Good day and welcome to the USANA Health Sciences Second Quarter Conference. At this time, I would like to turn the conference over to Mr. Pat Richards. Please go ahead, sir.

Good morning. We appreciate you joining us this morning to review our second quarter results. Today's conference call is being broadcast live via webcast and can be accessed directly from our website at ir.usana.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 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. Examples of these statements include those regarding our strategies and outlook for fiscal year 2017. 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. I'm joined this morning by our Chief Executive Officer, Kevin Guest; our President, Jim Brown; our Chief Financial Officer, Doug Hekking; our Executive Vice President of Legal and Investor Relations, Josh Foukas, and other executives. Yesterday, after the market close, we announced our second quarter results and posted our management commentary, results, and outlook document on the company's website. Before opening the call for questions, we'll first hear brief remarks from Kevin.

Thanks, Patrique. Good morning and thank you for joining us to review our second quarter results. While the second quarter presented some challenges for USANA, our business still generated solid results. Although sales came in below our expectations, we still generated our second highest quarter of sales in the company's history. We had a tough year-over-year comparable as we're comparing against the highest sales quarter in the company's history. But the fact remains that we typically see more of a lift in our second quarter sales, so we didn't see the full extent of that this quarter. In fact sales were soft in several of our markets, primarily due to lower overall customer growth across the business including several markets where we've delivered consistent customer growth in the past. For incidence sales were down 4.8% in Southeast Asia Pacific, really 1.7% active [ph] adjust for currency and customers were down 3.9%. These declines were really the result of softer results in the Philippines where we experienced both sales and customer declines in the quarter. The Philippines has been and still is an excellent market for USANA but we are seeing that market mature in terms of associate leadership and we are now focusing on developing the next level of associate leadership to drive growth again in that market. That kind of development takes time but it's underway. Additionally, while Indonesia now has about 18 months of operations and is growing, its growth rate has been slower than we originally anticipated and consequently its contribution to the region has been lower than originally anticipated. We still have high expectations for Indonesia and expected to follow the pattern we saw in the Philippines which is a slower startup and ramp up followed by solid growth. In the Americas and Europe region, sales…

[Operator Instructions] Our first question comes from Frank Camma of Sidoti. Your line is open.

Good morning, guys.

Good morning.

Good morning, Frank.

Hey, I remember the convention when you launched MySmart foods, I think was two years ago. And it seem like it's time the associates were very excited about the products in at least towards good positive at the convention, when have you learned from that because I am assuming you did some studies ahead of time with your sales leaders and everything, I got they are buying on some of the product, but what have you learned from that you know as far as it kind fading off if you will that you can use it for future product development?

This is Kevin. Just from a - and taking to our field leadership, one of the key things that we learned was the convenience is a key diver to our consumers and the complexity of separate flavor, mixing and three steps in the process to get to the point from a convenience factor was a big deterrent and the usability for our demographic. And it had an effect on us globally. And so although we're trying to be more personalized by offering different flavor options and that they could add their own flavors, the inconsistency that they are receiving as they are mixing the drinks and creating the drinks also cause an issue. But one of the key concerns we saw in our group was convenience of grabbing a shake and running out the door and taking the kids to school, whatever they might be doing. So something we certainly learned as it relates to a food and especially a meal replacement and/or something of that category convenience is a key driver and the change really completed the offering versus the convenience factor. So that was a key issue that we learned. We also learned that on a global basis that it's a little more consistent as it relates to flavor and taste and not so individualized in that as we're looking at our chocolate base and our vanilla base that those are very widely accepted globally and we didn't have to be as specific on a regional basis as it related to flavor and taste. And then the last thing we learned is that as our customers have been accustomed to a certain taste and just product that they're consuming that when that has changed, change is very, very hard and they weren't really open to making such a huge change. And so I don't know Jim or Doug if you want to address anything else. One thing I will add also from a comparable perspective quarter-over-quarter, we really saw a spike in sales in MySmart second quarter of last year and the comparable this year that is totally we're in decline from a foods perspective that we've talked about. And it's had a dramatic effect from a customer basis and a customer interaction. And so that has really created a different layer on the comparable as we look at quarter two of last year and quarter two this year.

And maybe a little bit more flavor on that Frank, and this is in Doug, in the convention of 2015 we did this is really kind of just a convention thing to go back and get feedback and input from the food and was really launched on more of a permanent basis last year convention.

Right.

So Kevin talked about that spike in sales and so that's where that comes from a little bit. And the other thing I tell you is that this disproportionately hit the Americas and Europe region far more than it did the other regions of the company.

You think maybe some of that is also because there's also a lot more competition in that space, protein shakes and such or is that a separate issue, like you say for those front.

You know certainly is a competitive marketplace. One of the things again just from an overall business perspective, what we've seen especially in America is that many of our leaders were using our food as their entry level product that they were offering and then use that to get them exposure into the rest of our product offering. And so it is a highly competitive marketplace, but we've been able over the years to differentiate ourselves, especially in the middle replacement weight management category and a point of good news we launched this week our first step in the RESET kits, which is back to what our customers love and need and we've seen just a few days then we probably - we've seen a huge excitement success and so we have strategies in place to be back on track that are well, well underway and they're already hitting the marketplace.

Great. Moving on to China, is there any reason to believe that the state investigation, internal investigations that you've gone on with impact sales recruiting, I'm assuming no since there's no media attention to that over there, but I just want to confirm my suspicion?

Frank this is Josh, yeah that's a correct assumption, you're right.

Okay and the other question related to China is, your inventory levels went down year-over-year and I assume some of that is the promotion driven. But so are you still and you've been doing that, I think you said for the last four weeks of the quarter, and I'm assuming that's still on going into Q3 that's part of the question and the second part of the question is, are inventory levels that now that you can support promotions going forward specifically in China?

This is Jim, yeah inventory levels went down mostly just from the control that we put in place, over the last year we've implemented the same ERPM RP system that's in the U.S. into China and with the new manufacturing facility we have just a complete control system that allows us back to reduce your inventory with the third quarter, yeah it's manageable, we're not going to see any issues with inventory with promotions we planned those out weeks in advance that we can react to that.

And Frank this is Doug. That promotion terminated at the end of the quarter, so there's nothing rolling forward to the third quarter on their promotion.

Okay. And I guess to be fair, I guess your inventory was probably a little bit high last year because you were building inventory in anticipation of closing all factors, is that correct?

Yeah, that's correct. We took a very conservative approach on inventory meaning back orders were what we didn't want to have, so for a while there we had much more and now we're able to manage that and bring it down.

Okay. My final question is just on South Korea, because the numbers I mean kind of stuck out to me as being really good there which I thought was surprising given what the environment there competitors, so I just wanted to if you could point out anything that kind of drove that anything specific I'm missing?

Well you know our business is driven by leadership engagement and boots on the ground that are actually out sharing and building they're inter pin a businesses and growing their customer base and in Korea it starts with the top leadership, we have an incredible general manager there who has connected with our associate leadership, our business model works really well there and as I've been over there this year and interacted with our leaders there we have a really, really solid young group in Korea that is working really hard and the excitement level is as high as I've ever seen anywhere in the world any USANA Group. And so it's just the combination of momentum getting a group of really, really some leaders that are working hard and watching their momentum just grow and grow it's what we saw earlier in the Philippines, which we hope to see again in the Philippines with our leadership and leader development. But really the political climate and what's happening there has nothing to do with our business that I've seen and has everything to do with people that are out building their business.

That's great, it's good to use boots on the ground especially in that territory right?

Yeah, I shouldn't have use that we'll probably do.

[Operator Instructions] We will take our next question from Tim Ramey of Pivotal Research Group. Your line is open.

Thanks so much. Can you describe a little bit about what the promotion in China was and I was surprised to hear that you ended at the end of the 2Q given that the quarter was the deceleration, is there further promotion expected in China, how should we think about that.

So this is Kevin. Yes, there are further promotions that we will run in China. We have to be careful as we're running promotions that it doesn't become expected behavior. And so as we're thinking strategically about how to implement our promotions with our sales force if we're not careful it'll become a perception that it's actually part of our normal course of business, and so as we start and stop, they become accustomed to certain promotions. And so we very purposefully don't run them for a long term from that perspective. Secondly the nature of the bonus was a - what we call a fast start, which it helps people get paid quickly as they go out and build their customer base in the business, and so it's a fast start promotion. That has been very well received in China obviously. But again the acquisition costs increasing, so you see our payout go up for our incentive line and so from a long term perspective it has to be managed because it's not sustainable, long term and so we were managing as best we can the incentive line while we're growing the top line. And so there are several other factors, but those are a few of the key factors that we consider and why we would run it just for a few short weeks. Then lastly with all of those things that we're managing the long term for the long term good of the business and so we're - there are a lot of moving parts and so that's why we chose to only keep it four weeks and like I said yes to your answer, we will run future promotions in the second half of the year in China.

And Tim this is Doug, maybe a little bit of flavor there, this is a very similar promotion that we ran the fourth quarter of 2014 and first quarter of 2015 and it really is rewarding on the sales of new customers coming into the business, right and save the growth in that area. But it definitely is a big influence in that market, but I think if we do it too long and stuff, it starts losing effectiveness too and that's something local management over there is very savvy too and they want to go back and help manage that, make sure they're supporting the sales that are generating.

Do you think the promotion was effective, do you think you have better momentum coming into 3Q or is it too early to say?

Too early to say. I having last time we ran it, we saw a little bit better tail than we expected but it's very premature to go back and start comment on that at this point.

Okay. And I know you're not likely to comment much but the FCPA investigation number one, I have to that is long and that is ongoing, you're not likely to repurchase shares, is that a fair statement?

No Tim. This is Josh. With respect to those two issues and how they relate to one another, we're not going to comment there. But again what I would do, I would direct you back to the earnings release where again we included the disclosure on kind of the nature and the scope of the internal investigation which is being led by the audit committee. And then we also you saw the disclosure on the share repurchase authorization, but I would just refer you to the release.

Okay. And are you using a third party to help you with that investigation or is this all an internal investigation?

Oh, no. We are - and again I'm going to limit my comments, but we are certainly using the most qualified advisors.

Okay. And to echo Frank's comment, South Korea numbers are remarkably strong given what we're hearing from others in that market. It sounds like you think that there's some sustainability to that but love to hear your comment on how sustainable you think that might be?

Tim, I would probably - I'll stay from giving too much flavor going forward, but if you look at the last several quarter, I mean Korea has been a strong growth market for a pretty consistent period of time now. And the Kevin's point, I think the leadership in market has really been a catalyst to push that market in the right direction. But it's been several quarters now, we don't think this is an anomalous quarter as far as their performance.

Okay. And you highlighted the impact of MySmart foods on North America, you cited Mexico and Canada being weak. I assume that means that the U.S. itself is not as weak. Is there anything you can share from a growth initiative perspective on other than just reformulating MySmart foods maybe getting better supply chain management going there should we now expect that this is to have a more steep negative trajectory as it's been developing so far this year?

I wouldn't say - I would say no. I think we're in a point where it's leveling off and we're now in the point of executing on our strategy to build that back up and bring that back up and so. I wouldn't say that we're going to be a steep drop off or steeper drop off but we're going to see certainly a leveling out any building in growth in that area.

And this is Jim. Kevin mentioned it earlier, but we said being launched in the U.S. this week in rolling out in both Canada and Mexico and the short term going to have a huge impact. That was a missing component. It was a short term weight management program that was introduction into the business and it's been missing for a while. And we think that is the first start of getting the foods back on track.

And real quick, the U.S. launch this week, we would expect Canada sometime in August and Mexico beginning the first part of fourth quarter, just for clarity. But Tim your point on the U.S. the trend in the U.S. has been pretty consistent, it's just that we saw in Mexico and Canada, but Americas in Europe without a doubt has been a challenging region. I think the foods that we've talked about has been a big catalyst why that's been happening.

Okay. Terrific. Thank you.

[Operator Instructions] We will take our next question from the Doug Lane of Lane Research. Your line is open.

Hi. Thank you. Good morning, everybody.

Good morning, Doug.

Can we can you review for me anyway what the mix is these days between food, nutrition and personal care and then maybe talk a little bit about what the trends are in the nutrition and personal care since we've been talking mostly about food this morning?

Yeah. And Josh, correct if I am wrong, it's about 83% nutritionals, 11% food. I think foods are down a little bit, so I would have to go back and grab that. And then the skin, personal care is about 5% to 6%, the rest of showed up by a variety of different things. But it really is a market-by-market discussion. It's a pretty uniform composition I mean that most the markets are pretty heavy on the nutritional supplements. On the foods, there are a great opportunity there as we go back and execute this and rolled out. We think there is roll opportunity. But you have seen - what we've seen in our nutritionals is we've seen a growth and what we call the optimizers which isn't really more the targeted nutrition and we've seen that that element picking up there. And the personal care line is been pretty consistent and hasn't been overwhelming as far as what has contributed but it's been pretty consistent a percent of sales.

Yeah. Certainly. Hasn't really moved that much over the years. On the food, if you had a lot of news in the last year or so and so I'm trying to maybe get straight in my mind, how much of the lower than expected sales in food comes from the lack of reciprocity in some of your new products verses your supply chain issues so they can get it versus maybe with a food product they order too much, so they're just working off inventories but they really like it, I mean is there any way to get color on what the factors are there?

I would say there really is no excess inventory with that that really isn't an issue. I think the primary thing is what Kevin articulator earlier it's a convenience and it's a pallet issue and obviously some of the supply chain challenges that we've had haven't help that matter. But I think it's primarily simplicity and a flavor profile.

Okay. All right. Thanks.

And the other thing is the format that we'd gone through that we had some trouble, it was really a meaningful change in the formulation and still is was quite a bit different what we had in the past was very, very healthy, it just didn't meet that pallet profile that they were looking for.

So the strategy there is just to continue with what you're doing but trying to find it just so it taste better, reformulated just so it taste better so people like it or you want to something else?

We're going back and reformulating like a second phase of it for the future but right now we're going back to very similar formulas that we've had in the past with the convenience factor involved single serve pouches instead of gusset bags and there are a lot of areas. But again as Kevin said earlier, one of the one of the major areas that we learned from was we made this very customizable without the seven different flavors and really the market didn't react well to that. Going back to the vanilla and chocolate with maybe some variations of that. And the ease of use, it was a major learning and we're just going back in that direction.

Okay. Thank you.

Thanks Doug.

We will hear from Tim Ramey once again of Pivotal Research Group. Your line is open.

Yeah, thanks again for the follow-up. The preferred customer accounts in North America took a sequential decline after the boost in the 1Q and your reclassified distributors. Do you think you're having difficulty keeping those folks active or this is really more to just weakness in Canada and Mexico?

Well, I think definitely part of it is kind of the weakness in the business model. We're learning how to go back and because so much of our focus historically really had been on the social side and we've had a robust PC population in these markets. But I think just a general direction the business has definitely been the primary catalyst there.

Okay. So nothing structurally wrong with your approach to the preferred customer base?

We're still looking at the data and stuff, but I think our communication could always go back and be improved in dialogue we are doing with other stuff, but structurally I don't think so, but we're still evaluating the data from that change.

Okay.

Yeah, Tim. This is Josh. And so you saw us execute on that in the Q1 in the U.S. and what we're really doing to Doug's point is learning now as we interact with leaders, as we interact what that really not new segment of customers, they've always been customers but now that they have been through this invitation process, we're learning from them and we'll take and kind of bake it into our valuation on how to proceed in these other markets.

And Josh, just a follow-up for you and maybe asking the question on different way. If it wasn't the FCPA investigation and reason why you didn't buy back shares in the 2Q?

I am not going to comment on that one Tim.

Okay.

[Operator Instructions] And there are no further questions.

Well, thank you for your questions and for your participating on today's conference call. If you have any remaining questions, please feel free to contact Investor Relations at 801-954-7961.