company achieved net earnings in the first nine months of 2005 of $28.5 million, an increase of 31.9% compared with earnings of $21.6 million in the first nine months of 2004. Earnings per share increased 37.1% in the first nine months of 2005 to $1.44 compared with $1.05 in the first nine months of last year.

During the third quarter, we did not purchase any shares via our stock buyback program. For the nine months ended, we have purchased a total of 352,000 shares for an investment of $15 million. We currently have approximately $25 million remaining under the share buyback authorization.

Before I go through our guidance, I'd like to take a few moments to comment on our current inventory levels. Inventory is up about $3.5 million from last quarter and nearly $8 million from year end. This increase in inventory can be attributed to the following reasons. First, we have hedged against supply shortages of specific raw materials. We have done this through purchasing additional quantities of raw materials that were anticipated to be in short supply or increasing in price.

Second is the increase in inventory related to our launch of RESET. We did not want to duplicate the customer supply challenges we faced last year with Sense'. Thus we built enough inventory to limit the stockouts.

Third, you recall the initial success of Sense' resulted in our being on backorder at year end 2004. At the end of the third-quarter of 2005, we have built sufficient inventory to limit the risk of stockouts in this key productline.

Finally in an effort to reduce our freight expenses, we are now shipping more of our product in containers via ocean cargo which lengthens lead times and therefore adds a dip to inventory levels. Our goal will be to begin reducing inventories beginning in the fourth quarter and get our turns back to levels consistent with previous quarters.

Now before I turn the time over to the operator, I will comment on our guidance. To reiterate the guidance that was provided in yesterday's press release, we now expect net sales in the fourth quarter of 2005 to be between 86 and $88 million, an increase of as much as 17.1% compared with the $75.1 million in the fourth quarter of last year.

We also expect that earnings per share in the fourth quarter of 2005 will be $0.50 to $0.52. These estimates are based on our assumption that we will open our new market by about the middle of the fourth quarter. As a result we believe net sales for the full year will be between 327 and $329 million. This represents full-year sales growth between 20 and 21% compared with 2004. Also we now believe earnings per share for 2005 will be between $1.94 and $1.96 representing growth of 28 to 30% compared with 2004.

Looking ahead to 2006, we expect net sales growth between 15 and 20% and earnings per share growth of 15 to 20% as well. Earnings per share assumptions include an estimated tax rate for 2006 of 35.5% that exclude an estimated $0.10 per share impact from the expensing of stock options.

I will now turn the call over to the operator to facilitate the Q&A session.

(OPERATOR INSTRUCTIONS) Tim Ramey, D.A. Davidson.

Good morning. Congratulations. Hey, you're fairly bold putting the new market opening in the 4Q in the middle there and as a part of guidance. Are the things that need to fall into place to get that next market open of a relatively trivial nature or is there real uncertainty about some of the issues that remain ahead of you?

Perhaps I can jump in with the first response and Dave and Bradford, if you wish to join, you certainly can do so. We believe that we are well positioned to open this market and that the things that remain are basically perfunctory and a bureaucratic thing. That is what we understand. We think it's -- we believe it's going to happen fairly shortly and we believe that there are no issues out there. It's a matter of dealing with the bureaucracy that seems to be there.

And if I think about your 2006 guidance, would you be building any expectation for China into that either cost of China opening or revenues from China?

Well certainly we have the cost -- some cost estimates in there for China. And they are some modest revenue assumptions in there late in the year, fourth quarter kind of thing. This is obviously uncharted territory for us with the rules just being published and I can't even apply for a license from what I understand until December 1. The granting of that license is probably going to take three to six months or so.

There is also the product regulatory filings that are underway and will be additional efforts being undertaken to get products registered and approved and that will take some time. So no question that we will have some costs in there. That is one of the reasons you see the earnings guidance and the sales guidance -- consistent we've normally had leverage projected in there because it certainly is our goal to get additional leverage but out of an abundance of caution, we certainly -- and the unknown aspects of entering that large market, we are being a bit cautious there.

A quick one for Dave. Were the sales, can you relate the sales of the RESET relaunch to anything that would be helpful for us particularly say the size of the inventory buildup there is about 3 million of inventory buildup. Can you -- would you have easily covered that with the sales of the RESET launch or how did that go?

The RESET launch went very well, better than we had hoped. It went even better than Sense' went last year. So we are very excited about the prospects. But we were very cautious with inventory to make sure we had plenty so that we weren't playing catch-up again and losing the momentum that we built at convention. So we believe that we built inventories to make sure -- guarantee success going forward and not hamper ourselves with stockouts and frustrated distributors. We are excited about the potential of it.

Terrific. Thanks.

Mimi Sokolowski, Sidoti & Company.

Thank you. Dave, can you characterize how you felt about the growth in associates? And also what may have gone on in Canada that generated flat associates year-over-year?

We struggle in the summer every time to come up with promotions and incentives to get people to avoid vacations and stick with work. But it is always tough to push them. We've been pushing really hard in previous quarters. And we've even had some complaints that there are so many promotions, one after another, they never have a chance to take a break. They are always asking when they can have a breather. And so I guess with part of the business and the lifestyle we teach is to have a time freedom. And so from time to time distributors will take a break. We can't push them twelve months straight without giving a little push back. They needed a break.

But were you surprised at all -- is 14% growth overall in line with your expectations?

Associate growth?

Yes, excuse me.

Yes, that is about normal it feels like for summertime and we're hoping that fall back-to-school things will pick back up and get going at a faster rate.

Do you have an idea, a ballpark perhaps of what the fourth quarter number might look like or how you might finish out the year?

I do not.

Mimi, we haven't ever given guidance on associate count.

I figured I would try at least. Any impact on cost of goods related to increased cost of packaging, anything like that -- just impacted by petroleum costs?

We have been talking about that for the last several weeks here and had our material supply people go back to vendors and see what was coming. And really through the third quarter we hadn't seen much of anything passed along to us. And what we gather might be coming -- where it affects us as in the plastic bottles, the petrochemical cost elements of that. And it is very modest. Apparently we are going to see some come along but you have to go out about four decimal places to get any impact in terms of cost to us.

Packaging is I think roughly about like 4% of our cost of goods sold, something like that. And so it really does get to be fairly minimal. That is the way we view it at this juncture anyway.

Okay, that is good to know. That is helpful. That is all I have. Thank you.

David Block, The Seidler Companies.

Hi, good morning. The first question I have is you had a number of international markets that were down sequentially this quarter. I was wondering if you could please strip out the impact for foreign currency, competition and I guess general operations on the performance and the sequentially down markets?

I will take a stab at that. Currency was an element in the third quarter again, just a brief quick overview here. Generally speaking a weaker U.S. dollar is a good thing for us. A stronger U.S. dollar tends to be a little bit hurtful on the top line. And overall for the quarter, we had a modest benefit from currency largely driven by the Canadian dollar. The Asian currencies were all weaker so some of the shortfall in those Asian markets was related to currency. And that would have been on the order collectively of $0.5 million, something of that sort, not a large number but still a factor.

I think sequentially too, one of the things to keep in mind is that this convention that we have in Salt Lake City International Convention draws a lot of our leaders from Asia, nearly all of our significant leaders from Asia come over here. And you saw that the U.S. numbers were up on a consecutive basis. Part of that is because the purchases were made here rather than their local market. They hauled stuff from here in September back home. In fact didn't purchase back home in large part anticipating what was going to happen in convention. So we viewed the consecutive results basically within the expectations that we had.

Can you address just competition and general operations within the sequentially down markets? Was there any impact from either?

Bradford, you may want to comment. I believe we did have some new entrants during the quarter in a couple of our markets.

Yes, definitely. I think the largest market where we had a huge impact from competitors was of course Taiwan, where three companies entered that market, Mannatech, Market America, and Amkey all in the end of the second quarter and throughout the third quarter. Those three major competitors all had a very similar compensation plan to ours and targeted USANA very specifically. So that really did impact that market.

Additionally a lot of companies that have been targeting -- a lot of the smaller companies who have been entering China through Hong Kong are touting that and USANA has chosen not to do that choosing to enter into the Chinese market the more traditional manner. And so we also had some impact in Hong Kong from competitors using that as leverage against us in that marketplace. So that was definitely a challenge in the summer.

David, let me just add onto that if I could. I think just looking at post-convention, while it has been very short yet, it looks like we have successfully dealt with that competition over there in Taiwan, just in my view. Bradford, you may want to add to that. I think we have held them at bay and we are certainly seeing some good things coming from there.

I think Taiwan has held up exceptionally well. We still were up over 25% but I think one of the things in terms of cyclicality is we were very strong in the first and second quarters and drove large promotions partially in anticipation of that. If you look at our growth in Q1 and Q2 versus last year, we were up strongly against that. It just did not carry over as much into Q3 especially in terms of sequential growth. But the nine-month growth was certainly strong when compared to last year as well given the first and second quarters.

Okay. Just for my understanding when a competitor enters one of your markets, are they actually signing up people in your down line or is it more a function of more companies and opportunities hitting the same pool of people?

Certainly the latter is the biggest issue. Of course you always have some people who live across the fence and say we might be interested in looking at that other company. But really it is targeting the pool that we are also going after. And it just makes it harder for our associates because they are coming in with something new initially. It's going to create some buzz and we just have to counter and then when the dust settles, we will just carry on with our growth.

Okay, great. Thank you.

Doug Lane, Avondale Partners.

Good morning everybody. I have three questions basically. First question is Gil, can you elaborate on the particular material that you are seeing supply shortages of and potential price increases?

My second question is on the new incentives, Dave, can you talk a little bit about what they target specifically? And then maybe what the impact will be to your associate incentives as a percent of sales for next year?

And then thirdly with China, how do you guys plan to compensate your leadership there if the MLM compensation system is not permitted at least initially?

Let me start in with materials. We had focused on two or three materials that were important. Remember a lot of the inventory increase was related to RESET and Dave commented we want to make very sure we didn't run out there. But in addition, there's two or three materials that we wanted to make sure we didn't have a problem with. One of those and we have talked about this before, was the glucosomine, which was related to the Tsunami events of a year ago. And so we have taken opportunities to make sure that we are sufficiently inventoried there.

Also Coenzyme Q10, you may recall we have talked in the past about the price of that going up. And we did some hedging with regard to that particular supply of raw material to make sure that we not only had supply but that it was at a price that was working okay within our margin structure.

And palmetto was another one. The hurricanes a year ago in Florida were a bit tough on the palmetto, the saw palmetto crop there. This year, in fact we just confirmed this a matter of days -- a few days ago, that the crop is harvested and in, so we're not too worried about Wilma heading in that direction now. And we have taken opportunities to make sure we are squared away with that particular product.

And curcumin is another one that we had -- there were supply issues on and we took an opportunity to hedge the supply issues as well as a price changes on that one. So those are examples of what we've tried to do. I think if the real question is are we worried about obsolescence or unusual inventory provisions, we are not as this has been strategic. It has been well thought out and planned and though it is a bit heavier investment than we had otherwise liked to have had in inventory, I think it has been to the right thing to do.

In fact in some cases, we are seeing some prices now come down in coincident with our ability to work through the product that we have had. An example is Coenzyme Q10. There is another plant coming on line the next little while based in Texas that should see those prices come down. I think it is going to coincide very nicely with us working through the inventory that we had purchased to hedge that particular ingredient.

Okay, thanks.

In regard to the incentives, the incentives of course will be extremely focused on new customers, new distributors bringing new business in. We launched a promotion at convention that was very well received which focused on new associates bringing in four new customers and received extra bonuses for doing that. Almost all contests going forward will be focused on bringing in new customers, producing more sales, selling more product to new individuals. With the thoughts that we will move our associate incentives line up to 41% at the top provided these are working for the USANA segment.

Got it. Okay, that is helpful, thanks. And then a little bit on China and how you are going to deal with the lack of the regulations permitting MLM compensation?

If I could handle that, this is Bradford Richardson. I think first of all, we've got to see where those laws come out. Clearly they have made some additional communications but there is a lot of work going to the U.S. TR (ph) and with the DSA to negotiate a better position for our companies to operate as we operate in countries around the world. And certainly all of our competitors and we are working very cooperatively to see what changes we can get made in that legislation.

It would be a little premature but I think the important things to note are USANA is a very strong product company. And if we are in a position where we need to focus more on the product selling on a single level and doing what we need to do to move product in that market through that model, we're going to have to make those changes until such a time as the government allows us to operate as we do around the world. I think one of the things that is beneficial for USANA also is we really control our own compensation plan structure and our software around that. So we are able to make modifications and changes I think quite easily. And once we understand exactly where the law falls out.

Let me put you on the spot then, Bradford. What do you think the probability is that MLM will be included when the regulations are adopted December 1?

There is a lot of work being done by a lot of people right now to change the positions not only about multilevel but about a number of issues in the law.

My guess is that things will not be changed by December, but I'm currently in the UK at the World Federation of the DSA and had a meeting with the rest of the CEO Council here and they are putting every effort as you can imagine into pressuring a change to the regulations that none of them find favorable. The two regulations that came out, there is concern amongst all companies and they are using every lobbying effort and government effort that they can to push to get things modified in the near future.

As slow as the government moves, I doubt that it will be a December change but they are working hard to let China's government know that we're unified as a Direct Science Association that these regulations we do not believe comply with WTO. And so we will be fighting hard to get them to comply.

Dave, what else besides MLM is the group concerned about?

That is our number one priority, is MLM.

Thank you.

Mimi Sokolowski, Sidoti & Company.

Thank you. Gil, just a quick follow-up question on the convention. At what time of the year was it in 2004? And how was attendance overall and attendance across geographies, if you recall?

Best my recollection --.

It was a day later last year than it was this year.

Okay.

September 15th instead of September 14th. And our attendance was up this year and I believe increased international presidents from just about all of our markets.

Okay. Do you know if you have the absence of leaders in Asia this year or excuse me -- in 2004 that you had this year, was that different or do you think it might have been about the same?

The absent?

We definitely had more leaders across each of the markets.

Like twice.

Okay.

Like twice in most markets.

All right, that is helpful. Thank you very much.

Linda McDowell (ph), of Manchester Management (ph).

Hi, yes, I had a couple of questions for you. One was can you tell us what the Sense' productline accounted for in sales this quarter?

Yes, for the quarter it was 14%, down a bit from the prior quarter but really that was not very surprising given the fact that we pushed very, very hard the RESET program at the convention. I mean that was the primary focus, not the only focus but it was the primary focus at convention.

And can you disclose to us what the RESET numbers were? Will you be disclosing that?

I don't think we disclosed that and I don't have that -- do we have functional foods, anywhere?

Riley is telling me that in terms of a category, we categorize as our RESET program as part of our functional foods. And it went from about 9% to 10% in the quarter. And RESET was the primary -- that was the driver of that change.

It was, okay. And I'm wondering if you could quantify for us a little bit just looking out to '04 and '06, what sort of revenue you are expecting in the fourth quarter; what portion you are expecting to come from the new market that you plan to launch? Just trying to get a sense of sort of what the range of numbers would be.

Yes, we have -- we are -- obviously it depends how soon we can get the final bureaucratic stamp on our license. But it is fairly modest assumption and it is less than $2 million for the quarter.

Okay, great. And any sense on sort of you said that in your '06 numbers you have a little bit dialed in there for China for the fourth quarter. Would it be a similar dollar amount (multiple speakers)?

Yes, yes. Similar, just almost a token amount that we've put in there in the fourth quarter.

Okay, all right. Great, thank you very much.

Because we really continue to expect strong growth in all of our existing markets.

Okay, wonderful. Thanks for your help.

Tim Ramey, D.A. Davidson.

Just a follow-up on RESET and the functional foods in general. Gil, am I right in thinking that this time a year ago that product was being manufactured either outside of Salt Lake City or just by a third party? And is there operating leverage to the cost of goods given that that is now in house?

Dave, you may want to comment here but we don't manufacture the bars in house and have no plans to do so. But some of the mixed drinks we do manufacture in house. However, one of the interesting aspects of our RESET packaging is that we have put Nutrimeal in pouches and we do not do the pouches. Those are done outside. But with regards to the mixed drinks that are in the cans, the reason we brought those in house was because there is some operating leverage. So as that volume goes up, hopefully we will benefit from that operating leverage.

Is there an opportunity to bring the pouches in house or is the pouch -- are the pouches viewed as kind of the promotional part of this program?

It is a key part of the program, both in terms of the convenience of taking the product, being able to throw a pouch in your briefcase or your purse or whatever and use it as a meal replacement wherever you might be going or traveling. But I think whether or not that comes in house is a function of volume. At some point if the volume in pouches was significant enough, we would certainly take a look at it. My expectation at this point is that could be a ways out there.

Thank you.

Shawn Kravitz (ph) of (indiscernible).

Good morning. I noticed there is just shy of a $700,000 swing in other income for the quarter year-on-year. Could you give us a little bit of color on that, please?

Last year in '04 the comparable period we had some foreign exchange negative impact. And this year we didn't. That is really the primary change.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Mimi Sokolowski, Sidoti & Company.

Thanks, Gil, just this last one. Can you quantify the infrastructure buildup in China that you anticipate next year?

You know at this point I think it is a little early for that. We haven't gotten through the licensing process.

Yes, I understand. Do you suspect that it is in line with what you may have spent in say Mexico for instance? Or do you think it would cost more or is it again too early to even go there?

I think it is really a bit early to go there. My gut would tell me that it would be a bit more than Mexico. Bradford, you may have an observation on that one.

Well, it seems like the government has liberalized some of their previous indications on how many retail stores. So I don't think we will see as much as we may have originally anticipated in that regard. But I definitely do believe that it will be more than Mexico because of the broader geographic scale of the marketplace. But the opportunity there is large as well.

Okay. Had you ever disclosed how much the infrastructure build in Mexico was?

No, I don't think we have really done that. If you think about it, in the case of Mexico at least where we don't have a plant, we have a call center, some meeting rooms, a few offices, you know and a pick up -- a will call center, it is relatively modest. All of this stuff is leased except for the computers. And so it is a relatively modest infrastructure cost in terms of assets. The biggest cost being the people demand those things. But all of that is relatively modest.

In China we have purchased this plant. We expect that the infrastructure there will be a little more complex. But it is early for us to tell.

What quarter if you would remind me, did you open up the market in Mexico?

It was late March of '04. The real impact of the results didn't really show until the second quarter of '04. That is when we were really up and running.

Okay. And so on the expense side that is when it would have come through the P&L?

Well the way -- we don't defer any of these expenses. In other words, when we expense the efforts of starting up a market as we incur them, you know, so it starts months before.

Okay. So earlier in the year perhaps?

Yes.

Okay, I will try to take a look at that. Thank you.

Ladies and gentlemen, this concludes the question-and-answer portion of today's conference. I will turn the conference back to management for closing remarks.

Thank you for your questions. If you have any remaining questions, please feel free to contact us at investor.relations at us.usana.com or call Riley Timmer, Manager of Investor Relations at 801-954-7922. We do appreciate your interest in USANA. And thank you for joining us on our conference call this morning.

Thank you for your participation in today's conference. This does conclude the presentation and you may now disconnect. Have a great day.