USANA Health Sciences Inc (USNA) 2007 Q4 法說會逐字稿

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

Good morning, everyone. We appreciate your joining us this morning to review our fourth quarter and our full year results. As a reminder today's conference call is being broadcast live via webcast and can be accessed directly from our website at www.USANAhealthsciences.com and a replay will be available on that site shortly after the call.

Before I turn the call over to Gil, however, I remind you that during the course of this conference call management will make forward-looking statements regarding future events or the future financial performance of our Company. Those statements involve risks and uncertainties that could cause our actual results to differ perhaps materially from the results projected in those forward-looking statements. We caution you that these statements should be considered in conjunction with the disclosures including the specific risk factors and financial data contained in our most recent filings with the SEC.

Also during this call, management will discuss non-GAAP information. We provide non-GAAP measures to assist investors in understanding our operating performance. I will now turn the call over to Gil Fuller, Executive Vice President and CFO.

Thanks, Riley, and good morning and welcome everyone. I am pleased this morning to be joined by Dave Wentz, our President, who you will hear from shortly. Also in attendance this morning are Mark Wilson, Executive Vice President of customer relations; and Dan Macuga, Vice President of field development.

This morning I plan to provide you with our fourth quarter and year end financial results. I will then talk about our guidance for the first quarter of 2008 as well as our updated forecast for the full year of 2008. Before I talk about our financial results I'd like to speak briefly about the closure letter we received from the SEC regarding our informal inquiry.

Since the beginning of the inquiry, we had been in regular communication with the SEC and had cooperated fully with all of their requests. The Company was advised by letter in early January that the SEC had completed its informal inquiry and is not recommending any enforcement action be taken. Obviously, we're pleased with this result and continue to believe in the integrity of our business model.

Another positive development for us during the quarter was the dismissal of the shareholder derivative lawsuit. The plaintiff agreed to dismiss this case with prejudice after USANA and the other defendants filed a motion to dismiss. We think this is an important outcome and let me briefly say why.

The class action and derivative lawsuits each contained very similar allegations and claims. Our position has always been and continues to be that these allegations are false. We believe that the recent events support our position. In the light of these outcomes we're optimistic about our position with regard to the two remaining class action lawsuits.

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

Like other multinational companies, we are benefiting from stronger foreign currencies. Net sales for the full year ended were $423.1 million, an increase of 15.9% compared with the year ended 2006 and in line with our guidance of 422 to $424 million. Excluding changes in foreign currency, net sales for the full year of 2007 would have increased by 12.9%. Net sales growth during the year was primarily driven by a 15% increase in the number of active associates compared with the same period last year.

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

Let's now go through the major line items on the fourth quarter statement of earnings. Our gross margin in the fourth quarter of 2007 improved as a percentage of net sales to 78.9% compared with 77.7% in the fourth quarter of 2006. This 128 basis point improvement can be attributed to a reduced impact from success from home magazine sales that took place in the fourth quarter of 2006 and improved inventory efficiencies especially with regard to reducing the amount of scrap inventory by an amount of about $700,000.

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

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

As we go forward however, we expect that associate incentive expense will be approximately 40.5% of sales in the first quarter of 2008.

Selling, general and administrative expenses increased relative to net sales to 21.8% during the fourth quarter of 2007 compared with 19.6% in the fourth quarter of the prior year. The year-over-year increase in SG&A was due primarily to the following factors -- an increase in spending to support growing sales and an increased customer base which included the expansion of several of our international offices; wage related increases including a strategic initiative to add bench strength in certain areas of our staffing both locally and internationally; an increase in depreciation expense relating to the capitalization of our newly expanded facility in Salt Lake City; and an increase in legal and other professional services of which just over $0.5 million related to our current and well-chronicled lawsuits.

We believe SG&A expenses in the first quarter of 2008 as a percent of net sales will increase compared to fourth quarter of 2007. We are expecting that G&A expense will be approximately 22 to 23% of sales in 2008 as we make the necessary investments to support the future growth of our Company. In some ways, 2008 will be at least initially a year of expense investing. We do expect however that in 2009, we will be able to generate operating leverage from these investments as we have proven in the past.

Okay, one quick note on other income. In the fourth quarter of 2006 we reported a fairly large onetime benefit to this line-item through a favorable foreign exchange gain. In the fourth quarter of 2007 we also received a benefit to this line item. This benefit relates to the GAAP requirement to capitalize interest relating to our construction projects and this added about $0.03 to earnings per share.

Now in regards to the balance sheet, cash at the end of the fourth quarter was $12.9 million compared with $27 million at the end of 2006. Inventories at the end of the fourth quarter were down year-over-year to $19.4 million compared with $22.5 million at year end 2006.

Capital expenditures for 2007 totaled about $26 million because of the facility expansion projects we have underway in the US, Australia, Singapore, and Taiwan. Each of these projects were undertaken to catch up on our underlying infrastructure, to accommodate our past growth and anticipate our future needs. While the increased depreciation did cause some near-term expense pressures, we should realize future operating leverage as our sales growth continues. We anticipate capital expenditures in 2008 to be in the neighborhood of 15 to $20 million with further decreases likely in 2009.

Okay now to update you on our share buyback program, during the fourth quarter, we didn't purchase any additional shares in the open market, however, during the year we purchased approximately 1.9 million shares for an investment of about $80 million. Currently we have $50.3 million available under our share repurchase authorization.

Additionally, we ended the year with a balance $28 million on our $40 million line of credit.

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

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

From an earnings standpoint, we also plan to continue to add key staff to complete our facilities and complete our facility expansion initiatives during 2008 in preparation for our next phase of growth. We're confident that our business model remains among the most effective and transparent in the industry and we remain very optimistic about the future both for growth of sales and in earnings in 2008.

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

Good morning everyone. Well yesterday we reported our financial results for the fourth quarter and year end 2007. These results did not meet our expectations. Net sales during the fourth quarter in North America were up a modest 3.7% over last year. Sales in the US were disappointing for us, down slightly on both the year-over-year and sequential quarter basis. Mexico however continues to grow nicely and was up 11% over last year.

In the US, we faced some challenges some of which were our own fault. During the second and third quarters of this year we held contests and promotions in North America that brought a significant number of new associates into the business in an extremely short time more than quadrupling our average weekly enrollments in one week. I believe this activity hurt us in two ways.

First these incentives pushed leaders to bring in more people at one time than they can reasonably expect to spend the appropriate time training and supporting. And second the Herculean effort of those leaders took a toll on their stamina to finish out the year on an aggressive note. We believe this led in part to the decrease in our associate counts in North America as compared to the third quarter of 2007.

We're also faced with public relations challenges as the short and distort scheme ran through the media and on the Internet. These PR challenges have made it more time-consuming for associates to bring in new customers as it takes longer to educate and dispel the rumors and myths that pervade the Internet. However, we believe these issues are old news and will be largely behind us in 2008. We're planning to implement several new associate related initiatives that are specifically designed to regain our momentum in the US. I will discuss a few of these initiatives in a moment.

Fortunately for us we have a good diversification of markets and during the fourth quarter of 2007 net sales in the Asia-Pacific region increased by 25.1% to $40.8 million. The growth in this region was led by double-digit, year-over-year growth in Hong Kong, Australia, New Zealand and Japan.

The number of active associates in the Asia-Pacific region increased by 28.8% to 76,000 compared with 59,000 in the fourth quarter of the part of the prior year. This increase was primarily driven by the opening of Malaysia which had 11,000 active associates at the end of 2007. As is typical with a new market sales in Malaysia were $4.5 million for the fourth quarter which is down from $4.9 million in the third quarter of 2007. We were not surprised at all by this consecutive quarter decrease.

It is often the case with new market openings that you will have two or three quarters of very fast grow followed by a recovery period as our associate leaders from other markets return to their home markets and (inaudible) arrange the new local leadership to run with things. We fully expect future growth in this market.

This year our Asia-Pacific convention will be held in Kuala Lumpur, Malaysia and should be provide an additional boost to the market. This event will take place at the end of March.

Now back to our strategy to grow the US and continue to grow our other markets. USANA is 100% focused on improving the quality of people's lives through our two founding principles -- true health and true wealth. Our customers are receiving the most tangible health benefits and our associates are succeeding in the strongest residually focused business. We continually strive to build trust with our customers and associates and reward them for their affiliation.

The key to building trust is meeting the expectations of our customers and associates. We accomplish this through operational excellence. We're going to invest in the continual improvement of our infrastructure and services to make sure we're meeting the expectations for product quality and delivery, customer service, sales tool and training effectiveness, IT support systems, and any other ways in which we touch our customers. This will continue to improve product loyalty as well as support the success of those associates who want to build a business of any size.

We want to make it as easy and as simple as possible to do business with us. Operational excellence is critical to our goal of providing true health and true wealth.

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

We will also focus a lot of attention on My HealthPak which provides a completely personalized nutrition program in convenient AM and PM packets which even have the customer's name on them. This is the future of supplementation. And we will also look to leverage our affiliation with the Linus Pauling Institute at Oregon State University to enhance existing products and develop new science-based products that our customers want.

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

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

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

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

When you think about the slowdown in the US business in particular, you certainly mentioned the reputational impact that you took. But can you see in your SKUs for instance that there is economic sensitivity going on? Are you seeing mix shift occurring within the product mix of selling or how do you kind of dive a little deeper into the assortment that is selling right now?

I will take a stab at it and then Dave and Mark, others may want to join in. We have not seen any significant mix shift in our product grouping and there continues to be basically steady as she goes. We are seeing some uptick in our My HealthPak which we're very encouraged about. Dave I don't know if you --

I do think we may be seeing a little bit as people are joining because there is so much uncertainty with the economic situation in the US. The media has created such a scary picture that people don't know for sure whether they want to invest in a new business or whether they -- what the situation is going to be. I think if we get into a full recession it's definitely beneficial to us because the downside is (inaudible) the people looking for supplemental income always goes up in those situations and direct selling is a great alternative for people.

We're kind of stock in that transition middle period where people don't know if the recession is coming or when it's coming and how to act accordingly. They're kind of hesitant in limbo at the moment and as soon as they see the swing I think we will see them respond appropriately.

Sounds good. And would you comment on why you did not repurchase stock in Q4?

We had and have two very large construction projects going on, one in Australia which is now well underway and a big one here in Salt Lake. We just absolutely had to add physical capacity both from the inventory production standpoint as well as from the administrative standpoint. We have just been running so thin that -- anyway, we really just needed to add capacity.

So with those large commitments and the timing of those being not always something you can manage exactly, we thought it prudent to be on the sidelines while we get work through some of these things. Now that we have got our admin building here in Salt Lake about wrapped up and the warehouse and production side is getting pretty close, I think we can see a little more clearly our cash flows and we will be taking a hard look at that.

Simeon Gutman, Goldman Sachs.

Implicit in the guidance the sales trajectory for the US for the overall business, it looks to be improving a lot in the back half of the year. A question especially given your comments earlier that the incentives, the promotions you ran, the receptivity wasn't as strong mainly because your distributor base is winded, maybe because of the reputational challenges. So in light of that and the economy how do you get confident in that ramp up? And yes you're doing initiatives but do those take a little time to set in?

Certainly, we're working on some strategies that will take some time. Some will be implemented quicker than others. But it would be nice if the economy can figure itself our fairly soon, the sooner the better so that can (inaudible) can help people make their decisions. And I think we will be able to re-energize our field associates.

They worked really hard to fight through last year, did some incredible efforts bringing in a lot of people. And in some cases of we formed contests that brought them in in too short of a period rather than spreading them out. But they did a lot of work and I think they did a lot of work and I think they just kind of relaxed in the fourth quarter to catch their breath and now we need to get them going again and excited and now that they have enjoyed the holidays it's time to get back to work.

Do you have additional meetings and/or not on the scale of conventions but can that be used as a tool as well?

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

And then switching gears to that market, I guess Singapore, Malaysia combined; can you track on a regional level and yes you can see in some of the numbers some of the other regions maybe got a little stronger on a sequential basis but can you track at least at the distributor level that there has been a migration back to home or origination country and that focus at least from Malaysia has just taken off for a temporary period?

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

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

Not all, as Dave said the pattern in some 13 markets we have opened.

We look back at the financials (multiple speakers) for all of them.

Sorry, go ahead.

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

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

I think last year's convention we definitely didn't see the at-event sales but I'm so excited about what we did launch there. That wasn't a product that drove people to buy immediately because it was the same inventory that they have, the same products they had. So they would wait for their month supply to run out before they started purchasing.

But I'm very excited about the increases we're seeing with My Health Pak. It's starting to pick up momentum, we're going to put a lot more attention and what we talk about people focus on. So we're very excited about the future of that. I think it will be a huge long-term product for us and the one weekend's sales are not that important in the grand scheme of things.

Bill Leach, Neuberger Berman, LLC.

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

Something of the order of $2.5 million in cost.

Would you expect that to repeat this year or not?

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

Are you still pursuing your legal suit against (inaudible)?

Yes we are.

What's the status of that?

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

In terms of your EPS guidance are you assuming any share buybacks or are you just assuming the status quo on the shares outstanding?

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

That's about 8% of your market caps. That would account for your entire EPS gain if you took that literally.

If we did nothing else but buy shares, you're probably right.

So wouldn't you say your guidance would be pretty conservative if you did that?

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

That's for sure.

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

Do you know what the option expensing charge was for the quarter and the year?

Yes, I do. The quarter was $1.3 million. By the way that was the same as it was in the third quarter.

That's pretax?

That's pretax and for the full year it was $6.1 million.

Do you have an estimate for this year?

Well what we have built in there is it's going to be about the name. That of course depends on what the Board does in terms of granting options, what the share price does. Both of those are sometimes difficult to estimate with any great accuracy.

Last question, do you see the tax rate about the same this year?

We see it about 36% in '08.

Doug Lane, Jefferies & Co.

Gil, you mentioned in the other income a $0.03 favorable item, something to do with capitalized interest. Was that in your original expectations?

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

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

No, it's about a $0.025 benefit.

You talked about associate incentives (inaudible) make sure I didn't miss anything -- of 40.5% in the first quarter. Did you mention a number for the full year?

For the full year last year? This year we are expecting it to be 40.5% this year meaning 2008.

For the full year?

For the full year. It was 40.3% of the full year of '07.

That's only a modest step up. I guess what I would like to talk about is what are you going to do to try to jump start the US? First of all with the active associates going down from 63,000 in September to 61,000 in December, can you put a little color on that? Is that from less new people coming in or less people ordering during the quarter? So is that more on the recruiting side or more on the retention side?

Definitely a combination of both. Definitely maybe lower rate retention because we brought in so many people at once and they weren't able to get the support they need and the fatigue of the leaders out in the field taking a breather fourth quarter because we have been driving them so hard for five years now. They have been carrying it up and I think they took a breath and now we will be out on the road talking with them, motivating them, finding out what they need to take it to the next level, what motivates them.

And we're also going to be looking to do everything we can to make them more efficient. (inaudible) they're more productive, if they can do more with less effort. I think that's the key and with technology and other things we can definitely help them become more productive.

I was looking back and the last time we went through sort of a retrenchment in the US was a long time ago. It was late '01, early '02. Obviously you were a lot smaller company then but it did turn around pretty quickly. What was the situation then and what did you do then and how can you apply maybe your lesson then to what you are seeing today?

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

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

Have you noticed -- has it been a material difference in the mood in the field with the events in January? Or is that just they don't really care and they just go about doing their day-to-day business? Really where do you go from a motivation standpoint to your leadership without the big increase in the promotions and associate incentives spending and all the things you talked about?

Just responding to that quickly and we have seen some great excitement here in 2008. We had some great kickoffs in January and we are seeing some large meetings that have taken place and will take place in the upcoming several weeks. I think there is a new initiative to get back to work.

There was a little bit as Dave and Gil had alluded to of wait-and-see with the negative propaganda as well as many of the other things that hit them and the fatigue Dave mentioned. We are feeling and seeing that there is an emphasis on getting back to work and getting out there and getting their teams moving again and I think we will see that respond in 2008.

Scott Van Winkle, Canaccord Adams.

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

We do look at that. Just looking at the numbers that did drop depends on which market you're looking at too but in the US it did drop from the second quarter to the third quarter. But we were pleased to see it rise in the fourth quarter again. And overall total Companywise it did rise in the fourth quarter from both the second and the third quarter. So it's something that we look at but it's not something that we consider a key element.

Okay and then (multiple speakers)

Customer account is the key element.

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

You see a lot of similarities. This is Mark again -- between Canada and the US. A lot of our leaders work back and forth between those markets. But we're seeing actually an excitement in Canada. I know in January we had 1800 people in a distributor led meeting in Montreal, Canada for example and as well as several of the other regions held some great kickoff meetings. So I think you will see some response there as well. But we have always worked very closely as a North America (inaudible) US and Canada -- the border gets a little fuzzy when we are out there and working and interacting.

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

We're certainly happy with the margins on My HealthPak. I think we're still not completely down the learning curve of equipment and packaging. It's a fairly complicated process to have that customer interface when you go online and drive your pills in and drop them in and so forth and then the machinery has to package that and seal the little envelopes and then put the customized nutritional statement on the box.

We are very happy with the margins. We waited a quarter to make sure that we weren't going to have any bugs. It was a new technology, the machinery. It's running smoothly and we are ready go gangbusters on pushing that product and talk about it every turn. We're excited about the future of that product.

Dave, one of the things I assume that I think you probably do as well that people on the My HealthPak will have a higher retention rate. Is it too early to tell if that is the case?

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

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

Mimi Noel, Sidoti & Co.

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

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

Can you comment on January or no?

Not yet. It's just a little early.

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

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

So it was a weird combination of events. Whereas if we have a steady accumulation of those people where they're evenly brought in through the weeks and months it's a much different workload than taxis and so to speak where all (inaudible) crunched into one month. It's spreading out over the year making much more effective much more -- better lifestyle so to speak as they're building their business.

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

I don't see that. That doesn't tend to happen with the numbers we're talking. Maybe there's a few people out there that change their targets but people usually follow their human nature and do what they have been doing.

Attracted to the same people that they always are. Okay that's all I have thank you very much.

Willis Taylor, Gagnon Securities LLC.

You mentioned at the beginning of the call the end of the SEC investigation. Can you tell us if any other government entities are investigating or making inquiries into the Company?

There are no other inquiries being made. I mean the typical thing that you get from time to time like a state sales tax auditor coming in and workers comp, I mean just the normal kinds of things at this point. Were you asking about any specific agency?

No. Unless there's -- okay if the answer is no then it's no. On depreciation and amortization it has been trending down over the last two years and you have these two big projects that are going to come online. Can you tell us what we should expect depreciation and amortization to be after those two projects come online?

Well depreciation for the full year 2007 was about $5 million -- $5.3 million. That's probably going to go up about about $2 million.

At this time there no further questions. Please go ahead.

Thank you for your questions. We continue to remain confident in the future outlook of USANA and the investment opportunity we provide. If you have any remaining questions please feel free to contact us at investor.relations@US.USANA.com or call Riley Timmer, Executive Director of finance at 801-954-7922. We appreciate your interest in USANA and thank you again for joining us this morning.

Thank you ladies and gentlemen. This does conclude the USANA Health Sciences fourth-quarter and year-end earnings conference call. You may now disconnect and thank you for using AT&T teleconferencing.