USANA Health Sciences, Inc. (USNA)

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USANA Health Sciences, Inc.

Q2 2010 Earnings Call

July 28, 2010 11:00 am ET

Executives

Riley Timer – VP of Finance

Jeff Yates – CFO

Fred Cooper – President and COO

Mark Wilson – Executive Vice President of Sales

Analysts

Per Osland (ph) – Jefferies & Company

John San Marco – Janie

Tim Rainy with D.A. Davidson

Ramone Deunecio – Woodbush Morgan

Scott VanWinkle – Kenakor

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the USANA Health Science Second Quarter Earnings Conference Call. (Operator Instructions)

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

Riley Timer

Thank you. Good morning, everyone. We appreciate you joining us this morning to review our second quarter results Today’s conference call is being broadcast live via webcast and be accessed directly from our website at www.usanahealthsciences.com.

Shortly following the call, a replay will be available on our website.

As a reminder, during the course of this conference call, management will make forward-looking statements regarding future events for 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 statement.

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.

Now, I am joined this morning by Dr. Fred Cooper, our President and Chief Operating Officer; Jeff Yates, our Chief Financial Officer; and Mark Wilson, Executive Vice President of Sales.

We’ll first hear from Jeff, who will discuss the details of our financial results this quarter. We will then hear from Fred, who will discuss our business activities during the quarter, as well as our plans for the remainder of 2010.

I’ll now turn the call over to Jeff.

Jeff Yates

Thank you, Riley. Good morning everyone, and welcome to the conference call. We appreciate your joining us this morning.

It’s a pleasure to be here with Fred and Mark, to talk about yet another record quarter for the USANA Health Sciences. I’m pleased to report that for the third consecutive quarter, net sales set a new high, high point, breaking through $126 million, which represents a 12.4% increase when compared with the $112.1 million we reported for the Second Quarter of 2009.

Our growth in sales this quarter was primarily due to an overall increase in the number of active associates, which for the second consecutive quarter, also resulted in a new high at $210,000. The number of active associates increased by 5% when compared to the Second Quarter of 2009, which is largely the result of continued growth of our Asia-Pacific markets.

Additionally, favorable changes in FX rates this quarter, added $5.2 million to our top line, when comparing our results to the same period last year.

Regionally, sales in North America decreased slightly by 1%, to $62.1 million compared to the prior year. While we were disappointed with our year-over-year results, we are encouraged to see that on a consecutive quarter basis, net sales increased 2.6% while active associates increased 1.1%.

It was also encouraging to see sales in the U.S. increase for a second consecutive quarter. We believe that we now have the right mix of executive and associate leadership in this market, and are optimistic that sales and active associates will continue to increase.

Looking now at results in our Asia-Pacific region, net sales increased by $14.5 million, or 29.5% when compared to the Second Quarter of 2009. Net sales for the region, totaled $63.9 million for the quarter, which represents more than 50% of our total sales.

Sales growth in this region was primarily due to a 22.3% increase in the number of active associates. In Hong Kong, our largest market in the region, net sales increased by 100%, and active associates increased by nearly 86% over the prior year.

In late May, we held our Asia-Pacific Convention in Hong Kong. We were pleased with the success of this event which added $2.8 million in sales. Because of the significant growth in this region and the excitement generated by this event, it will now be held annually.

During the event, we made several exciting announcements, including our intention to open business in China. We believe these announcements have added to the already significant momentum we are experiencing in this region.

Fred, will discuss more about these announcements in his remarks.

Now, to discuss the other major components of the income statement.

First, gross margin for the – excuse me, gross profit margin for the Second Quarter increased as a percentage of net sales, to 82% compared with 78.8% for the Second Quarter of 2009. This increase was primarily due to lower direct cost and the leverage gained on higher sales.

Associating incentives for the quarter were 45.3% of sales compared with 44.9% for the Second Quarter of the prior year. This increase was due to higher utilization of our matching bonus program and the negative effect of changes in currency exchange rates. Although this expense increased on a year-over-year basis, it is important to note that it has trended modestly downward over the last three quarters and is 10 basis points lower than Q1.

Additionally, as we discussed last quarter, we made certain strategic international policy changes to manage this expense. Many of these changes were made to better align payments under our associate compensation plan, with actual sales growth.

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