USANA Health Sciences Preliminary Q1 2008 Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the USANA Health Sciences preliminary first quarter 2008 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) This conference is being recorded today, Thursday, March 27, 2008. I would now like to turn the conference over to Riley Timmer, Executive Director of Finance. Please go ahead, sir.

RILEY TIMMER, IR, USANA HEALTH SCIENCES: Thanks, Mary. Good afternoon, everyone. We appreciate all of you who are joining us today, especially on such short notice. Today's conference call is being broadcast live via web cast and can be accessed directly from our website at www.usanahealthsciences.com. And as always, shortly following the call, a replay will be available.

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.

Let me now turn the call over to Gil Fuller, EVP and CFO

GIL FULLER, EVP AND CFO, USANA HEALTH SCIENCES: Thanks, Riley. And good afternoon, everyone. Joining me this afternoon from our management team is Mark Wilson, EVP of Customer Relations, Fred Cooper, EVP of Operations, and Kevin Guest, EVP of Marketing. This weekend is our Asia Pacific convention, so unfortunately Dave Wentz and other members of the management team are in Malaysia participating in that event and are unable to be on the call this afternoon.

As you are aware, we issued our preliminary numbers for our fiscal first quarter of 2008 earlier today. Keep in mind that as we go through these preliminary results with you that we have not yet ended our quarter or fully analyzed our operating results. These results are very preliminary, but due to the shortfall, we felt that it was prudent to preannounce and have this conference call.

In addition, we will provide as much detail as we have available, but some questions may need to be answered during our normal earnings call in about three weeks when of course we will have more visibility into the final numbers. The details including market by market commentary, customer counts, and sales by product line will be discussed on our final first quarter conference call that is scheduled for April 21.

As was mentioned in the press release this afternoon, sales came in lower than anticipated. Clearly we are disappointed as our expectations were not met. From our early analysis, it looks like North America accounted for the majority of the slowdown, particularly in the U.S. We do expect, however, that our Asian markets will be down slightly on a consecutive quarter basis, but up on a year over year basis. We believe we missed our sales expectations due to the following three factors. Disappointing results from new promotional incentives activities in North America, declining macro economic conditions in the U.S., and lingering effects related to the negative misinformation that appeared in the mass media during 2007.

Now I'll take a few minutes and address each one of these factors. Each January we hold what we call reset meetings. We hold these meetings all across North America and historically we've sent out members of the management team to a number of our growing areas. This year we took a bit of a different approach and used video conferencing to broadcast the event to these different locations. Unfortunately, we did not see the positive results in North America that we have historically seen by the last month of the quarter following these events. Accordingly, management is back on the road meeting personally with our leaders in areas where we are seeing growth or good growth potential.

During the quarter our marketing group spent most of their efforts on market research and identifying what truly motivates our associates. From this market research, we plan to implement a number of different strategies which Mark Wilson will address shortly in his prepared comments. Second, and in regard to the macro economic environment, we have received feedback from leaders that current market conditions have resulted in more difficult recruiting efforts for our associates. Based on this feedback, we have shifted some of our messaging and focused to explain to potential customers why they should join USANA now.

We believe that the immediate impact of the media describing the deteriorating economy has had a negative impact in the midterm. However, we believe slower economic conditions will ultimately benefit our business model. Finally regarding the lingering effects from the misinformation, we believe this is mostly behind us. Initially we underestimated the impact this would have on our associates, but with the engagement of PricewaterhouseCoopers, the closure of the FCC inquiry, and the dismissal of one of our lawsuits, we are now in a good position to move forward.

Okay, now I'll spend a few minutes discussing earnings per share. Based on our current analysis, we believe that earnings per share is going to be lower than guidance, perhaps as low as $0.44. Again, I remind you that we have not fully analyzed our expected results. However, we believe the primary factors which have negatively impacted earnings per share in the quarter are as follows. Obviously lower than expected net sales which has a deleveraging impact on our SG&A expense line. Higher wage related expenses. An increase in advertising expense including our investment in market research which we believe will show a return in future quarters. Higher than anticipated accounting and legal expenses and the lack of share buybacks during the quarter.

Given the recent economic uncertainty surrounding the credit markets and the fact that we still have two facility expansion products that require capital commitments in the first quarter, we felt it prudent to not buy back stock during the quarter. We currently have about $50 million remaining under our share buyback authorization. Over the last few quarters, we have made a number of expense investments in order to keep pace with our associate pace in sales. Frankly, we hit a point where we had to make these step investments which included the expansion of facility space in several of our markets. We believe that it was critical to get our infrastructure aligned with our operational needs. We are nearing completion on our warehouse expansion project in Salt Lake City and we expect that our new Sydney, Australia facility will be completed sometime in the late second quarter or early third quarter.

We …