USANA Health Sciences Inc (USNA) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you so much for standing by, and welcome to the USANA Health Sciences second-quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Wednesday, July 18, 2007.

I would now like to turn the conference over to Mr. Riley Timmer. Please go ahead, sir.

Thank you, Michael. Good morning, everyone. We appreciate you joining us this morning to review our second-quarter results. As a reminder, today's conference call is being broadcast live via webcast and can be accessed directly from our website at www.usanahealthsciences.com. Shortly following the call, a replay will be available on our website.

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 Chief Financial Officer.

Good morning, everyone, and thank you for joining us to review USANA's second-quarter results. I am 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 Fred Cooper, Executive Vice President of Operations.

This morning, I plan to update you on the record financial results we achieved in the second quarter, talk about our guidance for the third quarter of 2007, update you on our full-year 2007 guidance and provide some additional comments concerning the resignation of Grant Thornton.

Consolidated net sales in the quarter were $109.4 million, an increase of 18.3% compared with $92.5 million reported in the second quarter of 2006. Net sales in the second quarter exceeded our guidance of $103 to $105 million, and we were very pleased with our record top-line results.

Net sales in our Direct Selling segment were $107.4 million, which is a strong increase of 19.8% compared with $89.6 million in the prior period of last year.

We remind everyone that on June 5, we announced our intent to sell certain assets in inventory related to the third-party contract manufacturing business. We will continue to produce our skin and personal care products at our retained facility, but look forward to exiting the low-margin contract manufacturing business.

Net sales growth in our Direct Selling segment this quarter was driven by a 25.4% increase in the number of active associates, and a 5.3% increase in the number of preferred customers when you compare it with the second quarter 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 for resale. Now, Dave will comment in his remarks about some of the drivers of this growth.

Our monthly auto-renewal rate, or as we call it, our Autoship order rate, represented 50% of our total product sales during the second quarter. Earnings per share of $0.66 for the second quarter exceeded the high end of our guidance range of $0.63 to $0.65 and is a new record quarterly high for USANA. This is an increase of 20% compared with $0.55 per share reported in the second quarter of 2006.

We reported a higher than expected effective tax rate of 37.9% during the quarter, which notably reduced earnings per share by approximately $0.02 relative to the expected effective tax rate of 36.5%.

Let's now go through a number of the items that had a material impact on our earnings per share during the quarter. First, there was about $1 million of legal, PR and other professional services expenses that related to the false allegations in the media. These expenses reduced earnings per share by nearly $0.04.

Next, and as I mentioned a minute ago, the higher than anticipated effective tax rate reduced earnings per share by $0.015 in the quarter.

And finally, in regards to our share repurchases, the reduction of shares due to the buyback program, offset by the interest expense, increased earnings per share by about $0.03.

Now let's go through the major line items on the second-quarter statement of earnings. Our consolidated gross margin in the second quarter of 2007 improved as a percentage of net sales to 77.7% compared with 75.9% in the second quarter of last year. This 180 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 low gross margins, and improved production and procurement efficiencies, including lower freight costs. Looking ahead, we believe that our consolidated gross profit margins will improve modestly as sales from contract manufacturing are expected to be down significantly in the third quarter due to the sale of assets related to that business.

Associate incentive expense in the second quarter of 2007 was 40.3% of our direct selling revenue compared with 40.2% of direct selling revenue in the second quarter of last year. We expect that associate incentive expense will approximate 40% of direct selling revenue for the third quarter and for the remainder of the year as we continue to offer promotions and incentives to our associates.

Now, as expected, selling, general and administrative expenses increased relative to net sales. SG&A increased to 20.6% during the second quarter of 2007 compared with 19.5% in the second quarter of the prior year. The year-over-year increase to SG&A was due primarily to the following factors -- we had an increase in spending to support our growing sales and an increased number of customers; a strategic initiative to add bench strength in certain areas of our staffing; and higher incremental expenses due to equity-based compensation expense. Now, in addition, and as I mentioned earlier, it is important that I point out to you this morning that during the second quarter we incurred about $1 million of legal and other professional services expenses related to and corresponding to the false allegations of our third-party detractor.

We believe SG&A expenses in the third quarter of 2007 as a percent of our net sales will be flat compared to the second quarter of 2007.

In regard to the balance sheet, cash at the end of the second quarter was just under $10 million compared with $27 million at year end 2006. Inventories at the end of the second quarter were $22.3 million compared with $22.5 million at the end of 2006.

Now, to update you on our share buyback program, during the second quarter we purchased an additional 1.6 million shares in the open market for an investment of $67.9 million. Currently, we have about $6.9 million available under our share repurchase authorization.

Now, due to the aggressive share buyback, we ended the second quarter of 2007 with a balance of $34.5 million on our line of credit.

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

Likewise, we have no specific information that is new concerning the SEC informal inquiry. However, we are in regular communication with the SEC, and we will continue to cooperate fully.

With regards to the resignation of Grant Thornton, and as was noted in our 8-K that we filed on Monday afternoon, this resignation was not related to any dispute over our past results or numbers and there have been no disagreements between USANA and Grant Thornton on any accounting principles or practices or financial statement disclosures. We did note, however, that there was an initial difference of opinion between Grant Thornton and the audit committee about how best to respond to the third-party allegations that were made about our Company in the media, including the appropriate scope of audit procedures in light of what we believed and continue to strongly believe are completely unfounded allegations.

In response to the allegations, the audit committee engaged third-party advisors to conduct investigations into certain of the key allegations, which uncovered no evidence of any wrongdoing by the Company. Subsequently, Grant Thornton completed its review for the quarter, and as the 8-K notes, the initial disagreements were resolved to the satisfaction of all parties, including Grant Thornton, who submitted their agreement in writing.

We have received many inquiries from analysts and investors concerning the following question -- if there were no disagreements as defined in your 8-K between USANA and Grant Thornton, why did they resign?

Frankly, I am not sure, and I don't think it's fair for me to speculate about that. But what I can tell you is that I have been personally assured by Grant Thornton that it was not related to any accounting principles or practices or financial statement disclosures. And any initial differences of opinion regarding audit scope or procedures were resolved to the satisfaction of Grant Thornton prior to the release of our first-quarter financial results. That I do know.

I would add here, though, that other than this being a very unfortunate time for this to have occurred, it is probably best that both parties move on at this point. I hope all of you understand that there is really nothing more than I can say about this matter that wouldn't just be speculation on my part. We look forward to moving ahead and engaging a new accounting firm as quickly as possible.

Now, before I turn the time over to Dave, I will comment on our future guidance. Yesterday, in our press release, we provided third-quarter guidance and updated our full-year 2007 financial guidance. Based on our current business circumstances, we believe that net sales for the third quarter of 2007 will be between $105 and $107 million, which is a growth rate of 12% to 14% compared with the prior year.

Now, please keep in mind that this guidance estimate assumes only a minimal amount of sales from our third-party contract manufacturing business, which, as I mentioned earlier, we expect to sell during the third quarter. As a reminder, this business had been generating about $2 million in revenue per quarter. Additionally, it is important to point out that seasonally, the third quarter is typically our softest quarter of the year.

We believe that earnings per share for the third quarter of 2007 will be between $0.65 and $0.67, a year-over-year growth rate of 18% to 22%. We remain very optimistic about the future, and accordingly, we raised our full-year 2007 guidance. We now believe that net sales for the year will be between $425 and $430 million and that earnings per share will be between $2.60 and $2.64. Again, it is important to note that this annual sales guidance includes the estimated reduction of revenue due to the expected sale of the third-party contract manufacturing business.

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

With that, I will now turn the time over to Dave to comment on our operating activities.

Thank you, Gil. Good morning, everyone. First of all, I would just like to take a moment and thank all of our employees and associates, who are doing such an incredible job. We definitely have some amazing hard-working and dedicated people involved with this Company, and it makes me very proud.

Although we faced some challenges, working together we were able to overcome them, and the second-quarter results were outstanding, achieving our 20th consecutive quarter of record net sales.

I was particularly pleased to see that our core business, direct selling, was up nearly 20% over last year. We had a very positive reaction from our field force regarding the false allegations in the media. Our associate leaders did a fantastic job of stepping up their efforts on both communicating the facts to their team members and taking aggressive action to build their businesses.

During the second quarter, we held two Company-sponsored regional events in North America, one in Montreal and one in Chicago. At these events, we focused our efforts on product and business training, motivational speaking and associate recognition. Both of these were very positive, with packed rooms and very happy people.

Okay, let's now take a look at our results on a regional level. Net sales in North America, our most mature region, increased by 11.2% compared with the second quarter of 2006. On a consecutive-quarter basis, sales were up 5.6% in this region. Mexico was up again this quarter, increasing 33.2% over last year and 7.6% compared with last quarter. In the U.S., sales rebounded nicely from last quarter and were up 10.7% over the second quarter of last year, while sales in Canada were up 7% in the quarter. The number of active associates in North America increased by 15.6% to 104,000 compared with 90,000 in the second quarter of 2006.

During the second quarter, we offered a couple of different promotions and incentives, which focused on rewarding those associates who were actively building their business. One promotion, which I believe we talked about last quarter, is the Share the Success 3 contest. This is a promotion that we have offered in the past which rewards those associates who create the greatest growth in their USANA business. Another promotion we offered this quarter, which was very well received, is something that we call the Platinum PaceSetter promotion. This program gives the new associates the ability to jumpstart their business and also gives them a higher recognition level, which is an important aspect of our business.

Our plan is to continue to offer contests and promotions that reward both new associates and old for growing and building their business. By offering what the State of Utah rates as one of the best nutritional supplements around, we are confident the products sold will continue to grow.

Turning now to our Asia-Pacific region, net sales in this region for the second quarter were very strong. Sales in the Asia-Pacific region increased by 38.5% over the second quarter of last year. Excluding Malaysia, our mature Asia-Pacific markets were up 22.5%. The year-over-year increase in this region can be attributed to growth in each of our Asia-Pacific markets except in Japan.

The number of active associates in the Asia-Pacific region increased 42.3% to 74,000 compared with 52,000 in the second quarter of last year. As was mentioned in the press release, the number of associates in the Malaysia market reached a total of 11,000 in the second quarter.

We have been very pleased with our first two quarters of operations in Malaysia, which opened in early January of this year. We believe that market has performed exceptionally well for a few key reasons. First, we have had a significant interest from a number of our large international associate leaders. One of the very distinguishing features of our global compensation plan allows leaders from other markets to build organizations in a new market. Malaysia was geographically close to a large number of existing markets, and the ability to work in both English and Chinese has opened this market up to many of our leaders.

Second, market size -- Malaysia is a large, mature direct selling market where there was pent-up demand for the launch of a globally prominent direct selling company like USANA.

Finally, strategic planning -- USANA has focused on a long-term market focus, including the Asia-Pacific Convention, which will be held in Kuala Lumpur in March of 2008. The Malaysia leadership sees that we are dedicated to the market by our investment in events, activities and promotions that will help them build their businesses. For example, our grand opening event, which had both a strong training component and an exciting recognition element, was attended by over 2000 associates and prospects.

Overall, our results this quarter leave us very pleased with the future prospects of USANA. We are very eager to host our 15th annual international convention in mid-August. We look forward to celebrating, motivating and recognizing the thousands of associates worldwide who have made USANA their passion in life. Similar to conventions in the past, we will introduce new products and sales tools which we believe will add to our associates' continued success.

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

(OPERATOR INSTRUCTIONS). Doug Lane, Avondale Partners.

I'd like to talk a little bit more about the 8-K that was filed, where you mention that the audit committee engaged select advisors to render advice with respect to certain of the third-party allegations. Can you give us just a little bit more color on which of the allegations that you investigated and what the advice was?

I'll take a crack at this, Doug. This is Gil. They want us to -- as you recall from that tome that was published, one of the accusations related to whether or not we were abiding by direct marketing laws, that is that the anti-pyramid laws were appropriately being monitored by us and practiced by us and coordinated by us.

So we went out to one of the most well-respected law firms in the country that deals with direct selling companies and experts in direct selling. Those are the kinds of things that we have done -- independent investigations -- reports came back. As we mentioned in our prepared comments, there was nothing that was found that was a problem with regards to those issues.

And is that report available?

No, it is not. It is not a public report, Doug. It is something that was done for the audit committee in conjunction with their work with the outside auditors.

Okay, but obviously it is on file with -- is that something that you are going to make available to the regulatory authorities if they ask for it?

If they ask for it, of course we will. But it is not a public document.

No, I understand. And can you talk -- switching gears here, am I right to assume that some of the growth in Malaysia may have come from Singapore, but in aggregate, the Malaysia/Singapore market, if you will, is growing? And was this kind of cannibalization expected when you opened the market?

Definitely. We have leaders from all of our markets most likely in Malaysia. So growth they would have done in their local market is in Malaysia. The key is to have enough leadership that remains behind to keep those other countries growing while some of the leaders go to Malaysia. So definitely, some of the growth in all the countries happened in Malaysia from the leaders moving there.

But if I've got my numbers right, the Singapore active associate number went from --

Without a doubt, the majority of the leaders in Malaysia are from Singapore. There are some from every country that are there, but Malaysia received -- of course, it is so close to Singapore. And lot of the Singaporeans moved up to Malaysia, definitely.

There has got to be a lot of cross-pollination between those two markets.

Most definitely.

Remember, Doug, this seamless compensation plan we have globally causes those kinds of things to take place.

Okay. And finally, we haven't talked about China in a while. Can you give us an update there?

Nothing new to update on China.

So where do we leave it? There is still no start date. But do you have people on the ground in China? Have you begun any kind of infrastructure building or product approval process there? Or are you just waiting to see how it unfolds with the other MLMs that are licensed there?

This is Bradford Richardson responding to that question. Certainly, the longest timeline, of course, is the product regulatory approval. We have work being done on that ongoing. But other than that, we are continuing to watch and see what goes on with the marketplace and continue to have the infrastructure that we've publicly stated in the past.

So you have not broken ground on a manufacturing facility there yet?

Doug, remember, in 2005 we bought a small facility in Tianjin. And that small facility, and I emphasize small, is actually manufacturing a few things for local market purposes. It is personal care, by the way, which is very small.

Rommel Dionisio, Wedbush Morgan.

I wonder if I could just delve into North America a little bit -- certainly impressive performance in the second quarter. Could you talk about what the impact of the relaunch of Success from Home was? And I think you mentioned on your last conference call you're also launching some free starter kit promotions in North America. Could you just talk about the impact that some of these promotions had on the quarter?

The Share the Success contest, which is unfortunately confusing, but different from the Success from Home Magazine -- Success from Home Magazine is a sales tool that we have promoted heavily to use to build the market. Share the Success is the growth contest, so just growing quarter over quarter, six month over six month, and rewarding those who grow the most.

Both of those are working well, as you can see. We continue to throw everything from free starter kits to Share in the Success to Success from Home contest to our field, like we always do. We are always adding a promotion every month or couple of months. Nothing really has changed from the norm. We have continued to do what we have been doing for years, as we have seen, with five straight years of consecutive record sales. And I think the leaders have stepped up even further in the face of challenges this last quarter to prove themselves. And they did an amazing job just by escalating their efforts, spending an extra hour a week than they would have normally.

Very good. Congratulations on the quarter.

Tim Ramey, D.A. Davidson.

Congratulations, too -- that was an awesome quarter. The associate growth usually is a leader or pretty directly correlated with the sales growth. And pulling off 25.4% associate growth ought to lead to stronger sales growth in the Q3, and yet I believe your guidance is for something like 12% there. Why should we believe that guidance? What --

Tim, we could be offended by that comment.

I am a third-party allegator here.

You have to remember, these are volunteer, part-time distributors. And summer vacation -- kids are out of school, they are at Disneyland, they are traveling to the Caribbean, whatever they happen to do. They enjoy this lifestyle that allows them to take off the summer, a lot of times, with the kids and take a break from their business. So it is just a normal July/August, take a break, and then once the convention kicks off, kick it into high gear -- the kids go back to school, so to speak. So as you have seen over the years, the third quarter is always our softest or sequential growth quarter, year in and year out.

Tim, I would just add one other little comment here. The third quarter is when we have our big international convention. And what we find also -- because they know we are going to do some exciting stuff at these conventions -- sometimes the customers keep their powder dry, so to speak, to see what is going to come there. So that also impacts the quarter. That is, people kind of hold off a bit sometimes. So we hope we are wrong. We hope we have a stronger quarter than we think we are going to have, but --

Plus we have the contract manufacturing going away.

That is true. Don't forget, Tim, the contract manufacturing is about $2 million a quarter -- has been. We hope that that transaction will close here in the third quarter. And so that revenue will be gone also.

Not to be argumentative, though, but you are doing the conference a little earlier in the 3Q this year, which probably means that some of that postconference momentum might fall in the 3Q as opposed to the 4Q. Am I right or wrong on that?

Yes, hopefully we'll get off to a quicker start with it being in August. With the Asia-Pacific Convention now available, fewer of our international -- or excuse me, Asia-Pacific associates are coming over for the international convention, just because it is so expensive to fly over here. And so the conventions have been split up, in a sense. If we hadn't had the Asia-Pacific, we would see even more impact, I think, from each international convention. But with 3000 of the people now going to Sydney last year, it has kind of divided up the convention.

So Dave, are you expecting attendance to be more like 4000 or 5000?

No, it will be around 8000, 9000.

That will be a new record, Tim, so we hope you have us on this one.

And then just a quick one for Gil -- the tax rate was up. I don't know that you specifically outlined what the driver of that was. Could you give us some help on understanding that?

It is primarily a factor of this manufacturing tax credit. One is being phased out in the so-called ETI credit, and a new one is being phased in. And net-net for us, it is hurting us. Now, we hope to see some mitigation of that tax rate in the coming quarters, but it is all tied to that ETI tax credit that has been now phased out. It is completely gone as of the end of -- I believe it was the end of this quarter we just completed. So that is where it is.

And should we expect the expenses related to the legal and other to pretty much maintain at that 2Q run rate for at least the 3Q and maybe 4Q, or any thoughts on that?

That is basically what we've got in there. It is one of those things that is hard to predict because we don't know how relentless this thing will be. And of course, some of the lawsuits are just getting underway. A lot of that will be covered by our D&O policy. Other aspects of it may not. But yes, we have basically assumed about the same level going forward for the next couple of quarters.

Andy Speller, A.G. Edwards.

Again, my congratulations on a solid quarter, in light of some tough news in the marketplace. Gil, do you have cash flow from operations in the quarter?

Yes, just give me a minute here. I think we can put our hand on that. For the quarter, it was $16.4 million. If you look at the EBITDA number, it is running a good, strong 17%-plus of sales. But you also have to go back and add in, then, things like 123R expense, which is not a cash expense, option expense. And it gets pretty close to 20% of revenue in terms of the EBITDA basis. So cash flows continue to be strong, just excellent.

And what was the specific 123R comp expense in the quarter?

Let's see if I've got that in front of me here. Let's see, that was -- I may have to get back to you on that, Andy. I can't put my hand on it. It was like -- here we are -- 1.6 for the quarter versus 1.2 a year ago in the quarter.

And that is going to stay pretty flat going forward, about that 1.6?

Yes, it depends on what the Board does, of course, with options, granting of options. But it is likely to stay at this level or perhaps creep a bit, but about this level. But again, remember that is a noncash item.

And then as far as the debt in the credit line, what should we think about paying that back? What sort of level of debt on that credit line do you expect to have outstanding for the balance of the year into next year?

If we didn't buy any additional shares back, then it would get paid out very quickly in about a quarter and a half or so, because of the cash flows that we generate. It depends, I think, on the Board perhaps -- if the stock keeps getting pounded, it wouldn't surprise me to see the Board come back with additional authorizations. So we are certainly not -- don't have angst about having a little bit of debt on the balance sheet, given the cash flows that we generate.

Okay. And then, you guys tend not to give, I guess, a level of detail with regard to maybe the levels of which your distributors reach in terms of their achievement level within the marketing plan. Can you give us a sense in the quarter, maybe, how people moved up to different levels, or -- specifically I'm asking about the U.S., but if you want to give it on a more broad term, that is fine, just so we just get a sense on -- just a better idea of what is going on.

I can't really give you any details or specifics, but we have had a lot of growth with U.S. leaders. They have been enthusiastic. They have been making a statement, and quite a few rank advancements, which is one of the things we look at. We have had a lot of rank advancements. A lot come always prior to convention, as that is where the recognition takes place, is the convention, but continuing on with the leaders in the U.S. growing their businesses to new levels that we have never seen before.

I might add in here as well to that question, anecdotally, one little aspect is that we have a level of distributor called Gold Level. And we have had to schedule another -- an extra Gold retreat here at the home office to deal with the growth that we have had, which is a nice thing. It is a good thing.

Is that something you guys would consider giving out, the stratification within the marketing plan in terms of the levels of achievement, either broadly or specifically within markets?

For the most part, we look at the commissions paid out. And that shows the growing leadership in the field. As those associates commissions grow, that means there are more people making more money. That is the only number that could be really compared quarter to quarter. Otherwise, you will be comparing apples to oranges from quarter to quarter.

And remember, I know we have talked about this a couple of times -- we just feel that that active associate count number is the best way to judge what is going on. It is what we use to manage the business.

But isn't the leader number more appropriate in terms of what is really driving the business?

If you have a definition of what a leader is, yes.

Well, you guys have a definition of what a leader is, because you stratify it within the marketing plan. There's the different levels of commissions that they generate, so the higher they are on that plan, the more important they are to your organization, right?

Not necessarily, not if they have earned that commission and now have retired.

In other words, we're speaking of leadership here in terms of how they approach the business, how engaged they are as opposed to what rank level they have achieved.

Income does not always mean leadership at the current time. This is a residual business where once they build up commission, they can retire and still be making hundreds of thousands of dollars every year and not be actively pushing their business. They will be working it, but not pushing like some of our leaders who are pushing hard to go to the next level. So it is completely independent.

So then providing us with information with regard to how people are moving up or down would be representative of that, right?

You would never be able to interpret it correctly.

Fair enough, just thought I would ask.

Mimi Noel, Sidoti & Co.

Two more follow-up questions on the 8-K, if you can provide us much insight. Gil, can you give me an idea who initiated the breakup of the relationship, so to speak, between USANA and GT?

Well, it was apparently a business decision on their part. That is all we know.

Okay. And was there any opportunely presented to you to get them to reconsider or perhaps negotiate their timing?

No.

Is it commonplace for an auditor to resign immediately before a public filing?

I have no idea, Mimi. Like I said in our prepared remarks, it is something that happened. We are moving on and they are moving on. There was no reporting or accounting issues.

Prior to their resignation, had you considered switching auditors, given that there was an initial disaccord about the internal -- or, excuse me, independent investigation?

As you know, the audit committee of public corporations has that responsibility, not me as a CFO, or CFOs in general. So I think certainly, it is a topic that gets discussed and had been discussed from time to time in the audit committee. But we had made no decision that I am aware of to do that.

And then two more related questions. How long on average would it take to find a new auditor, and would it result in any delayed filings?

Obviously, with an international company like we have, we will want to select an auditor that has the capabilities and the resources to provide us the service that we will need to make sure that we continue with just pristine reporting and timely reporting and so forth. We are going to take whatever time it takes to get that done, to make the right decision for us. We do have -- every quarter, we will have to file a Q. And I suppose -- we are going to stick to those Q filing deadlines and file on time.

And then two questions about the actual operations of the business. Do you have any sort of quantitative or qualitative information you could provide with regard to associate trends mid-quarter so it reflects not so much the beginning of the quarter, which wasn't too long after the negative report came out, but sort of a mid-stream indication?

Mimi, that is a hard thing to get very precise with. So much of it depends on -- as Dave mentioned, we have a number of contest going on -- when did they start, when do they end -- you see it move around based on those kinds of things. But we just had a solid quarter throughout.

And the last thing I wanted to ask about is the potential proceeds from the sale of the third-party manufacturing.

This is a nominal amount. It is a nominal amount -- won't be a blip on anything.

All right. That's all I was trying to determine, then. Thank you.

Steven Martin, Slater Capital Management.

Most of my questions have been answered. One thing I just would comment -- Overstock put out a press release today that the judge has allowed their suit against prime brokers to go through for short interest violations or fraud. Can you talk about any trends in Autoship and in -- as some of the allegations have been related to people's decisions to return product or cancel their memberships?

We haven't seen anything out of the ordinary. If we were seeing that, we probably wouldn't have had such an incredible quarter that we had. It has been business as usual.

Steve, [what news] -- Autoship, 50% -- as Asia becomes more and more important, sometimes we see that go down just a bit because they are newer markets, for example, like Malaysia and so forth. But very strong Autoships, and no change in our credits and returns -- still run less than 2%. That is historically what they have been for the 12 years I have been here.

Got you. Malaysia, at the rate it's growing, could very quickly become your -- easily your third largest market in Asia, possibly your second. Where do you expect it to get to?

Bradford, that might be a comment for you to make. And we will hold you to what you say about any growth --

We are certainly very positive about what has happened in Malaysia so far. Our goal is continue doing the same types of activities that will grow the business. Of course, with a new market, you hope you will sustain that level of growth and build a solid Autoship base and build a solid group of leaders. It is probably too early to tell, but early indications say that it will be a very strong and solid market for us going forward.

And as to the buyback and share debt levels, as a shareholder, I have no -- I said this to you guys privately -- I have no problem with you guys putting a little more debt on the balance sheet if people are going to take potshots at your stock.

We concur with that, Steve.

Scott Van Winkle, Canaccord Adams.

A couple of questions. I apologize if I break up; my cellphone has a bad signal. What should we expect from the convention in August -- significant new products? Significant new tools? Could you maybe give us a grade without signaling too much? I know you like to keep it quiet for your distributors.

It is really hard to predict with a new product, but this is definitely one of the products I am the most excited about that we have been working on for a number of years. I have been waiting, I guess, four or five years for this product. I am extremely excited. I think it has huge potential and long-term, longer-lasting potential. But you are going to have to come to the convention and find out, I guess.

Another question -- distributor growth accelerated, obviously, and there was a question in the past about the correlation with revenue, which I completely agree with Tim's statements. But can you give us an indication of, with that higher distributor growth, is that driven by recruiting, retention, both? Maybe just a little indication there.

It is both. It is active leaders out there. It is a push market. We don't advertise and wait for them to come to us. It is when the leaders are spending more hours calling people, talking to people, having meetings. They got active, they got busy, which shows the power they have when they are motivated. So our goal is to just keep them motivated. I think the activity level increased new consumers -- enrollment of new consumers. And we are just going to keep pushing that to make sure that continues.

And Dave, the preferred customer count declined in the U.S. on a sequential basis by about 1000 customers. Anything behind that, a reason you can point to?

A lot of our distributors are preferred customers. Some of them just pay the extra $20 to have that title versus the preferred customer title. They are still consumers of products. And sometimes, some of the promotions and contests cause our leaders to focus more on one direction than the other. And with the $20 difference, it is really not much of a jump for a preferred customer to, in a sense, become a card-carrying preferred customer, or however you want to describe them, for an additional $20.

And can you track that rate of change between preferred customers to distributors and so forth?

We don't know who is who. We can guess based on their activities, what they do. But it is a guess. It could be they're -- I mean, with individuals in different mindsets, you just don't know where they are for sure unless you were to call all the thousands, and we just don't have the time to do that.

This one is probably for Fred. I think (technical difficulty) the answer to this, but since your last quarterly call, there was an initiation of nutritional supplement Good Manufacturing Practices. I know you use Pharmaceutical GMPs. Is there anything in there that is causing you to change your manufacturing practices?

There wasn't anything. We are above that now.

Bill Leach, Neuberger Berman.

In the press release, you mentioned that your shares were down to 16.3 million. Is that a fully diluted number?

No, that is the outstanding -- that is shares actually outstanding, Bill.

At the end of the quarter?

Yes, at the end of the quarter. The fully diluted number was 17,163,000.

17,163,000. So that's at the end of the quarter?

That was at the end of the quarter.

So that wasn't much different than the quarter average.

That is true. The quarter average was 17.8 million.

And have you given any further thought to paying a dividend?

No.

Why not?

Because we much prefer share buyback.

Really?

Yes.

Doug Lane, Avondale Partners.

Just a couple quick follow-ups. Can you give us a feel for where you think the timing will be for additional authorizations, since you pretty much wound down now?

Secondly, Gil, what is your cost of debt on that line?

Thirdly, can you give us what the, if any, there was a foreign exchange impact to sales in the quarter?

And then lastly, if you could talk, Gil, about capital spending this year and next year.

Well, with respect to the buyback, that is going to hinge quite a deal on where the stock price goes from here. Of course, if we believe that it is a great value, we will push the Board to consider buyback. If it runs up, they may not be as quickly to come with the buyback. So I think it is dependent on the stock price.

The Board has certainly given us an indication they are willing to give us more and look at it on a regular basis.

Will that be at the next Board meeting, or can that be in the interim period?

That can be at any time.

And on the cost of debt?

Cost of debt -- our credit facility provides pricing at basically 100 basis points over LIBOR. It depends to some degree how far out you go, as you would expect. So it is a very attractive credit facility, and I think an efficient way to do this.

With regards to foreign exchange, we had in the quarter about $2 million benefit on the top line from foreign exchange. So the growth would have been about, instead of nearly 20%, it was closer to 18%, of that sort.

And then CapEx, do you have an updated number for '07? And where do you think that will settle in in '08 after your expansion is pretty much finished?

CapEx through six months is about $14 million or so. And that is probably going to end the year somewhere on the order of -- just north of $20 million, is my guess -- depends on the timing of completing things -- maybe $22 million.

We've got two projects underway -- one here in Salt Lake City, which should wrap up by the end of the year, or be virtually wrapped up by the end of the year, I think. Fred, is that correct?

Yes.

And then we've got another one in Australia, Bradford, that I think is going to carry over at least through the first quarter of next year.

Correct, Q1.

And so this year is going to be like on the order of $22 million or so, probably, when we are done, and next year, probably on the order -- normally, CapEx is going to be $10 million or less. That has been our run rate when we haven't had a big project going on. But with the Australian project, it may be on the order of something like $12 to $15 million next year. We haven't refined those numbers; that is just my judgment call at this point.

That's helpful. Thanks.

Bill Leach.

Gil, I was looking in the -- you had 17.163, was your weighted average outstanding for the quarter. What was the share count at the end of the quarter?

The actual share count?

Yes.

The actual shares outstanding?

For fully diluted.

Fully diluted -- that was 17.163.

But that is what you show as the average for the quarter. Surely it declined as the quarter progressed.

Let's see, maybe I'm -- I may not have the right number here for you. The actual outstanding shares is the 16.265. And I am showing fully diluted at the end of the quarter, 17.163. Now, hang on just a second.

Okay, I have got a six-month average fully diluted -- you know, the accountants get so esoteric on how they have you do this stuff. The six-month number was 17.813 as average diluted shares.

I would be happy to call you back and get some more numbers.

It's a big -- you have had a big drop in your share count.

Yes, we have.

And it is important to have that accurate number to calculate the EPS. So your actual shares are 16.3?

16.265.

That is primary, right?

Yes, that is actual outstanding shares as of the end of the quarter. No option, no additive shares reflected through options.

What would you suggest we plug in for our third-quarter estimate? You gave an EPS guidance -- what share count are you assuming?

We are assuming that number at the end of the quarter -- 17.163.

But that is the average for the quarter.

It may trend down. But we were active early in the quarter, Bill.

Oh, I see.

We were most active early in the quarter. So it won't move much from that. And then you've got a few options that could come in, and it gets to be a little bit of an art form.

Management, please continue with any closing comments.

We thank you for your questions today. We continue to remain very confident in the future outlook for USANA and the investment opportunity that 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.

Thanks again for your interest in USANA, and thanks for joining us on the call this morning.

Thank you. And ladies and gentlemen, this does conclude the USANA Health Sciences second-quarter earnings conference call. At this time, you may now disconnect. We thank you for using ACT Conferencing. Have a very pleasant day.