Welcome to the USANA Health Science second quarter Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded today, Wednesday, July 23rd of 2008. At this time, I'd like to turn the presentation over to our host of the conference, Riley Timmer. Please go ahead, sir.

Thanks, Andrew. Good morning, everyone. We appreciate you joining us 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. A replay will be available on our website shortly following this call. Before I turn the call over to Gil, 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'll now turn the call of over to Gil Fuller, our Executive Vice President and CFO.

Thanks, Riley, and good morning and welcome, everyone. I'm pleased to be joined by Mark Wilson, our newly promoted Executive Vice President of North America Operations. You will hear from him shortly. Dr. Tim Wood, Executive Vice President of Research and Development; and Jeff Yates, who is our Vice President of Finance and a new member of the management team. Unfortunately, Dave Wentz and Fred Cooper were both unable to participate in this morning's call. They're not here today, as we move the originally planned call back one week, and prior commitments had been made, which could not be changed. Now, before discussing our financial results, we'll make a brief statement about the recently terminated tender offer. As you know, the tender offer group withdrew their final offer on July 15th. Everything that company is permitted to discuss at this point has previously been disclosed in the Securities filings submitted by the company and the tender group. As such, we will not discuss or respond to question regarding the tender offer on this call. Rather, the focus of this call will be to update you on our results of operations and business for the recently completed quarter. We completed the second quarter with what I believe are very solid numbers for USANA. The first quarter of this year was met with the few unexpected challenges, and our business slowed. In the second quarter, however, net sales were stronger than what we originally expected and came in above our initial guidance expectations. We reported net sales of $109.2 million, an increase of 1.5% compared with $107.5 million reported in the second quarter of 2007. The slight year-over-year increase in net sales for the second quarter of 2008 was primarily the result of effecting promotional incentive programs offered to our Associates during…

Good morning, everyone. We're pleased to see the results this quarter that came in stronger than we expected. Sales in North America, while down year-over-year, were up on a consecutive quarter basis by 5.9%. Sales in the U.S. improved 4.1% from the first quarter, following three consecutive quarters of declines. We believe this is a positive trend and a sign in our U.S. business that is beginning to regain its momentum. Also adding to North America was an 8.9% year-over-year increase in Mexico, which hit a high watermark for sales in the second quarter. We're also very pleased that our second largest market, Canada, increased by 5.1% compared with the first quarter. This is a market with strong Associate leadership, and we're optimistic that this market can continue to see growth. The recent feedback from our Associate leaders in North America is that the noise created by the misinformation, which appeared in the mass media during 2007, is beginning to subside. We believe this to be the case, as well, and we are seeing very positive trends in a number of Associates who are advancing in the ranks. Rank advancements show that our active Associates are growing and building their home-based businesses. As for our Asia Pacific regions, they continued on their consistently strong pace for sales. Leading their growth in this region was Hong Kong, which was up 44.9% over the second quarter last year; and Malaysia, which increased 28.7% over the prior year's second quarter. There are two main factors that we believe were key contributors to our improved overall sales results. First of all, we returned to the tried and tested promotions that reward our Associates who are actively growing their business. As was mentioned on our first quarter conference call, we launched a new global promotion…

(Operator Instructions) Our first question will come from the line of Simeon Gutman with Goldman Sachs. Please go ahead.

First, a question for Mark. What can you do to ensure that the incentives being implemented are creating permanence in the business, and is there anything that you can point to today that says it's already happening?

Great question, Simeon. Yes, in fact, the incentives and enhancements we're working on are geared towards long-term stability and growth. We've done a number of promotions that have been quick tests, so to speak. And what we've learned from those is we've been able to kind of ascertain which ones work and which ones maybe are short-term growth, but really don't build the long-term business. From those, we're able to develop some very exciting things that we'll come out with at convention. I can't really say too much about it. But we're looking forward to this and we're anticipating some positive momentum, as you can see in our second quarter. We're already starting to move that direction.

And how quickly do you think the U.S. business can resume growing on a year-over-year basis? And, I guess, aside from convention, what are some of the measures that you think might get you there?

Well, I think, primarily, as we mentioned, by bringing in our top leaders and sitting down with them and discussing the areas where we needed to improve in recognition and enhancements to helping them grow the business, we think that this kind of noise out in the media is starting to subside, as we talked about. The momentum can come back. It is a big wheel. Obviously, it's our biggest market, and there is a lot of maturity to that. But we're seeing some trends already in the rank advancements, as we mentioned, and some positive indications. I think convention will be a great indicator of kind of our future and leading us into the end of the third quarter and the fourth quarter.

Simeon, this is Gil. Let me just add a little bit more color there. We did have, of course, consecutive quarter growth in the U.S. in all of our markets except our two smallest. But the comps, second quarter this year versus last year, are very tough. We had a promotion a year ago in the second quarter of 2007 that was unusually successful. As Mark alluded to, it was one of those that had kind of a relatively short-term, but a large bang, and we've taken what we've learned from that experience and are building it into the things that are going to be announced here at convention. So, we think it's turned, and we're looking forward to the things that will be announced.

Okay. And then second with respect to the compensation changes, what was the more important driver behind them, I guess, if you have to rank them between retention and motivation? Was there something more important? I know the loss of an executive in the Asia Pacific region. Was there something then on the retention side that this was motivated for?

You're talking now executive compensation changes?

Yes, I mean the $0.12 additional for the rest of the year.

Yes, this was a matter that the Comp Committee had been working on for some time. If you've looked at our proxy materials and seen the base salaries that are disclosed there, I think you'd quickly see that our salaries on average and generally were kind of on the first quartile or even in some case below first quartile kind of compensation. And so, this move was made to update that and get us into competitive compensation. And I think one of the things that we found when we lost Bradford is that because of USANA's success, there were frequent calls coming in from headhunters and others. And I am not sure exactly what caused Bradford to go. But clearly, there were some adjustments that were appropriate to be made, and the Comp Committee studied this out and went ahead and made these changes.

And of the increased compensation, what percentage is cash versus equity?

Out of the $0.12, it's about $0.03 cash compensation, about $0.09 equity.

Okay. And then of that equity, I'm guessing a chunk of it is options. Are there strike prices attached to those that you can talk --?

It's mostly SARs.

Okay.

I believe this decision was made on Monday, and that strike price was $26.06, I believe. And keep in mind, Simeon, these are five-year grants.

Right.

So that rather than doing annual grants, the Committee felt like a larger one-time grant that would vest over five years would be the way to keep and attract and motivate and so forth the management team.

Okay. And then lastly, how does Dave's role change with the title change? I don't know. More strategic, less day-to-day?

Mark will have some color on this too. He'll clearly focus on the more strategic issues. And along with our Founder and Chairman, he'll take up kind of the visionary flag waving, if I could say it that way. And day-to-day, the managing the field and so forth will clearly drop down more directly on Fred and Mark and others.

Deborah and others.

Deborah Woo and others. And so, I think this is a good thing.

Okay. Thanks.

Thank you. Our next question will come from the line of Tim Ramey with D.A. Davidson. Please go ahead.

Good morning. Gil, as a follow-on there, you're a young man. Why step away from this battle just now when it starts to get interesting?

Well, I am not exactly stepping away completely, Tim. At 67.5, you hate to overstay your welcome also. But certainly, USANA is such a great company, and I'm so pleased that Dr. Wentz had asked me to join the Board upon my retirement and also asked if I would stick around for a while as a strategist. But I think they'd like to see me stay on the Board for some time. So, I don't look at it as stepping away from the battle. I look at it as an opportunity to continue to have some input. I can help our new CFO come September 1, Jeff Yates, as he transitions into the role. And so, just a little different angle for me. But I'll be here taking the tough questions from you, Tim.

Well, I hope I can speak for the Street in saying thanks for all your terrific work, and you have been an effective and outstanding CFO for the company.

Thank you, Tim.

Thanks.

Thank you. Our next question will come from the line of Doug Lane with Jefferies & Company. Please go ahead. Doug Lane - Jefferies & Company: Yes, hi. Good morning, everybody.

Good morning, Doug.

Good morning, Doug. Doug Lane - Jefferies & Company: Gil, can you talk about stock buyback? Was there any done during the quarter? And now, with your debt down, I guess, back really to a net cash balance sheet, what's your outlook for use of free cash going forward?

Well, there is a number of things that are coming together here that I think will be attractive to be active in the buyback program. First of all, we did not make any purchases during the quarter. Actually, we haven't done any this year. But with the [TO] out there and a number of issues going on, we were not able to do any buybacks, even though at times, of course, we felt the stock was way undervalued. It's still undervalued in our view. There is an authorization outstanding for about $50 million that's available for us. Our cash flows seem to be accelerating now once again. We have the major expansion projects now virtually behind us. The third quarter will still have some finish-up work on our two big ones. So, I'd be surprised if the Board didn't direct us to be quite active out there. Doug Lane - Jefferies & Company: Okay. Makes sense. Any contemplation of a dividend?

The dividend question comes up from time to time, and the Board considers it from time to time. And one of the things that we hear about is you can't buy back stock forever. Soon your float becomes such that it'd be difficult to attract the kind of investors that we'd like to attract. So, it's something gets talked about all the time, Doug. And I guess I would just say at this point there is no decision to do it. It doesn't mean there wouldn't be in the future, but at this point, no decision at this point. We've got that buyback authorization out there. But it certainly is something that's reviewed regularly by the Board. Doug Lane - Jefferies & Company: Okay. Shifting gears to SG&A, you mentioned it was down sequentially on an absolute dollar basis. And given the cuts that you made and where you are today, is that trend good for the next couple of quarters as well?

Of course, now with these compensation changes that are effective beginning here in the third quarter that we just talked about, you're going to see some pressure there. We hope to relieve that pressure by seeing the topline take off on us with the things that are going to be announced and happening at the convention. Doug Lane - Jefferies & Company: Okay.

So, we're going to look at it as basically steady with some increases related to the organizational changes that we made and general increases that I think most companies are facing. But we certainly want to manage that as closely as we can. As you know, Doug, the leverage in our model is just so outstanding. As we get the topline moving, we're not overly concerned about SG&A. But we'd move quickly, if we need to, as you saw going from the first quarter to the second quarter. Doug Lane - Jefferies & Company: And on the topline, you mentioned new initiatives coming at convention. Have you talked about any additional geographies to move into over the next year, maybe the rest of '08 or 2009?

We have talked about some new geographies. And I think it's been a while since we've opened a new market. Those things are always under discussion, and that's certainly a possibility. The timing of that, wouldn't want to say and I can't say, but we're certainly looking at new markets on a regular basis, and we have some that we would like to open. And so, it wouldn't be surprise to see that come along before too terribly long. Timing is just a question. The process, we're getting products registered. Since we have such high quality or what I characterize I guess generally in statement is potent products. And this process does take some time. So, we don't want to preannounce anything until we make sure all of our ducks are in a row. Doug Lane - Jefferies & Company: Well, can we assume then that --?

(inaudible) Mark or Tim?

I think it was well stated. Doug Lane - Jefferies & Company: Can we assume then that this process is underway in some form or fashion in markets other than China?

Yes, you can. Doug Lane - Jefferies & Company: Okay. Fair enough. Thanks.

Thank you. Our next question comes from the line of Mimi Noel with Sidoti & Company. Please go ahead. Mimi Noel - Sidoti & Company: Good morning.

Good morning, Mimi. Mimi Noel - Sidoti & Company: Gil, if you would first address, and I have dialed in late; I'm sorry if I missed it, but cash from operations in the quarter?

Yes. We had EBITDA of about $17.5 million, about 16% of sales, a nice gain on a sequential quarter basis. We paid down our line of credit by about $20 million nearly. So, let's see, $28 million down to $9 million. So, yes. So, we did that. We saw CapEx grow at about $5.5 million, and we saw a little bit of increase in inventory as we prepare for convention. But we had a great quarter cash flow-wise, generating about on the terms of cash from operations, $16.1 million. Mimi Noel - Sidoti & Company: Okay.

EBITDA of $17.5. So, anyway, good strong quarter. Mimi Noel - Sidoti & Company: Okay. And then secondly, and again I apologize if I missed this detail, in considering the accounting treatment of the newly added compensation, I mean if you're at a 12% drag in the second half of the year on an annualized basis, are you looking at $0.24?

That's the right way to look at it. Now, don't forget that out of that $0.12 in the last half of the year, $0.09 of that was equity. And it's non-cash. Mimi Noel - Sidoti & Company: Okay.

Remember, it's --. Mimi Noel - Sidoti & Company: But that would still mean that at least for the next five years as you amortize it, that's going to be an ongoing expense?

It'd be ongoing. But as I said earlier, I think that we fully expect that our topline growth will take care of this because of the operating leverage we get, yes. But it is a non-cash item with regards to the equity piece of the $0.12 or the $0.20. Mimi Noel - Sidoti & Company: Sure.

If you want to look at it on an annualized basis. Mimi Noel - Sidoti & Company: Okay. And what --?

And, Mimi, just also, in case you missed it, these were larger one-time grants, so that there won't be annual grants going forward as a general rule. Of course, if we add a new team member or something, there could be some grants. But as a general rule, it's not likely to be annual grants. That's the concept now. Things change, of course. Mimi Noel - Sidoti & Company: Okay. And what positions does this change in compensation generally address?

It addressed primarily the senior management level positions, the highest level, with some trickle down to the next level, although we have on the SARs, like we call them, equity compensation, the stock appreciation rights. That went down to, I'd characterize, maybe four levels to what I'd call the Executive Director. Clearly, the senior men are President, Executive Vice Presidents, Vice Presidents, and Executive Directors. Mimi Noel - Sidoti & Company: Okay. And then the last question I had, and maybe the response has to be shared by everybody, but given Dr. Wentz's letter to the company, I guess, a month or two ago now that started off, initiated the tender offer, there seems to be not a culture of cooperation with Wall Street. And to that extent, what do you plan to do to rebuild relationships that have perhaps been stressed by what's transpired in the last month, month-and-a-half?

Well, you've known us for a while, Mimi, and you know that we're pretty open in our communications. We plan to continue to communicate with the Street. You have to remember Dr. Wentz is a scientist. That's what he is at heart and soul. Mimi Noel - Sidoti & Company: Okay.

And he appreciates Wall Street, but it's not something he really likes to interact with. It's just not his thing. He is a scientist. But the rest of us here and the management team, we'd certainly want to be available. Mimi Noel - Sidoti & Company: Okay.

For phone calls and discussions and presentations, and we plan to be communicative. Mimi Noel - Sidoti & Company: Okay. Thank you.

Come on out to convention.

Yes. Well, Mimi has been. Mimi Noel - Sidoti & Company: I do every year.

Yes, she is --.

You'll like this one. Mimi Noel - Sidoti & Company: All right. Thank you for the invitation.

Thank you. We'll move to the next question from the line of Rommel Dionisio with Wedbush Morgan. Please go ahead.

Hi. Good morning, everyone. In your Q1 preannouncement, you talked about big impact of a sluggish economy on your U.S. business. So, I wonder if you could just give us an update. And obviously, the economic conditions have probably worsened since then. (inaudible) consumer spending is down, but are you seeing a pick-up in recruiting because of the tough economy as well?

Yes, we're seeing a positive trend, as we talked about. I think when you first start into the recession, there is a little bit of hesitancy and people pull back. We're starting to see people come forward a little more, looking for an opportunity in a home-based business. And traditionally, our industry thrives during this type of a period, and we're very optimistic as to what we can accomplish with some of the things we have planned to take advantage of this.

Okay. And let me just add to Tim's comments the same. Gil, it's been a real pleasure to work with you all these years. And I think we're really glad to hear that you'll continue to do so going forward. Thanks.

Thank you, Rommel.

Thank you. Our next question will come from the line of Diederik Basch from Canaccord Adams. Please go ahead.

Actually, it's Diederik Basch. And most of my questions --.

Good morning, Diederik, and we know that.

Okay. Thank you, Gil, and congratulations, by the way. I'm just trying to get some more color on the U.S. market. It'd be helpful if you could give us some color on how the performance progressed during the quarter. Did you see any type of sequential uptick month-to-month or perhaps was there an acceleration at the tail end?

You know, I'll jump in first and then let Gil comment on this, Riley. But certainly, we did see an uptick from first quarter as we progressed through second quarter. We've seen a lot of energy. As I mentioned, the rank advancements, which is the individuals that are actually increasing their businesses, especially in our leadership roles, have made some substantial strides there. So we're seeing a positive growth. These contests that we've been doing have been very effective in getting individuals back out and working. And I think, as we mentioned, the noise that was out there, folks are finally working through this and learning how to do their business around it. And actually, as it's subsiding, they're finding that they can get out and really start building their business again. So, we're seeing some very positive things. We saw some strong meetings towards the end of second quarter and some activities. So --.

I'd add just a little bit of color to that, Diederik, is that I think Mark, you mentioned you had a contest, a Platinum PaceSetter contest. Was that mid-quarter or early quarter? I've kind of forgotten now.

Early.

Early quarter. And that got us off to a good start. And then followed that on with a large promotion where people who achieved certain things could participate in a large bonus pool. And that seemed to carry it on. And so, we've been pleased. It started good, and it stayed steady and strong.

I think it also helped with the communication. This is a relationship business. And working with our top leaders, bringing them in, was a great way for us to see them face-to-face across the table for several days and address any of their concerns and issues and make sure that we're moving forward, making sure they're excited about the opportunity and everything that's happening. And so, while we've had a few distractions and I think people are back on track and really looking forward, we're seeing some very positive trends.

Okay, thanks. That's helpful. And I know you don't want to tip your hat too much about the convention, but can we expect any significant new products or new selling tools?

Well, I'd tell you, you just ought to come out and see, and you'll --.

Tim, can you bait him a little bit? Now, be careful, Tim. We have Dr. Wood here, Diederik.

I don't think we've ever had a convention where we didn't launch a new product. So, come to the convention and find out for yourself, firsthand.

I would say that they're just one tip on this. You're going to see business and product. And that's something you're going to see very strong showing at convention.

Yes, sometimes our conventions have been focused either maybe perhaps more on the products or perhaps more on business. And this, we think, is going to be exciting, and it's going to be a strong one-two punch is our belief.

Sounds good. Thanks, guys.

Thank you. Management, at this time, we have no additional questions in the queue. and I'll turn the conference back to you at this time for any closing remarks.

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

Thank you, management. Ladies and gentlemen, at this time, we will conclude today's teleconference. We do thank you for your participation on the program. At this time, you may now disconnect. And thank you for using the ACT Teleconferencing. Please have a wonderful day.