USANA Health Sciences Inc (USNA) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the USANA Health Sciences Q1 earnings conference call.

During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (OPERATOR INSTRUCTIONS). As a reminder, this call is being recorded today, April 18, 2007.

I will now turn the conference over to your host, Mr. Riley Timmer, Manager of Investor Relations. Please go ahead, sir.

Thank you, Chris. Good morning, everyone. We appreciate you joining us this morning to review our first-quarter results.

As a reminder, today's conference call is being webcast or broadcast live via webcast and can be accessed directly from our Web site at www.USANAHealthSciences.com. Shortly following the call, a replay will be available on our Web site.

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. 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.

Thanks, Riley. Good morning, everyone, and thank you for joining us to review USANA's first-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 Bradford Richardson, our Executive Vice President of Asia-Pacific Operations, and Doug Hekking, our Vice President of Finance.

This morning, I plan to update you on the strong financial results we achieved in the first quarter, talk about our guidance for the second quarter of 2007, and update you on our full-year 2007 guidance.

Consolidated net sales in the quarter were $102.6 million, an increase of 16.3%, compared with $88.2 million reported in the first quarter of 2006. Net sales in the first quarter were solid and came in just below the low end of our guidance of 103 million to $105 million.

Net sales in our Direct Selling segment were $100.6 million, which is an increase of 17.9%, compared with $85.3 million in the prior year -- prior-year quarter. Sales in our Contract Manufacturing segment were down nearly $1 million compared with last year's first quarter. Our focus continues to be on growing our Direct Selling business and not to add new business in our Contract Manufacturing segment. Net sales growth in our Direct Selling segment this quarter was driven by a 17.6% increase in the number of active associates and a 9.6% increase in the number of preferred customers compared with the first quarter of last year. Keep in mind that we only count and include those associates or preferred customers who have purchased products in the preceding three-month period either for personal consumption or resale.

Our monthly Autoship order rate represented 50% of our total product sales during the first quarter. This rate was down slightly compared with the prior quarter due to the growth in the Asia-Pacific region, including the opening of Malaysia. As you would expect, when you open any new market, the initial customer orders do not take place on Autoship. However, over time and as the market matures, we would expect that number to increase.

Earnings per share of $0.63 for the first quarter came in at the high end of our guidance range of $0.61 to $0.63 and is a new record quarterly high for USANA. This is an increase of 26% compared with $0.50 per share reported in the first quarter of 2006. We are pleased that our business model continues to show earnings per share leverage.

Let's now go through the major line items on the first-quarter statement of earnings. Our consolidated gross margins in the first quarter of 2007 improved as a percentage of net sales to 78% compared with 75.8% in the first quarter of 2006. This 220 basis-point improvement can be attributed primarily to the following -- a smaller portion of our total revenues coming from our third-party Contract Manufacturing segment, which has relatively low gross margins, and improved production and procurement efficiencies, including lower freight costs. Looking ahead, we believe our consolidated gross profit margins will improve modestly, as Contract Manufacturing sales continue to be a smaller portion of our total business.

Associate incentive expense in the first quarter of 2007 was 39.3% of our Direct Selling revenue, compared with 39.9% of Direct Selling revenue in the first quarter of last year. This modest decrease in relative [incentive] expense was due primarily to the lack of certain contests and promotions in North America during the current quarter and the opening of Malaysia. We expect that associate incentive expense will increase to approximately 40% of Direct Selling revenue as we increase our North America promotions to bring them in line with historical levels.

As expected, selling, general and administrative expenses increased relative to net sales. SG&A increased to 21% during the first quarter of 2007, compared with 20% in the first quarter of the prior year. The year-over-year increase to SG&A was due primarily to the following factors -- there were expenses related to our Asia-Pacific convention held in Sydney, Australia; expenses associated with the opening of our Malaysian operations; an unfavorable sales-tax ruling in Mexico; and higher incremental expenses due to FAS 123R related to equity-based compensation.

I would also note that the first quarter of every year is typically a higher spending quarter for SG&A relative to net sales. We believe SG&A expenses in the second quarter of 2007, as a percent of our net sales, will be modestly lower compared to the first quarter of 2007.

In regards to the balance sheet, the cash at the end of the first quarter was $32.5 million, compared with $27 million at year-end 2006. Inventories at the end of the first quarter were $21.9 million compared with $22.5 million at the end of 2006. We have been pleased with our management of inventory over the past two years and have kept inventory levels flat while growing sales significantly.

Okay, to update you on our share buyback program, during the first quarter, we invested an additional $5 million and repurchased approximately 97,000 shares. Since the end of the first quarter, we have purchased an additional 791,000 shares in the open market for an investment of $34.5 million. Currently, we have about $40.3 million available under our share-repurchase authorization, and we will continue to be buyers of the stock.

I will now take a moment and talk about our capital expenditure activity. As of year-end, we had spent about $7.1 million on our Salt Lake corporate expansion project. During the first quarter, we spent an additional $2.7 million on this expansion. Overall, we have approximately $6 million of additional spending to complete the Salt Lake expansion plan, and we believe this will be completed by the end of this year.

Additionally, we invested $6 million to purchase a new property in Australia, which will serve as our regional support center for that area. As was mentioned on our preliminary conference call on April 4, we are working with the SEC on their informal inquiry of USANA. We are at the beginning of this process and believe that it is proceeding in accordance with the normal process related to an informal inquiry. While we have not reached the point where it is appropriate to discuss these matters in detail, we remain confident in our business model and will fully cooperate with the SEC on this informal inquiry and look forward to resolving these matters on a timely basis.

By way of note, we have nothing new to report to you today regarding the status of the shareholder suits. However, as we have stated in the past, we believe that these suits simply mirror the misinformation that has appeared in the media. We do not believe they have merit and we will vigorously defend against them.

Now, before I turn the time over to Dave, I will comment on our future guidance. Yesterday, in our press release, we provided second-quarter guidance and updated our full-year 2007 financial guidance. Based on our current business circumstances, we believe that net sales for the second quarter of 2007 will be between 103 million and $105 million, which is a growth rate of between 11% and 14% compared with the prior year. We also believe that earnings per share for the second quarter of 2007 will be between $0.63 and $0.65, a year-over-year growth rate of between 15% and 18%.

While we remain very optimistic about the future, we felt it appropriate to adjust our estimates for 2007 somewhat, due to distractions resulting from the recent news appearing in the mass media. Accordingly, we adjusted our full-year 2007 guidance and now believe that net sales for the year will grow between 13% and 15% and that earnings per share will grow between 16% and 18% compared with 2006.

We are confident that our business model remains among the most effective and transparent in the industry. We are taking aggressive action to address media misinformation. We stand committed to offering the finest nutritional products and home-based business opportunity in the industry. We will continue to do all that we can to keep our associates active and engaged in the USANA businesses.

I now turn the time over to Dave to comment on our operating activities.

Good morning, everyone.

Our first-quarter results were once again solid and we achieved our 19th consecutive quarter of record net sales. Earnings per share in the first quarter of 2007 were also a record high mark for USANA. Even though USANA is an international seamless company and we share one pool of associates, we still provide some regional information.

Looking at our net sales in North America, our most mature region, we increased by 9% compared with the first quarter of 2006. The Mexico market led the growth in this region, increasing 32.1% over the first quarter of last year, reflecting strong momentum in that market. Sales during the first quarter were up 9.3% in the U.S. and up a modest 2.6% in Canada over the first quarter of last year. In North America, the number of active associates increased by 12.8% to 97,000, compared with 86,000 in the first quarter of 2006.

An important point that I want to talk about this morning relates to the lower growth in North America, specifically the U.S. and Canada. By way of example, if you look at sales results in Asia for the first half of last year, you will see where we were growing at about 5% in that region, and a lot of questions (inaudible) on this call last year were focused on Asia. Now, in the first quarter of 2007, sales were up 38.1%, including Malaysia, and up 26.1% if you exclude Malaysia. It is important to remember that this is a global seamless company and a momentum business.

We were able to respond to our slower growth in Asia but focusing on market-specific promotions and activities, re-engaging our leaders in our Asia-Pacific region. We also had some North American associates travel over to focus on Malaysia.

We are taking a similar approach to stimulating greater growth in the North America region. To help boost our sales in North America in the second quarter, we have instituted a quarter-long promotion that we call "Share the Success 3". This is a promotion that we have offered in the past, which rewards those associates who created the greatest growth in our USANA business. As we have done in the past, we will continue to offer product and incentive-based promotions to motivate our associates to continue sharing our great products with others.

In addition, we have two Company-sponsored regional events scheduled for the second quarter of 2007. The first of these events will be held in Montreal and the second in Chicago. At these events, we focus our efforts on product and business training, motivational speaking, and associate recognition. We are confident that we can foster associate activity and further grow in North America. Our focus will continue to be keeping our field fully engaged in actively growing our businesses by selling more and more products.

Turning now to our Asia-Pacific region, net sales in this region in the first quarter were strong. As I stated earlier, sales in Asia increased by 38.1% over the first quarter of last year. Excluding Malaysia, our mature Asia-Pacific markets were up 26.1%. The strong year-over-year increase in this region can be attributed to solid, double-digit growth in each of our Asia-Pacific markets except Japan. The number of active associates in the Asia-Pacific region increased 26% to 63,000 compared with 50,000 in the first quarter of last year. The number of associates in the Malaysian market reached 6,000 in its first quarter of operations. Our second annual Asia-Pacific convention held in Sydney, Australia, along with opening of the Malaysian market, were key catalysts for growth in this region during the first quarter. This year's Asia-Pacific convention was approximately double in size compared with last year's convention held in Singapore.

In regards to Malaysia, we are encouraged by the early results in that market. There are associate leaders from a number of our different markets who are on the ground in Malaysia developing relationships and building their USANA businesses. We are optimistic that this market will follow a growth pattern similar perhaps to that of our Mexico market.

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

Thank you, gentlemen. (OPERATOR INSTRUCTIONS). Tim Ramey, D.A. Davidson.

Can you give us a little bit more detail on the "Share the Success" promotion, what that entails, what it's like going to cost, what the expected outcomes are? Anything on that?

This contest will be the second-quarter sales of our associates over the first-quarter sales of the associates, so it's their growth, quarter-over-quarter. We have a $250,000 prize pool that we will be distributing to the top 50 growers in North America only.

Okay. Dave, I noticed that R&D spending was up a little in the quarter; I was curious about that. Do you have any comment on future products or opportunities?

Well, we have a goal of approximately 1% sales for our R&D spending, and we are trying to get up to that level but we keep going so fast that it's sometimes hard to keep up. But we have a number of clinical trials going on to learn more about ingredients in existing products, and we will continue to add more clinical trials as we see opportunities.

Great, thank you.

Andy Speller, A.G. Edwards.

Good morning. With regard to the SG&A, Gil, I want to make sure that your comment with regard to it being lower -- that was for the second quarter and then you're talking a percent of sales, right (multiple speakers) full year?

That's right. We anticipate it, relative to sales, being somewhat lower in the second quarter versus the first quarter.

Would that trend continue through the balance of the fiscal year?

You know, I think we -- as you I think know, we really pride ourselves in running efficient operations, so that's certainly our goal, is to continue to leverage that line. Some of the things we're facing in that first quarter should be mitigated, but we're going to be focusing on spending money where we think it will drive the top line. So I think steady to modestly better would be the thing I would look for.

Okay. I guess I found it interesting, in the quarter at least, that you hit the low-end of your top line but the high end of your EPS. Can you just maybe speak to that little a little bit, in terms of what's going on within the overall business, to hit I guess the major (inaudible) of that would be gross margin, at least for the first quarter, right?

Yes, gross margin I think is where we saw the big benefit there. As I mentioned in my compared comments, that was driven by a couple of things. One was the fact that our contract manufacturing business was a lower amount, in absolute terms lower that was a year before by about $1 million and also lower in relative terms since our core business, the Direct Selling business, grew so nicely. So that was a major factor there. Also, we continue to gain improvements in the whole process of procuring materials, manufacturing our products, better utilizing freight and so forth. We are just -- I think I would characterize our folks in that area just being relentless.

Dave, your comments with regard to I guess the slowdown in Asia Pacific a year ago, picking up this year, I guess you're trying to I guess make us feel better that you guys can pull some levers to accelerate the growth in North America from where it was. Just outside of what's going on with the second-quarter promotion, can you talk to maybe other things that might be behind that notion that U.S. business or the North American business might accelerate through the back half of the year?

Sure. Yes, I would just note that there's a lot of focus on regional and regional is -- however you want to term it, we could look city by city and one city may be growing great and another one may be flat.

What matters with the roving associate pool that travels the world with a seamless business is the overall company growth. As people -- this is a volunteer army as we call them; they work when they want. So they will go into high modes and then they will take a break and then they will go back into high mode, and you can't burn them out full-time, 24/7/365. It goes in waves; it's a momentum thing. So we see it ebb and flow in the different regions but all that matters is the net overall continues to grow and that's what we're focused on. So if they took a little break and rested up from the hard push last quarter, we're ready to get them going again after they've enjoyed some of the benefits of what they've built their businesses to last quarter. We will get them going again, that is for sure.

Lastly, Gil, any -- you know, I guess with the issues that are circulating out there with regard to turnover in the distributor force, have you guys thought of giving us some better metrics to identify the business opportunity piece versus the people who are actually utilizing the products as a retail on the associate side? Have you guys given any more thought to that and can you kind of carve up the associate numbers maybe a little better for us to give us a better indication of really -- how the health of the business, I guess?

You know, Andy, that's something that we are always evaluating, is what is the most meaningful information we can provide to the public. You know, we've looked at this a number of times over the years and when we went with our current methodology of this three-month activity measure, we really felt and still feel that's the best way to look at this business. I mean, that's the best measure of the number of active customers that we have in this business. It's the data we use internally to do our own guidance and I think to get into how many cancels letters we get -- which are very few, by the way -- or when people don't come back and order for a while, it's just -- I think it would create more of a distraction than provide any additional, meaningful data. So I think, for now, we feel like this is the best information we can provide.

Okay, thank you.

Mimi Noel, Sidoti & Company.

Okay, thanks, just a couple from me. Dave, Gil, can you comment on quarter-to-date second-quarter feedback or sales activity that you've witnessed thus far? It's my opinion that this is probably the most vulnerable quarter in terms of any sort of detriment from the negative publicity.

Mimi, it's a great question. Keep in mind, we are only two weeks -- we've had two full weeks (multiple speakers).

Yes, sure. I realize that.

-- this quarter, so it's way, way too early for us to tell. As you know from our guidance, we toned it down just a bit, maybe perhaps out of abundance of caution, but we remain very optimistic and we're going to work like mad to make sure we don't slip very much.

Can you share with us any recent feedback from the distributor that you think warrants caution?

You know, Dave, you may --.

We've gotten responses across the board. Some are rallying and getting more active. Others are being cautious and wait-and-see, so you're going to have people across the map with thousands and thousands of people, different personalities, you are going to have them all across the map. The thing is we keep the masses moving forward and we believe we can do that, that we have so much positive coming out right now, there are so many positive these happening that we're going to focus our people on that and this will be old news in no time.

Based on your optimism, would it be valid to assume that the majority sentiment on the part of your distributors is also more positive and the confidence in the business is still there?

I was just going to chip in here if I could, Dave, and then you jump in here. Certainly -- and I'm the finance guy and the CFO, so I'm not as close to the field as Dave and others are, but I'm telling you, you know, I've certainly been getting a lot of e-mails that seem very positive and upbeat, so from my perspective, we are seeing a lot of positive things.

It was very exciting to have that largest week ever in the Company history the last week of the quarter. That was very exciting for us and we look forward to making sure that happens more in the quarter or next quarter.

Okay. The only other question I have is a housekeeping for Gil. Can you down the what the options expense was for the quarter?

It was about $1.5 million.

Okay, that's it for me. I'm all set. Thank you.

Rommel Dionisio, Wedbush Morgan.

I wonder if you can just quantify the incremental legal and other sort of PR expenses that might have resulted from all the negative publicity (inaudible) quarter and maybe what you're building into the '07 forecast.

Well, we have -- in the first quarter, we had about $250,000 in there roughly (inaudible) don't hold me to that too precisely, and we've tried, to the best of our judgment, to build some additional amount. I will not give you the amount. We've tried to build that into our earnings guidance. The earnings guidance has our expectations built into it, but I wouldn't break that out for you.

Okay, that's fine. Just on a product perspective, can you talk about the antioxidant (inaudible) TenX and just how they performed relative to plan in the quarter?

The TenX Blast sales?

Yes.

TenX Blast sales, I don't row specifically how those are going. It seems to be going along fine. It's a good answer, I think, for our associates to the juice company and questions or competition there, but it's another great product in the entire scale of things and going fine. I don't have any specifics on it, sorry.

Yes, I would just comment that, remember that we, right now, are basically selling it in the U.S., working on increased shelf life and other things to get it to go around the world more. That will certainly be -- it's very popular here and that will be a very positive thing when we hopefully get that done before too terribly many quarters.

Great, thanks very much.

Scott Van Winkle, Canaccord Adams.

Thanks. A lot of the questions were already asked but I think I missed, in the gross margin discussion, Gil -- did you say what the gross margin was on Direct Selling alone?

I don't know that I did, but I think I can put my hands on that here, Scott. It was 79.4, versus 78.4, about 100 basis points better than the prior-year quarter.

You know, I hate to always rework a prior question that wasn't quite answered but I will ask it a different way. Was there anything you saw in these first two short weeks of the quarter that led to your more conservative revenue guidance in the back half of the year?

Well, we are in new ground here; we are in new territory the first time in 15 years, so we don't know if exactly where it's going to go. We are very optimistic but we don't have -- we are not used to this, we do not know how this works, and so we are being cautious until we learn how these things work. I'm sure this will happen more in the future, but up until now, we are virgins in this area and so we hope our associates who have I guess you could say have the -- have been fortunate enough to have 15 years without anything like this, they haven't been exposed to this, where other companies and their distributors and associates may get exposed to it more regularly. This is a new thing for our people to react to and we think we will bring them through just fine, but we are waiting to see how they react.

Scott, I would just throw in my two cents here. I think (inaudible) an abundance of caution as Dave said, having new territory here for us that we backed off just a little bit. But we certainly see and hear a lot of positive things, but it's just way too early to comment on that very much.

All right, sorry for asking the question again. Thanks, guys.

Bill Leach, Neuberger Berman.

Good morning. I was just wondering. The latest ratings from Mr. [Minkophs] suggests that 87% of your distributors aren't making any money; maybe you watched their latest thing on YouTube, but they had this couple that lost $5,000 supposedly. Can you just comment on that? He keeps referring to your documents and saying that "as reported in your documents". Is there any truth to that at all?

Well, you know, I think the trouble with referring to his spinning of that information is it really is just spinning in our view. In results that we've -- in surveys that we've done, which are consistent I think with the BFA data, most people get into direct selling -- whether it's us or anybody else, Tupperware, Avon or whatever -- most people get in there to benefit from the products, and that's certainly the case with us. So you only have something on the order of about 12% of people who get into this business with the intent of making money. Only a small fraction of those, maybe half of those or something, do it with the intent of doing it more than part-time. So what he ignores in his [machinations] is the element of time with regards to who is going to make money. This is kind of stating the obvious, but the people who work at it are the ones that in fact generate the income for themselves. Those that don't or do it for product reasons obviously don't.

No, I mean one of things that a lot of just associates focus on is just making enough money to pay for their products, which of course is not a possibility if they are buying their products retail from GNC or Wal-Mart or whatever. So making money for them isn't the goal. Just covering the cost of their products may be the goal. For others of course, it's just customers -- (inaudible) with our survey 75% joined just focused on the nutritional benefits, and 25 joined focused on the business aspect.

So, what percentage of the people who go for it are successful? I mean, I don't think we are different from any other business, whether it's real estate or stocks or whatever? It's people who work hard, stick with it, do it right are successful.

One interesting statistic related to last year is that about 80% of the people who qualified for commissions in USANA actually earned commissions. So anyway, probably enough said.

Could you comment on the status of your legal proceedings against him? I mean, is he able to just continue to put out these negative press releases? It just seems so incredible that he can get away with this, knowing that he short your stock and he is profiting from this.

That is one of the things with this country, freedom of speech, so (multiple speakers).

But you're not free to just lie and profit by it, are you?

Well, until someone says otherwise! (LAUGHTER)

What I understand, Bill, is that government regulators could actually take action against him. I think as we've said publicly, we have referred the matter to the FCC because he specifically admitted he had positioned himself so he would benefit from the stock to fall and proceeded to put out this information to get it to fall. We don't want to get into a blow-by-blow battle with the media on this matter, but it is before the courts. We believe that the outcome will show eventually that USANA meets and complies with all regulations.

Okay, well, good luck.

Andy Speller, A.G. Edwards.

I had a follow-up. I want to ask about Malaysia. That was much stronger than we had thought. The rate there looks to be a lot more aggressive than what we thought. I was wondering if there was maybe some preloading that is going on in terms of is it going to ramp real fast and then maybe fall off? Bradford, I know you are there. Maybe you could speak to that.

Well, I think it's been successful because we've had a lot of associates from around the world focusing on the market. It's a very robust direct-selling market. As Asia has grown, we've had more Asian leaders with an interest in building in that market.

In terms of the ramp, what we've seen is a very nice, steady growth. We continue to see very good growth in that market, both in Autoship sales, new enrollments as well as people focusing also on the retail opportunity. So I think Malaysia will continue to be a very strong market. Dave alluded to the Mexico ramp. I think we are seeing something very similar along those lines.

Then if I could just follow-up kind of on that last question, we've had a chance to talk to a number of distributors here in the last couple of weeks. I guess I want to clear up a couple of things. One, it seems that the ones we've talked to, that the way they were brought into the business was more with the business opportunity versus using the products. So, I mean, I know the statute (technical difficulty) certainly we don't have a sample size to be specifically relevant yet, but certainly the notion we're getting is that it seems easier to sell based on the business opportunity than just on the products themselves.

Then I also want to clarify on -- if someone opens up three business centers, there is a product amount that they are required to purchase. Is that right? Is that a commitment for a full year or can they stop at any point on that?

They can stop at any point; there are no requirements. They can stop at any point and they can return what they want.

I don't know how your sample is being [polled] for the distributors you're contacting. Of course the ones being building the business will be more vocal and more well-seen than the ones who are customers. So I don't know where your sample is coming from but I mean we sent out the survey. This is the information we got back from our field -- 48,000 people we sampled with just the question in mind, trying to get the answers for ourselves, and that's the results we got.

Does that answer both your questions or --?

Yes it does. Thank you. I appreciate it.

Doug Lane, Avondale Partners.

Good morning, everybody. Two questions -- one, Dave, is there any way to quantify what you think opening of Malaysia may have cost as far as distraction in the U.S. and Canada?

Then for Gill, is there a -- should we be concerned about added SG&A spending from these, you know, the investigation and these legal proceedings that are underway?

With regards to Malaysia, it is impossible for us to measure the correlation to other markets. You don't know the exact efficiency rates of distributors from one market to the next; we don't know if they are more productive or less productive as they went to Malaysia. So there's no way to directly correlate reaction from one country to the next. We just know that some leaders will of course have focused on the new market and the excitement that comes with that. So, we've never been able to measure that in any of our expansions.

But you know, in the past, is that very much a short-term phenomenon or will there be another residual quarter or two where that might be taking place?

They will have to establish leaders in the new country and then they will feel more comfortable to spend less time there and more time on their global business as a whole and distribute themselves appropriately with where their business ratios are.

Yes, I think we are establishing leaders are quickly in Malaysia, and that's always helpful to allow the foreign leaders to go back and make sure that they are growing their global business as a whole and not just focus all their attention on one market.

Okay. And Gil, legal expenses?

Yes, we had about -- I don't know if you were on earlier, Doug, but we had about $250,000 million in the first quarter that reflected our efforts there. We have not specifically identified, in terms of our information that's out there in the public, as to what we expect quarter by quarter going forward, but we have tried to build it into our guidance numbers. That's really about all I can say, Doug. We will obviously have some. Perhaps we can gain some back from spending on other things. But it's in there and to the best of our ability, it's what we can see at this point we've built into our guidance.

Okay, thank you.

Steve Martin, Slater Capital.

Two questions -- with respect to an earlier question, how could someone possibly lose $5,000, unless they just bought a ton of product and sold it at a loss?

The only way, yes, they could have bought $5,000 worth of product and threw it in the garbage can, in which case I guess you would call it a loss, or they could have I guess sold it at much less. The couple you are referring to actually made commissions for a while and were purchasing the product, we would assume, to consume and to resell. So we don't know how much they made total.

Yes, but how could they claim on this video that they lost $5000? Is it mathematically possible, short of them buying it and selling it at a loss or throwing in the garbage?

If I went to Wal-Mart and bought a lawnmower, did I lose $300? I guess that's up to the purchaser.

Okay.

It's purely definition. If they want to claim that that's losing money by buying a lawnmower, then they lost money I guess. So it's purely on an individual's definition of loss is.

Okay. Contract manufacturing was down, as I think we've all been anticipating. Could you give us some guidance as to what it's going to look like over the balance of the year? Is your sales guidance based on the fact that contract is going to continue to shrink?

I think what we've said is that we are basically -- in my prepared comments -- I know that we are not looking to build that business, particularly, and so what we are anticipating is that business would basically be flat for the year.

I got you. All right, thank you very much.

Mimi Noel, Sidoti & Company.

One quick probably easy one -- Dave, I think I ask you about Japan every conference call. I realize it's not a big piece of the business, but it seems like a pretty steady decline and accelerating in the last two quarters. Can you comment on what's going on there?

Yes. Japan has been a region that we have been working to crack the code. We had management issues there that we feel we're getting better on putting the right team in place. But yes, once again, it is -- I mean, it's not a large region for us and share the associate pool. So maybe I will turn it over to Bradford for any comments on Japan. I think I've said the same things over and over, so maybe Bradford can add some new light.

Mimi, it is a small portion of our business. I think what's interesting is, one, if you look in local currency terms, we were actually sequentially up just a teeny bit in Q1 over Q4, so that's a positive sign that that has flattened out. It was 238 over -- 239/238 in terms of yen terms. We have made significant management changes in putting those folks in place and building that trust in the field, which is key. We are starting to see some turnaround in that arena, and I think that flattening out is a sign that we are at least hopeful that slide has stopped.

Would you remind me of about the timeframe when these key management changes were made, how long has it been?

Sure. We brought in a new sales and marketing director in the September timeframe, a new customer service manager in October, and a new network development person in January, as well as we've hired a senior person that came over from the States to support that market as well and that person joined in February.

Okay, that's all very helpful. Thanks, guys.

Thank you, gentlemen. There are no further questions at this time.

Well, 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, Manager of Investor Relations at 801-954-7922. We appreciate your interest in USANA, and thank you again for joining us on this call this morning.

Thank you. Ladies and gentlemen, this concludes the USANA Health Sciences Q1 earnings conference call. Once again, we would like to thank you for your participation. You may now disconnect.