USANA Health Sciences Inc (USNA) 2003 Q1 法說會逐字稿

Good morning and welcome ladies and gentlemen to the USANA Health Services Incorporated First Quarter 2003 Earnings Release Conference Call. At this time, I would like to inform you that all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions and answers after the presentation. I would now like to turn the conference over to Doug Hecking (ph.), Controller. Please go ahead sir.

Thank you Chris. We welcome our Institutional Investors and our analysts to our conference call this morning. We also welcome Retail Investors, USANA associates and customers participating via the Internet. At the close of market yesterday, USANA reported its results for the First Quarter of 2003. If you have not received your copy of the release, please call Riley Kemmer (ph.), Investor Relations Analyst at 801-954-7100, you can access the conference call this quarter directly from our website at www.usanahealthsciences.com. The press release is also available on this site shortly after a call. Shortly after the call, a replay will also be available for approximately 90 days. For those who are participating via the worldwide web, you may submit questions, by e-mail, to investor.relation@us.usana.com and we'll do our best to answer them during the call.

We also know that the company filed a current report yesterday on Form 8-K to make publicly available current customer information on a quarterly basis for the last two fiscal years. A copy of that report is also available on the web at the SEC's website, www.sec.gov. The purpose of today's conference call is to discuss financial results for the first quarter of 2003.

Before we begin, 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 the 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 those disclosures, including specific risk factors and financial data contained in the company's most recent filings with the SEC, including its most recent report filed on Form 10-K.

I will now introduce Mr. Gilbert A. Fuller, USANA's Chief Financial Officer who will begin today's call.

Thanks Doug, and good morning everyone, and thank you for joining us for the call this morning. Yesterday USANA reported its highest quarterly sales ever. This represents the third consecutive quarter we have achieved record sales. Additionally, earnings per share are up just over 183% over the prior year quarter. I'll now take a minute and review our quarterly income statement performance on a line-by-line basis.

For the first quarter of 2003, net sales were $40.9m, up 42.8% over the first quarter of 2002. Sales were also up 6.7% on a consecutive basis over the fourth quarter of 2002. The growth in net sales is due in large part to the increasing number of active customers. By way of verbal annotation, let me insert a note here. In our most recent 10-K we redefined how we report active customers, which includes both associates and preferred customers. We also filed an 8-K providing a table of quarterly data for 2001 and 2002 that captures the number of active customers, using our new definition. We now count as active customers those associates and preferred customers, who have purchased products from USANA during the most recent three-month period. Previously, we had defined active customers based on purchases made in the most recent 12-month period. We believe the new definition is a more meaningful representation of our network marketing system.

Based on this new metric, in the first quarter of 2003, we reported that the number of total active customers was 117,000, compared to 96,000 in the first quarter of 2002. The increase in the active customer base was the primary driver of our sales growth. Separately, sales growth also benefited from a $1.4m impact due to a weaker U.S. dollar as compared to the prior year's first quarter, and nearly an $800,000 benefit on a consecutive quarterly basis over the fourth quarter. Absence of currency benefits to the top line, sales growth would have been 37.7% on a year-over-year basis, and 4.7% compared to the fourth quarter of 2002.

For the first quarter, cost of sales decreased as a percentage of net sales to 22.6%, compared to 26.9% in the same quarter in 2002. The decrease in cost of sales was mainly due to improved production and procurement efficiencies, a change in sales mix to products with higher gross profit margins, the effects of a price increase on certain products implemented in the fourth quarter of 2002, and to improved economies of scale associated with an increasing sales base. We expect cost of sales to be consistent with the first quarter, relative to net sales, during 2003.

Associate incentive expense for the first quarter was 39.4% of net sales. This is an increase of 190 basis point compared to the first quarter of 2002, an increase of 70 basis points from the fourth quarter. The increase in associate incentives can be attributed to an increase in the amount of commissions paid to associates in Australia and New Zealand, the elimination of processing fees on associate commission checks, and a larger proportion of sales coming from products with higher sales volume point ratios.

We continue to pursue all avenues to make the USANA home base business appealing to our associates who have done the hard work of growing our business by more than 40% in just one year. Associate incentive expense should stay consistent with the first quarter, relative to sales, as we go forward in 2003.

Billing, general, and administrative spending decreased 4.7% to 23.4% of sales during the first quarter of 2003 as compared to the prior year quarter. This can be fundamentally attributed to operating leverage gained on an increasing sales base. We expect SG&A for the year to run at approximately this level, relative to sales, although we could see modest benefits as our top line continues to grow.

As a result of these factors, we saw operating income for the first quarter of 2003, increase to 13.8% of sales as compared with 6.7% during the first quarter of 2002. The first quarter results are also 15% higher than the 12% operating margin achieved in the fourth quarter of 2002.

Income tax for the first quarter came in at 37%. Although we had predicted a 36% income tax rate in our previous guidance, with the profitability of our foreign markets, we now believe that the effective tax rate for 2003 will be 37% of pretax earning.

Let's now look at the bottom line for a moment. Earnings for the first quarter were 34 cents per share, compared to 12 cents in the first quarter of 2002. This is an increase of 183.3% on a year-over-year basis.

Now to reiterate the guidance that was updated in the press release, we now expect to see annual sales in 2003 of approximately $170m and earnings per share will be approximately $1.40. We believe second quarter sales will top $42m, with earnings per share in the range of 34 to 36 cents, depending on the level of spending associated with the opening of the South Korean market.

I would also like to expect or comment on cash and cash flow before turning the time over to Dave. EBITDA for the first quarter was $6.6m. With our strong cash flow, we were able to eliminate all of our bank debt in the first quarter. And from time to time we may borrow in the future, but being completely debt free at the end of the first quarter, for the first time in about four years, is comforting to a conservative CFO. With that I'll turn the time over to Dave Wentz our president to comment on some of our recent activities.

Thanks Gil. I appreciate being here to discuss the vision of USANA with you. It was just over ten years ago my father, Dr. Myron Wentz and I founded USANA, as we look back the remarkable growth of the company in that first decade, we see that maintaining a balance focus on our founding principle of True Health and True Wealth was the key to our success.

USANA continues to operate on these two founding principle of True Health and True Wealth, I believe this was proven again this quarter by the excitement and dedication we're seeing from our associates. As they enthusiastically work to introduce people to our innovative health products, they spread the vision of True Health, and as more people receive the benefits of True Health, we have more and more people receive financial benefits from USANA. This creates a time freedom that can only come from residual income, which we know as True Wealth.

We continually investigate different avenues for rewarding and motivating our [sales] force, which we believe generates excitement, enthusiasm among our associates to continue to spread the word at a faster and faster pace. We believe that maintaining this excitement and enthusiasm amongst our associates is the key to generating consistent double digit sales and earnings growth over the next decade. Philosophically, in order to see the maximum number of people benefit from USANA's products and its economic opportunity, we need to grow profitably.

Profits provide us with the resources to invest more on our sales force and to also deploy people and infrastructure in new markets. We're excited [how] our improved profitability has paved the way for future incremental growth internationally, allowing us to open South Korea in the third quarter of 2003, and Mexico in the first quarter of 2004. We believe that our patented, premium quality products, will sell well in these new markets and that people in these markets, will benefit both from the improved health associated with our products, and from the lifestyle enhancement that comes from having a successful home base business.

Before concluding I would to expand to on something that Gil mentioned earlier, regarding the growth of cash flow and EBITDA. Before we give careful consideration to the use of this cash, clearly the priority will be to invest in growing USANA profitably. The cash will allow us to accelerate growth by entering new markets at a pace of approximately two markets per year; additionally the board has evaluated, and will continue to evaluate potential acquisition targets. We continue to look for ways to increase shareholder value and committed to supplying high quality, science based, nutritional, personal care and weight management products to more people around the globe.

By way of wrapping up, I would like to formally mark the first quarter of 2003 as the first quarter of the next ten years. I'm optimistic that the quarter will set the tone for continued growth and profitability for USANA's next decade. I look forward to working and growing the business alongside Dr. Wentz. I will now turn the time over to the operator to facilitate the question and answer session, thank you.

Thank you sir. The question and answer session will begin at this time, if you're using a speaker phone please pick up the handset before pressing any numbers. Should you have a question, please press star 1 on your push button telephone, if you wish to withdraw your question please press star 2, your question will be taken in the order it is received. Please stand by for your first question.

Our first question comes from Scott Coleman from Forstmann (ph.). Please state your question.

Hi guys, congrats on (technical difficulties) - - Hello, you guys there?

We're still - -

Oh there you are.

Yeah.

Great quarter, my question is, I was regarding the new way you're looking at associates in three months versus twelve months, and I'm just trying to compare apples to apples. Can you guys give us old numbers on a three-month basis or maybe the new number - - the new quarters as if they were on a twelve-month basis, so I could just see the growth levels. Can you supply us with that?

Well, yeah Scott. One of the, this is Gil. As we analyze this data and just look at what would be the most meaningful way to describe what is happening in the business and the direction of the business, we wrestled with this issue quite a bit. We looked at what other --- what our competitors were doing and most importantly looked at what was most meaningful in our own business, and have settled on the three-month definition, the best way to show the direction of the business. The 12-month data we found, tended to lag enough that it wasn't always indicative of what was happening. That's why we changed. So, I guess we just feel like it wouldn't really be very helpful to go back and start emphasizing the 12-month data. Although you could certainly go back to the 10-Ks for the last five years and it’s there. You know, the 12-month data is there.

So, I hear you on that. I am trying to figure out, just trying to get apples to apples. So it'll either be if I could get the 12-month data on the new year --- the new quarters or three months going back. Can you re-do the data going back so we could see what the three months data was back when you were calculating as12-months? Is there any way to get those, get back into that?

We are just --- Scott I guess --- you know, you were aware that we filed the 8-K that last (inaudible) broke out for the last two years three month data by quarter ---

Can we get it further back than two years?

We could. In the 10-K we gave the last five years of data in the selected financial data portion on a year ending basis. So in the 10-K you can see it back five years at the year end. So for - you know you've got in the 8-K the quarterly data for 2001 and 2002. You can see the year-end data for '98, '99 and 2000, on the new basis.

Okay.

I think we can go back and get it quarterly if that's what is important to you Scott.

Yeah, I would like to see that. That's great.

In those prior years and probably what we will do Scott is make that available in additional 8-K filing just so that everybody will obviously have it.

Great. Okay thanks.

Thank you, our next question comes from Barry Cline from Keystone Capital. Please state your question.

Good morning gentlemen, congratulations on your great quarter. My question has to do with possible anti-American sentiment. Obviously, this hasn't happen so far, but do you see any early indications of any anti-American sentiments impacting your future sales in the foreign countries where you do business?

As of this point, this is Dave Wentz, we have not seen any and we do not anticipate this to affect business very much. It seems that the political seems to have been kept fairly separate from the business side of things in people's lives. We worried a little bit about it in Korea, but from what we've seen, we are not concerned, it always could change. But at this point we feel quite comfortable that that will not cause us a significant problem business wise.

Okay thank you, that's all I have.

Just to remind you ladies and gentlemen if you do have a question, you may press star one on your push button telephone at this time. If there are no further questions I will turn the conference back to Mr. Fuller to conclude.

Thank you for your questions. We recognize that this is an exciting time in USANA's history and look forward to having you stay the course with us. Our stock price won't likely grow twenty fold in the year ever again but we are confident that investors who hold the stock over the long haul will be well rewarded. Thank you for joining us on our conference call this morning. If you have any remaining questions please feel free to contact us at investor.relations@US.USANA.com or call Riley Kemmer, our investor relations analyst, at 801-954-7100. Thanks again for joining us.

Ladies and gentlemen this concludes the conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.