USANA Health Sciences Inc (USNA) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the USANA Health Sciences third-quarter earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded today, Wednesday, October 18, 2006.

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

Thanks, Mary. Good morning, everyone. We appreciate you joining us this morning. As a reminder, today's conference call is being broadcast live via webcast and can be accessed directly from our website at www.USANAHealthSciences. Shortly following 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.

Also, during the course of this call, management will discuss non-GAAP information. And 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.

Let me now turn the call over to Gil Fuller, our Executive Vice President and CFO.

Thanks, Riley, and good morning, everyone. Thank you for joining us to review USANA's strong third-quarter results. I'm pleased this morning to be joined by Dave Wentz, our President, who you will hear from shortly. Also in attendance this morning is Fred Cooper, our Executive Vice President of Operations, and Doug Hekking, our Vice President of Finance.

This morning, I plan to update you on the strong financial results we continued to achieve in the third quarter, to talk about our guidance for the fourth quarter and to also provide our first look at the full year 2007.

Third-quarter sales were once again very strong. In fact, the third quarter represented our 17th consecutive quarter of record sales. We're pleased to report net sales of $95.2 million, an increase of 15.8% compared with $82.2 million reported in the third quarter of 2005. This result was in line with the guidance we provided to you last quarter.

Net sales growth this quarter was driven by a 14.2% increase in the number of active associates and an 11.8% increase in the number of preferred customers compared with the third quarter of last year. We were quite pleased with these results, given that the third quarter is seasonally our toughest quarter to predict.

The summer vacation season in North America, along with the anticipation for new products introduced at convention typically, bring a bit of seasonality and softness to our business in the third quarter. Our monthly Autoship order rate continued its consistently strong pace and represented 52% of our total product sales during the third quarter.

Earnings per share for the third quarter, which includes equity-based compensation expense increased to $0.55 compared with $0.51 per share in the third quarter of 2005, which excluded equity compensation expense. Equity-based compensation expense decreased earnings per share by $0.05 in the third quarter. Excluding this expense, earnings per share would've been $0.60, an increase of about 18% compared with the third quarter of the prior year.

Earnings per share in the third quarter of 2006 were reduced by about $0.025 due to the following -- additional incremental expenses related to Malaysia, costs associated with the promotion of Success from Home magazine and a slightly higher effective tax rate.

Let's now go through the major line items on the statements of earnings. First, for comparative purposes, I will give you the impact that equity-based compensation had on the third quarter by line item -- in cost of goods sold, $145,000; in SG&A expense, $1 million; and R&D expense, $139,000. The total reduction from equity-based compensation was $1.3 million or about $0.05 per share.

Our consolidated gross margin in the third quarter of 2006 improved as a percentage of net sales to 76.7% compared with 76.0% in the third quarter of 2005. If you look at gross profit margins by segment, our direct-selling segment improved 60 basis points to 78.3% in the third quarter compared with 77.7% in the third quarter of last year. This improvement in our direct-selling segment is primarily due to lower pricing on certain key raw materials, which were in short supply in 2005.

In our press release that was issued yesterday, it was noted that we would be heavily promoting Success from Home magazine during the fourth quarter. These promotions include the following -- selling the magazine at a discounted price, free shipping for customers with a 56 pack of these magazines on their Autoship and our matching check incentive. The combination of these promotions will reduce our operating margins by about 40 to 50 basis points in the fourth quarter. However, these are short-lived promotions; and thus, we expect our margins to normalize in the first quarter of 2007.

Associate incentive expense in the third quarter was 41.2% of our direct-selling revenue compared with 40.4% of direct-selling revenue in the third quarter of last year. As planned, the level of payout increased year over year because of an additional emphasis on contests and certain incentive promotions. These incentive programs are designed to increase excitement in top-line growth and have historically been successful. For the fourth quarter, we expect associate incentive expense to be somewhat lower as a percentage of direct-selling revenue than the third quarter of this year, primarily as a result of sales mix due to Success from Home.

Selling, general and administrative spending increased relative to net sales to 18.8% during the third quarter of 2006 compared with 17.9% in the prior-year third quarter. As I noted earlier in my comments, equity-based compensation expense increased SG&A by $1 million this quarter. If you exclude equity-based compensation expense of $1 million, our SG&A expense relative to net sales was 17.7% in the third quarter of this year. We believe SG&A expense in the fourth quarter of 2006 as percent of our net sales will be modestly lower compared to the third quarter of 2006, notwithstanding the additional expenses associated with Malaysia.

In regards to the balance sheet, cash at the end of the quarter was $21 million compared to $10.6 million at year-end and $9.2 million at the end of the second quarter.

To update you on our share buyback program, during the third quarter, we invested $3 million in cash to repurchase approximately 67,000 shares. Currently, we have approximately $47 million available under our current share repurchase authorization.

For the nine-month period ended September 30, 2006, consolidated net sales were $278.7 million, an increase of 15.8% compared with $240.8 million in the first nine months of 2005. Earnings from operations for the first nine months of 2006 were $45.6 million, an increase of 6.3% compared with $42.9 million for the same period in 2005. Remember that earnings from operations for the first nine months of 2006 were reduced by $3.5 million due to the required expensing of equity-based compensation.

We achieved net earnings in the first nine months of 2006 of $30.1 million, an increase of 5.7% compared with net earnings of $28.5 million in the first nine months of 2005. Excluding expense of equity-based compensation, this increase in net earnings would have been about 14%.

Earnings per share increased 11.1% in the first nine months of 2006 to $1.60 compared with $1.44 in the first nine months of 2005. Again, excluding the expense of equity-based compensation, this increase in earnings per share would've been 20.1%.

Now, before I turn the time over to Dave, I will comment on our future guidance. We expect sales in the fourth quarter to be in the range of $98 million to $100 compared with $86.9 million in the fourth quarter of last year for a growth rate of 13% to 15%. This guidance is consistent with, though a bit tighter, than the top-line guidance provided in connection with last quarter's report. If achieved, sales in the range of $98 million to $100 million would represent our 18th consecutive quarter of record sales.

We expect earnings per share in the fourth quarter of 2006 to be between $0.56 and $0.58, including the expense of equity-based compensation. Excluding the expense in equity-based compensation, we expect earnings per share in the fourth quarter of 2006 to be between $0.61 and $0.63, a growth rate of between 13% and 17%. As I noted earlier in my comments, during the fourth quarter, we will be promoting Success from Home and we will be incurring additional expenses as we prepare for the first-quarter opening of Malaysia.

But now, let's look at the full-year guidance for 2007. We expect to grow both net sales and earnings per share in 2007 between 15% and 17%. This top-line guidance and earnings per share estimates include operations in Malaysia, the expense of equity-based compensation, and assumes a 2007 tax rate of 37% which is meaningfully higher than the 35% tax rate we expect for 2006. In fact, this higher estimated tax rate will reduce earnings per share by approximately $0.08 in 2007.

Therefore, let me make a quick couple of quick comments in the higher estimated tax rate for 2007, as I'm sure many of you would like a little bit more information on the cause of the higher tax rate. Unfortunately, Congress has repealed the ETI tax credit based on complaints by the World Trade Organization. This is being replaced by a phased-in tax deduction related to domestic manufacturing. However, the phase-in of this new manufacturing deduction has not offset the loss from the ETI benefit.

Congress has also not acted on the extension of the credit for increased research expenditures. If Congress extends this credit by the end of the year, the effective tax rate could be lower for both 2006 and 2007, depending on final qualified research expense.

I will now turn the time over to Dave to comment on our recent announcements and operating activities.

Thanks, Gil. Good morning, everyone. As Gil mentioned, the third quarter marked the 17th consecutive quarter of record sequential sales and we achieved double-digit year-over-year growth in all but one of our markets.

First, let me talk about our new market announcement we made yesterday. We're very pleased to finally announce the long-anticipated opening of Malaysia. Malaysia will be USANA's 13th market. According to the World Federation of Direct Selling Associations, Malaysia is one of the top 15 markets for direct selling and generates approximately 1.4 billion in annual sales.

Given the success we have achieved in other markets in this region, including Singapore, we believe that Malaysia will further support our goal of strong long-term growth. The USANA Malaysia facility will be located just outside of Kuala Lumpur. It will contain administrative offices, a distribution center, some associate meeting rooms and a call center. We're currently working on the last-minute logistics, and we hope to begin selling products there in the first quarter of 2007.

Now, let's look at the sales results in our two main geographic regions. Net sales in North America, our most mature region, increased 14% compared with the third quarter of 2005. Excluding the positive impact of currency fluctuations, sales in the region would have increased 12.1%. The growth in this region was led by strong sales in Mexico, which increased 32.1% compared with the third quarter of last year.

Sales during the third quarter were up 13.7% in the US and up 10.4% in Canada compared with the third quarter of last year. The number of active associates in North America increased 13.9% to 90,000 compared with 79,000 in the third quarter of last year. For the third quarter specifically, I believe it is important that investors focus on the year-over-year sales results. With many of our leaders based in North America, the summer vacation season and the anticipation of new items launched at convention combine to make this our toughest sequential quarter for growth.

In the basic -- in the Pacific Rim regions, sales were very strong. Sales in this region increased 20% over the third quarter of last year. Excluding the negative impact of currency fluctuations, sales in the Pacific Rim region would've increased 20.6%. This increase can be attributed to double-digit growth in the following markets -- Australia/New Zealand up 10.1%, Taiwan up 14.4%, Singapore up 28.1%, Hong Kong up 56.3%, and South Korea which was up 76.1% -- each compared with third quarter of last year.

We have aggressively maintained the strategy of not pursuing new markets too quickly, and we believe these are the rewards of that strategy. The number of active associates in the Pacific Rim region increased 14.6% to 55,000 compared with 48,000 in the third quarter of 2005.

In mid-September, we held our annual International Convention in Salt Lake City, Utah. At this year's convention, we emphasized the focus on business-building tools and introduced new exciting sales tools to our associates. Our key announcement was that USANA would be featured in the November issue of Success from Home magazine. We believe that Success from Home will be a powerful third-party sales tool for our associates when they present the USANA product and business opportunity. We have made Success from Home another affordable sales tool for our associates by selling it at our costs.

During the convention, we asked associates to give away two of these magazines per day every day going forward. We offered an incentive to do this by providing free shipping to any associate who has a 56 pack on their monthly Autoship. Our 28-day cycles allow two to be given away each day with this 56 pack. We are very optimistic that Success from Home will support both higher incremental enrollments and sales.

Another highlight of this year's convention was the introduction of a new optimizer supplement called TenX Antioxidant Blast. One of our key strategies is to provide our associates with innovative but focused products. We believe we have accomplished this with TenX. TenX is a unique dietary supplement fruit leather. It provides the equivalent of two fruit servings, three grams of fiber, and is low glycemic. TenX is also fortified with important antioxidants, including quercetin and our patented Olivol, which is an olive-fruit extract, so people can get more antioxidants without taking another tablet.

It is important to note that we are marketing this product as a supplement and not a food product. TenX signifies that this product provides ounce per ounce 10 times the antioxidant of the best fruit juices, green tea extracts and finest red wines. We believe this is one of the characteristics that separate this product from our competitors.

It also is a product can be used by our associates as samples and for introducing a new prospect to USANA. So far, the reception of this product from our associates has been very good.

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

(Operator Instructions). Scott Van Winkle, Canaccord Adams.

A few questions. First, on the promotion for Success from Home and the cost of shipping and things of that nature, it seems like you're building in incremental expense but not necessarily giving yourselves an acceleration in revenue growth from higher recruitment. Is it fair to say that? Or your thoughts would be great.

I think, Scott, we have -- I hope we are in fact a little cautious on the revenue forecast. You know, this is a new thing for us to try, and so we are probably -- perhaps we're a bit conservative on what we've got out there for guidance. Certainly, we are hopeful that if this two-a-day concept in giving the magazines away really does bring us a higher level of enrollments and therefore customers and the follow-on sales, then we would be very pleased with that. So, it perhaps is a little bit conservative on our part, but that's the path we've chosen to put out there at this point until we understand the dynamics of this new approach.

When do you think you have an idea of the success rate from that selling tool, either in whole numbers or -- I think during the convention, you had gone through a kind of a payback analysis with the distributors and what kind of success rate they expect? When will you think you'll have that data as to how successful it is?

I think we will know this quarter. We do have a slight delay because we sold a lot more than we expected and went on backorder for three weeks, and so they weren't able to hand out two a day for those three weeks. And we will be getting those out this week. So, we have a little blip in our being able to tell. But we think we should be seeing results this quarter.

Okay. And Malaysia, was it -- when you got the license, did they give you a start date of Jan. '07 or it just take you a little while to get ramped up? I would have thought you would've been so excited and prepared for this for the last year; you kind of go day one.

It's going to take a little while to ramp up because we had basically been operating in that we didn't know if we would ever get the license. And so, we didn't have things waiting and hoping. We were just going to ramp up once we did officially get the license.

We are excited about it though, Scott. I think it is a great market. We've done well over there in nearby markets, and so we anticipate that it's a great market for us.

And one other question, probably a little more specific than you usually talk about, Gil, on the revenue growth. I guess I'm still trying to gauge if you are expecting any kind of acceleration from Success at Home. Do you expect the US market was up -- US and Canada up 14 and 10 I believe this quarter respectively. Do you think that is the type of growth we should expect? You had gone through a nice acceleration really from the beginning of last year in the US, and this was a little softer quarter than trend. Do you expect to see that reaccelerate or are you banking on kind of low-to-mid teens growth in those more mature markets?

Well you know, as we mentioned in our prepared comments, the third quarter is sometimes a tough quarter to judge because of the anticipation of convention and the summer season in North America and so forth. So if you look consecutively, it is often a little tough. I think we were pleased with the results this quarter and would anticipate that we would see some nice growth going forward.

You know, last quarter, the year-over-year growth was like 20% and I don't know that we will get there. We're still looking for strong double-digit growth in North America.

Tim Ramey, D.A. Davidson.

I was curious about the comment that the TenX bar is being marketed as a nutritional supplement rather than a food bar. It wasn't intuitively obvious to me why that makes a difference. But, could you elaborate on what you were trying to convey there?

Well, we definitely are -- the focus of the product is on the antioxidant, and the antioxidant levels are that equivalent of a tablet. And that is the main benefit. The secondary benefits are the fiber and the fruit source and another means of administration to be able to have a snack bar in the middle of the day rather than taking more tablets. So we are looking as the main benefit of this product to a person is the antioxidant content, much like our Proflavanol, our CoQuinone, our E-Prime, or Poly C, etc., etc.

Any early sales read on that? You didn't really get into specifics on TenX.

It's doing well. The reception has been great. People are seeing this as a great answer to some of their competitors. We've done some comparison marketing with it, and the associates have been very excited about this tool to help them in their comparison to other businesses because we've created this product with other products in mind to make sure that it was ten times or more better in the antioxidant category. And so, the associates responded well to that marketing strategy.

Good. Gil, on the comment on the research tax credit, of the $0.08 or so, what portion of that would be attributable to something that might still happen this year?

Well, the $0.08 applies to 2007. That's where we think the 37% tax rate and we have nothing built in there for tax credit in 2007. So, as our comment suggestion -- if we get lucky and they extend the law, we may have some modification of that 37% tax rate in 2007. But I don't have a sense that I could comment further about that, Tim, as to what that might take it down to. But that's what we're facing right now. It looks like it will be about a 37% tax rate.

Okay. And just the slight decline in the Autoship's percentage, I understand that food products and maybe TenX is perhaps less prone to be enrolled in Autoship. Is there an explanation on that or it's just noise?

It's mostly noise. But there was some effect from convention. You know the fact that you have people here taking things, buying -- coming to the convention knowing that they are going to carry some things home with them. And they will go online and perhaps lower their normal Autoship order because they are taking something home with them in their suitcase -- those kinds of things.

Mimi Sokolowski, Sidoti & Company.

I have a couple of questions, and I apologize I'm a little under the weather in case you don't hear me clearly. First, Gil, I have two for you. Is there a period where we anniversary these higher raw material costs?

We are (technical difficulty) a bit. We were just whispering here amongst ourselves. We started to see some of this about -- so the fourth quarter is basically the anniversary. Is that all right, Doug? I think my recollection is that that is about the anniversary date of when we start to see those.

Can you make any commentary as to future gross margin expansion once we pass that anniversary period? Is there a potential for that?

Well, we never throw in the towel on trying to get more -- squeeze a little more margin out of there by our own internal efficiencies and by buying smart -- you know, the standard kinds of things you think of. One thing to keep in mind as we continue to grow the direct-selling business, the third-party contracting business which has significantly lower margins, becomes a smaller and smaller percentage of sales. So, that on its own results in margin progression on a consolidated basis as we go forward.

So mix shift, scale and some more efficient supply chain activities.

Yes.

Okay. And then I wanted to ask also if you have any cash flow metrics available -- cash from operations, CapEx for the quarter?

Yes, we do. We generated about $15 million in operating cash flow, and CapEx for the quarter was just under $4 million as I recall. Let me just make sure -- $3.2 million for the quarter, about $6.3 million year to date.

And that 3.6, that's a little bit higher than what it has been on the first half. Is that a result of Malaysia or something else?

No, it's more a result -- there will be a little bit in Malaysia -- but it's primarily the result of our expansion here we have going on at the home office. We're adding some administrative space, some warehouse space and some manufacturing space here at the home office -- long overdue. And that total project, by the way, is going to be about $13 million. Probably about $8 million of that or so or $9 million spent this year, depending on the timing of things, and the balance spent next year.

: Okay, that's helpful. And one -- actually, can you elaborate on that manufacturing capacity? And how has that expanded or how much further will it expand?

Well, we are adding about 66,000 square feet of office and another 70,000 square foot manufacturing/warehouse to improve our Sense manufacturing somewhat, be able to create a layout specifically designed for USANA and Sense.

Do you have for the warehouse and its distribution, do you have -- or warehouse manufacturing, do you have a base number now or know of a percentage increase offhand?

About capacity means?

Yes.

I don't off the top of my head. And that's probably a little early for that. But keep in mind in the tableting business, it's relatively easy to add capacity with a new high-speed tableting press. So it's --

It's not floor space so much as the equipment.

I understand; okay. And I do have one last question. I'm not sure if you can answer it -- looking for quantifiable specifics on the magazine. How many magazines were sold out, and how many are now in backorder? Ballpark numbers would be fine.

Fred Cooper is here, and maybe he can give us some data here. Let's see. Doug, maybe -- Doug Hekking, our VP of Finance, got a little sheet here. Doug, is that 4056 packs were sold?

That's currently from the run rate onset. As far as what was done in the first three weeks, we probably had about 3200 of these 56 packs on backorder.

Numbers of magazines.

You know you -- probably 60,000, 70,000 magazines on backorder. And we have plans to do I think meaningfully more than that through the fourth quarter.

How many did we sell at convention and immediately after convention before we went on backorder?

150,000?

Yes, something like that.

So, Mimi, just to recap about 250,000 magazines were sold. Our initial order sold out. And we backordered another 60,000 roughly, which will be shipped this week. And we've got these things on Autoship, so we expect with this promotion we've got in the fourth quarter to have a very nice strong run rate right through December hopefully.

Okay, those are some great numbers. Glad I got my hands on one. Thank you very much.

Andy Speller, A.G. Edwards.

I was hoping -- I don't know if you mentioned this. But share repurchase in the quarter, how much did you do?

About $3 million and just a little less than 70,000 shares.

And that leaves how much left on the authorization?

About 47 million still remaining on the authorization.

How quickly should we look at maybe that being extinguished?

Well, that's a good question.

I'm glad a good chuckle out of the room.

Well, we were just looking at one another. When we saw the stock price this morning, we were rubbing our hands with opportunity. But seriously, it depends on what happens to the stock price and a little bit to our cash flow with the building going on. But we look for opportunities to buy back at what we consider good values.

Buy back as fast as the market indicates we should.

And when -- in terms of blackout dates, when can you get into the market -- back into the market?

That's tomorrow morning.

Guys, any lessons learned from the Malaysia experience that you want to convey that you can convey?

Not to talk about anything before it's happened.

I think we have always tried to be pretty open here, and I think in this case --

Too open.

We were maybe a little bit too open, and we didn't foresee the delay. So, I think Dave's right on.

But anything different you guys could've done with the Malaysian government in terms of getting the license differently or speedier?

Nothing we would have done.

You can always second guess the Monday morning and quarter back kind of thing. But I doubt we would have done anything differently.

Malaysia wasn't critical to us or our growth, and so we probably should have kept it -- it's working to ourselves longer until we were ready. But it's something that time comes when -- now it is here and we're going to take full advantage of it. We are very excited about the possibilities now. We are going to run with it.

Lastly, nothing to say about what you guys are talking about in terms of China. Any update with your China strategy?

No further -- nothing further to report at this time. We're going to focus our attention on Malaysia.

Doug Lane, Avondale Partners.

Just to be clear on the magazine initiative, which was a pretty major initiative for you, the reason for the stock-out is because of better-than-expected demand, not because you had any problem getting the magazines printed up and delivered to you? Is that right?

Yes, the reception blew away our expectations. We are very excited about how well it was received. We had -- we thought we had overpurchased when we bought them. But the adoption of them and the leadership in pushing it and talking to the people about it and encouraging it caused our demand to be far more than we could have ever dreamed. And so, it took four weeks to turn around as fast as we could and we did that. We're looking forward to having a nice run rate going forward.

Doug, just if I could add one other little tidbit there on the quarter we just completed. There was about $0.01 of EPS hit in the third quarter that we just reported related to the subsidizing that we did -- the selling at cost if you will -- the free freight concept there in the quarter. Because we sold a lot, that really resulted because we sold a lot more than we thought we were going to in that quarter. So it was one of those good surprises, but it had a little bit of a drag, a little friction cost there in the earnings and therefore earnings per share. But, it's a good thing we believe.

Right. No, obviously with the new indications, you factored that into the fourth-quarter estimate as you continue the program, correct?

Yes.

We definitely see this as an investment in future growth.

It's an expense investment that we think will pay off. But it's a new thing for us, so we don't want to get too exuberant on the top line. We want to be realistic, and hopefully we can do very well with it.

Well, now, taking this to a logical conclusion, assuming you're not stocked out of the TenX bars, can we assume that the magazine sales tool was better received than the TenX bar on a relative basis?

It depends on how you are measuring in units or dollars or whatever, but they were fairly equal. They are two totally different sort of categories, and people always like to take home products from convention and they did a lot of that. But we really focused the majority, three-quarters of our attention on the magazine because we see that as the future of growth and enrollments is far more important to us than one product item sales in the general scheme of things. It's nice to have a new product. It's something new and exciting, something we go back to the people about. But the magazine is what is going to grow this Company to the $1 billion mark.

If I could just add one other little point on that. There's a lot of enthusiasm, as Dave mentioned, for the TenX also. In fact, it's an optimizer remember. And so if you look at our optimizer product mix, optimizer as a percent of sales did increase for the quarter as a result of primarily the successful launch of this terrific product, the TenX.

Was RESET an optimizer?

No, RESET is what we call a macro optimizer. But as a pure optimizer, we saw that number increase to 35% of our sales from 34% a year ago and from 33% in the second quarter.

Getting back to the magazine, Success from Home has been around for a couple of years now and they have worked with other direct-selling companies in a similar kind of capacity. What has their response been? Have they seen a distributor force response like you've seen with the November issue? Or is this from their perspective, the biggest response that they've had among the direct-selling companies they feature?

The reason that we launched Success from Home or did that was because of some of the results we have seen with other companies. Some companies have launched it extremely well, and some have not launched it as well and not seen much in way of results.

We're very excited to be one of the companies that when it launched, the numbers were staggering. And I think the supplier -- the vendor of those magazines has been very impressed with how well we've launched it with all the three-pronged attack what we've had to get those out there.

The companies that did do well with it, there's another company that is working on selling 5 million of these. They have seen a drastic increase in enrollments. And that's why we took this on and made this investment. If other companies hadn't seen that drastic of an increase in enrollments, we probably wouldn't have taken the risk.

And again, just from a lead lag standpoint, there's no reason we shouldn't see those recruiting numbers customers or associates as soon as this quarter, right?

I'm hoping we see them very soon. Of course, we need to get them in quickly because then we hit the Christmas and Thanksgiving holidays. And you don't care how many magazines they have when it's time to take vacation.

Craig Leighton, Lord Abbett.

Gil, since you started the mix of business discussion with the optimizer proportion of sales, I'm wondering if you might just go down the line and give us essentials, optimizers, macro and Sense.

Yes, essentials, 36.6% -- this is all for the third quarter -- optimizers, 35.0%; macro optimizers, which includes RESET, 13.1%; Sense, 10.8% and then our sales tools and other things, 4.5%

Okay. And the acceleration in the optimizers, is the bulk of the difference from the 30 million last quarter to the 33.5 million. Is the bulk of that from TenX?

A big chunk of it is. There's no question about it. I didn't dig down too far. But certainly, that's a lot of it.

Great. Just a couple of other one-offs. The Hong Kong area increased quite a bit this quarter sequentially anyway, and I guess I'm just wondering if you're able to pin down what might be the cause of that.

You know, Bradford Richardson, our EVP of Asia-Pacific, is actually over there right now. And I know that we had what we considered a very excellent convention in Singapore for the Asia-Pacific distributors out there. And of course, Hong Kong was very well represented there at that. A lot of it I think is follow-on from a very successful convention, and then a number of localized incentive programs that they've had for the -- during the third quarter were very successful. It was just a number of things that seemed to be hitting on all cylinders over there. We're very pleased with that.

It could be very interesting how from region to region, the leaders will get on a -- go on a run. And you just never know where or when these leaders are going to -- sometimes it happens they do it in tandem, where four or five of them will try and advance at the same time. So, you never -- these things can pop up. Even from area to area in the US or Canada, we see regions just take off as one leader. And a lot of their people go for a run to advance to the next level and make a big push all at once.

I'm sorry. Was Gil suggesting a return off of the Asia convention or a strong showing at the US convention?

I was suggesting that since the US convention was very late in the quarter, I think we can't lay too much of the (multiple speakers) --

It would be the Asia-Pacific convention.

It would be the Asia-Pacific convention.

From six months ago?

Yes, from March.

Okay, well, it would be nice to get any return on that investment. And just also, Dave, you had a one-off comment on China as in nothing further and you are going to focus on Malaysia for now. That's surprising to me that that isn't in parallel and that you aren't expecting licensure or maybe not expecting -- maybe expecting is the wrong word -- but you aren't at least progressing on licensure in 2007 in China. So the question is really what will the activity be in China in 2007?

We are continuing to progress on China. It's just not our number one priority at this time. It is being worked on the same as it was last quarter, the quarter before and the quarter before and we continue to work on it. But all of our highest priority items are Malaysia because of its eminence in 2.5 months. We need to make sure we take full advantage of the launch of that market and not ignore it, looking at China and waste that opportunity.

Oh yes, I don't mean to suggest you should ignore it. But if I were to say that China development expenses in 2007 were higher than in 2006, would that be an accurate statement?

Yes.

So that will continue to ramp and there is a chance if you do get licensure, you're going to apply next year, right?

We don't know when we're going to apply at this point. It's -- we still are struggling with the laws that came out. We still don't know whether any of the companies going in with those laws are going to be able to be successful. And so, we're very anxious to find out what happens with those companies that are going to be the first in to see whether it burns them or whether they are successful.

Yes, we really are trying to evaluate -- we've only got Avon and Nu Skin if I am current on that with kind of Western companies with licenses. We would really like to understand more about those. So that when we do submit, we've got the best possible submission to date. So I think our strategy is very appropriate.

Would it be fair to say that early in '07 as in the first or second quarter of '07, you will have enough experience, or the current companies in the market will have generated enough experience data that you would be able to make a decision? Or would you wait for more Western companies to be operating there?

We do not know at this time.

I will get off of that. Just the last question on tax rate in the fourth quarter. Gil, do you have an estimate?

Yes. 35% for the quarter.

In the fourth quarter, you expect to accrue 35%?

That is what is built into our guidance.

Okay, so it's not a steady ramp to -- or you get a partial ETI detriment there or anything like that?

No, it looks like it is a calendar year kind of clip thing that's going to happen that we face next year.

I see, interesting.

Rommel Dionisio, Wedbush Morgan.

Just a couple of quick clarification questions. On TenX Antioxidant Blast, is that just US sales or was that also Canada and Mexico? I know you talked about there being an issue with being able to ship that overseas because of the expiration date. Is there any sort of development with sort of improving that technology there?

Currently, it is US only but it is also Canada not for resale. In other words, people in Canada can buy it from the US warehouse but they cannot resell it to other Canadians. They can use it only for personal consumption. And so, we're working as quickly as we can to get it into Canada, get it into Mexico and then look at possible other vendors or increasing the expiration date so that we can also get it to Asia-Pacific hopefully next year but who knows.

Just one other final question. If you could just sort of big picture characterize Malaysia's market opportunity, is it -- is there potential to be a $15, $20 million business in a few years, like a Mexico or something, or is it more like a South Korea just in terms of market size, market potential over the next few years?

We anticipate that Malaysia will act a lot like how Mexico unfolded for us or perhaps even Singapore unfolded for us.

But Malaysia is a far larger market than Singapore.

Right. So we are quite optimistic about it. It's just under a $2 billion market in terms of measured by the DSA. So, it's one of the top 15 markets. We're certainly hopeful that our rollout there will bring about an outcome at least as good as our Mexico or Singapore outcomes.

Doug Lane, Avondale Partners.

Just a couple of quick follow-ups. One is on China, what is the timing for applying for a direct-selling license there? And secondly, on the Success from Home magazine, what markets and what languages are you printing that magazine up in?

On China, there is no timing at this point. On Success from Home, we have it in French, Spanish, Chinese, and English.

So it will be distributed to all your markets, most of your markets? Which markets won't get the magazine maybe if you could put it that way?

North America is heavily focused on it in all three markets. Asia-Pacific is watching to see how things go. Australia/New Zealand is leaning toward picking it up sooner. But, the Asian countries at this point are watching to see how it works. Their cultures have less of a sales tool mentality than are North America. So, I think it will be strongest in North America. And maybe with the success of it here, a few of our Asian countries will focus on it.

Tyler Burke, Trenton Capital.

I wanted to go back to the US market for a second. When I look at the average sales per US associate, it was down 5% year over year. And with that being 40% close to your sales, I am just wondering if you could comment on the dynamics causing that.

Let's see here. Just a second. Let's see, we were down from a year ago about 2%. Is that the number you are looking at? In my view -- and maybe others in the room have a different view on that -- we had such a strong quarter second quarter in the US with sales up 20% that I think going down a bit was just kind of a normal convention quarter where we had bit softer overall growth in the US. Kind of the normal wiggle is the way I would look at it. I don't see anything in there that gave me any angst.

Okay, I was looking at the sales per average associate year over year. I calculated down 5%. And you know, that was the second quarter in a row of negative growth and that's why I was wondering. It looked like more than just a one-quarter phenomenon but maybe a trend. I didn't know if you feel like the US has reached saturation?

We certainly don't feel like the US is saturated. I'm sorry; I'm showing a year-over-year decline of 2% -- 1.9% actually. We may have some math differences.

Yes, maybe so.

And if you would like, we can have a follow-on discussion about whether or not we've got math issues here. We're just going to have a look and see if we've got something else that we can give you on that. But, what my point on the -- we've had very strong growth in the US. Often, when you have a lot of growth and therefore a lot of new distributors, sometimes, that average amount of sales per distributor moves around some and rapid growth of number of distributors. Sometimes, you get a decline in the amount. The sales mix also is a factor in it as well.

Okay. But it's nothing that you guys are overly concerned about.

That is correct.

One moment please. Thank you. That's all the time we have for questions today. I will turn it back to management for closing comments.

Thank you for your questions. We continue to remain confident in the future outlook of USANA and the investment opportunity that we provide. By the way, we will be presenting at the Bear Stearns Smith Cap -- they call it -- Conference in New York on November 15.

If you do have any remaining questions, please feel free to contact us at Investor.Relations@US.USANA.com or call Riley Timmer, Manager of Investor Relations, at 801-954-7922. We appreciate your interest in USANA, and thanks again for joining us this morning.

Thank you, ladies and gentlemen. That does conclude today's teleconference. We thank you again. And at this time, you may disconnect.