USANA Health Sciences Inc (USNA) 2003 Q3 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the USANA Health Sciences Incorporated third 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 Mr. Riley Timmer, Investor Relations Analyst. Please go ahead, sir.

Thank you. Good morning and thank you for joining us this morning. Today's conference call is also available live via webcast and can be accessed directly from our website at www.USANAHealthSciences.com. Shortly after the call, a replay will be available for approximately 90 days.

The purpose of today's conference call is to discuss financial results for the third quarter of 2003. Before we begin, as a reminder, during the course of the 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 the disclosures, including specific risk factors, in financial data contained in the Company's most recent filings with the SEC, including its most recent annual report on Form 10-K. I will now turn the call over to Gilbert A. Fuller, Chief Financial Officer of USANA.

Thanks, Riley, and good morning, everyone, and thank you for joining us to review USANA's third-quarter results. I am without our President this morning. Dave Wentz is traveling to South Korea to participate in that market's grand opening events. We're excited about our progress and potential there.

Yesterday, USANA reported record sales for the fifth consecutive quarter, record net earnings for the fourth consecutive quarter, and record earnings per share for the fourth consecutive quarter. In order to (technical difficulty), I will break down the results line by line. Net sales for the third quarter of 2003 were $52.5 million, and increase of 50.9 percent, compared to the $34.8 million reported in the third quarter of 2002. Sales were also up 13.3 percent on a consecutive basis over the second quarter of 2003. The year-over-year growth in net sales is due to the increasing number of active customers, sales in Taiwan, which did not open until the fourth quarter of 2002, the recent opening of the South Korean market, and added sales from Wasatch product development, which was acquired early in the third quarter of 2003. Sales in the third quarter were also impacted by stronger foreign currencies relative to the U.S. dollar, which positively impacted sales this quarter by approximately $2.7 million, compared to the third quarter of 2002. Excluding the positive impact from the weaker dollar, year-over-year sales growth would have been about 43 percent.

Cost of sales this quarter decreased as a percentage of net sales to 21.6 percent, compared to 24.2 percent in the third quarter of 2002. Our gross margins improved during the quarter due to a change in sales mix of products with higher gross profit margins, strong foreign currencies, and improved economies of scale associated with an increasing sales base. We expect to see cost of sales as a percentage of net sales remain about consistent in the fourth quarter of 2003. Associate incentive expanse for the third quarter was 38.7 percent of net sales. This is an increase of 10 basis points compared to the third quarter of 2002. Prior guidance suggested associate incentive expense for this quarter would be modestly higher than last year's -- last quarter's 39.6 percent of net sales. Lower associate incentives relative to past guidance can be attributed to the third party revenue from Wasatch product development, on which no commissions are paid, and an increased amount of revenue coming from the sale of non-commissionable products, such as sales aids and logo merchandise at our annual convention.

Excluding the revenue from Wasatch, associate incentives would have been 39.2 percent for the third quarter. During the fourth quarter, we will be running two separate promotions to motivate our associates. We believe that these promotions will increase associate incentive expense to approximately 40 percent of net sales for the upcoming quarter. More importantly, we believe these promotions especially (ph) will help in furthering top-line growth. USANA remains committed to providing our associates with what we believe to be the most fair and equitable compensation plan available in the industry.

Selling, General and Administrative spending decreased relative to net sales to 22.7 percent during the third quarter of 2003, compared to 26.2 percent in the prior-year quarter. The year-over-year improvement can be attributed to operating leverage gained on increasing sales and the leverage gained off the physical and information technology infrastructure investments made over the last couple of years. On a consecutive quarter basis, SG&A was up 30 basis points. This increase was due to the spending associated with the July opening of the South Korean market, as well as the premarket launch and implementation costs associated with the planned fourth quarter opening of Singapore and the first quarter opening of Mexico. We expect to see improvements to SG&A spending as a percentage of sales in the fourth quarter as we continue to leverage our growing sales base. As a result of these line items, we saw operating income for the third quarter of 2003 increase to 16.2 percent of sales, as compared with 10.3 percent achieved during the third quarter of 2002.

Let's now look at the bottom line for a moment. EPS for the third quarter was 57 cents per share, compared to 22 cents in the third quarter of 2002. As was mentioned in the press release, 4 cents of EPS can be attributed to a reestimate of the Company's effective tax rate for fiscal year 2003, bringing the tax rate to 32.9 percent for the quarter. EPS was also positively impacted by 2 cents due to foreign currency benefits. Without the adjustment to the tax rate and foreign currency benefits, earnings per share would have been 51 cents, which is an increase of nearly 132 percent compared to the third quarter of 2002. Although we expect the tax rate for the fourth quarter of 2003 to be about 35 percent, tax strategies currently being implemented may lower the effective tax rate for fiscal 2003.

Our balance sheet remains very solid. Our strong cash flow has allowed us to finance our international expansion with cash, keeping our balance sheet free from any bank debt. I'll now comment on some recent operating activities. In September, we held our annual international convention in Salt Lake City. This was the largest associate-attend event ever held by USANA, with over 6000 associates in attendance. We were pleased with the excitement and enthusiasm that was present at this year's convention.

South Korea opened its doors the second week in July and we are seeing a brisk business. We are pleased with the $2.1 million of sales achieved in its first quarter of operations and are confident this market will grow to be a significant market for USANA. As I mentioned at the beginning of the call, we will be holding a grand opening event this month in Seoul, where we anticipate there will be a strong associate turnout. We just finished another very strong quarter in Australia and New Zealand. This quarter, we achieved year-over-year growth in those markets of nearly 67 percent. In January of this year, we increased the amount of commissions paid to associates in Australia and New Zealand with no associated price increase. We believe this has been one of the key reasons we have seen such tremendous growth in those markets.

Hong Kong continues to perform well for us. We have built a solid associate base in that market and are pleased with the strong sales. Taiwan continues to progress nicely. This quarter saw an increase in sales of 6.7 percent compared to the second quarter of this year. Japan continues to make modest progress as well. We are well aware of the great potential for network marketing in Japan and are confident there is a place for USANA to be a key contributor in the market.

Yesterday in our press release we announced that the Board of Directors has approved a 2-for-1 split of our common stock. We believe this will provide an opportunity for more retail institution investors to get involved with USANA's growth. By splitting the stock, we hope to enhance liquidity. Principally, we intend for the split to serve as a signal of our confidence in the continued growth of our business.

I will now review our forward-looking guidance for the fourth quarter of 2003 and provide additional guidance for the 2004 fiscal year. Based on the third quarter operating results, we now believe that for the 14-week fourth quarter of 2003, net sales will be approximately $57 million and earnings per share on a pre-split adjusted basis will be in the range of 57 to 59 cents, depending upon the level of spending associated with opening the Singapore and Mexico markets. For fiscal year 2004, we expect net sales to be in the range of 240 to $250 million, and earnings per share on a pre-split adjusted basis will range between $2.45 and $2.55 for the year. Currently, we are planning that Mexico will be the only new market we will open in 2004. Our focus for 2004 will be on growing our existing markets. Now in order to take questions, I will turn the time over to the operator to facilitate the Q&A.

Thank you. (OPERATOR INSTRUCTIONS) David Block of Seidler Company.

Thank you. My first question, I'm looking at the Canadian market, and for the second year in a row, I'd guess we see the sequential decline in revenue in Canada. But unlike last year, this year's decline came on rising associate base. I was just wondering, are there some seasonality issues in Canada or is there some other explanation for this?

David, a couple of things I think going on. There is a bit of seasonality in Canada. The summer season, kind of midsummer, tends to be a little bit slower there. But another factor has to do with our convention, which was held in September. We had tremendous Canadian turnout for the associates for the convention. In many cases, they kind of save up their purchases and make them at the convention because they know there will be a number of special -- convention specials and also there's a couple of products that are formulated a bit different in the U.S. that they like to take home with them. And so, in effect, they postpone some of their buying in Canada and bought it here in the U.S., and of course, that registers as a U.S. sale rather than a Canadian sale. Those are basically, I think, the two primary factors involved in that.

With Wasatch, are plans still underway to move the Sense line in house into the Wasatch facility (technical difficulty), and what kind of gross margin impact do you see this having on the overall business?

In the fourth quarter, I don't think we will see much improvement in gross margins on the move. As you would expect, moving the productline production over there is a process rather than a singular event. You're unwinding contracts, you're finishing up contracts with our third party vendors. But we will see the transition of our Sense product manufacturing to Wasatch beginning this quarter -- it's underway now. And probably won't be completely over there until the first quarter of next year; maybe sneak some into the -- it won't be totally complete until the second quarter of next year. So we're thinking that the benefits on gross margin will probably show up more in the first quarter and the second quarter next year rather than so much in the fourth quarter this year. We may get a little nudge this quarter, but I think it is wiser to look for that to come in the first quarter next year.

Okay. My last question, I was wondering if you could maybe give some color into the Sing (technical difficulty) happening there for the current quarter?

We plan to open the market there in Singapore in mid-November, and what we're hearing is that there is good enthusiasm. We have a number of our leaders from various markets, the U.S., Australia and so forth, that are now identifying potential people enrolled in their organizations. Our team is over there organizing the facility and getting the call center set up and so forth. We are generally -- I guess I would just characterize it as we are feeling good -- we're seeing good (technical difficulty). Remember this is a relatively small market. We think it is an important market because of the geography there. But we are quite enthused about it and we are hopeful that we will have the opening as planned and see some results in the fourth quarter; we certainly expect to.

Thanks, Gil.

Scott Van Winkle of Adams, Harkness & Hill.

Hey, Gil, congratulations on the results.

Thank you, Scott.

A couple questions. First, what was the hot product at convention this year?

We introduced something that we call the five-day cleanse, which is a combination of existing products that we had, but put in a package and sold as a package, along with a kind of a menu of what people should do for a five-day period to get started on controlling their weight. Again, we call it the five-day cleanse. That was very popular. It really has worked out well. It was kind of interesting, in anticipation of this, a number of us here at the corporate offices -- I would say quite a number of us tried this during the summer in anticipation of the convention, in anticipation of offering this product, and the results are quite amazing. In five days, you can lose somewhere between four to six or eight pounds. And the way it works, by using our products and our bars and our Fibergy products and so forth, it really is done almost without any kind of discomfort with regards to hunger. That was really a strong thing.

Another product that was I think well-received was an item that we call a Prelude. It relates to the Sense productline. And it is a package -- it is almost like a sample pack for our Sense products, packaged in a nice little box, attractive looking and priced well. And it gives people a chance to try the Sense products in this almost sample pack, again called the Prelude, and that thing we just basically sold out of that at convention.

We also had a third thing that we did is we reformulated our Usanimals, which is our vitamin product for children. And the doctor went and gave an impassioned speech about nutrition in children, and I think we are all well aware of the challenges that all families face in this regard. And we have made our Usanimal product -- it was already an excellent product; it is a super product now, and I think that also generated a fair amount of enthusiasm. Those were the three main things that were successful, and we did have nice sales at this convention.

Are you going to be focusing more on the diet market? It seems to be the most often commented health concern in the right now.

I think we're going to continue to push this five-day cleanse, and we're rolling it out now in some of our other markets. There is a process we're going to go through. I think we will, Scott. I think the total obesity issue and adult onset diabetes and those kinds of issues related to obesity, there's lots of reasons for us to make this an important aspect of it. Nutrition is a critical part of it, so our spin on it will be a little bit different, I think, than many. I think the five-day cleanse will be a way to get people started and then we will emphasize strongly continuing to take the nutritional product. In fact, the key part of the five-day cleanse is to take the essentials; I mean, it is built right into the package. It is a good comment, Scott, and we -- that is our intention.

You are giving more good guidance for '04 -- 20 to 25 percent revenue and EPS growth, if my back (indiscernible) math works. What is giving you confidence there, Gil? Is it just the fact you're at a higher level today than you were in the first quarter this year or do you see more momentum from where you are now?

You know, you always take a deep breath when you think you can see the future real clearly. But based on what we feel and see in terms of the momentum in the market is really where we are coming from. And with our scheduled openings of Singapore and Mexico and again the feel that we have right now for each of the markets is really what is driving this. We do remain quite optimistic about what we are seeing, and therefore, have put out what we think is some good strong guidance for '04.

And this last question. Do you hedge currencies?

We do have a hedging strategy. We have a foreign exchange committee that meets from time to time to review these issues. Our policy has been to hedge cash flows rather than the balance sheet or even rather than the top line. We tend to hedge expected cash flows. Our strategy for the last number of months has actually been to be bear (ph) because we felt like the dollar was going to be under pressure. It turned out that has been the case. But as a more normal position, we would have in place forwards -- a combination of forwards and options that would hedge expected cash flows.

Great. Thanks and good luck.

Gary Lenhoff of Bricoleur.

Hi, Gil. I apologize -- I missed the beginning of the call -- if you touched on this. I was wondering if you talked specifically about any associate incentives or incentive costs or programs you are implementing in either Q4 or the first half of next year specifically, and I guess I am looking at your sales per active customer in a few markets. You noted what was going on in Canada, but in Hong Kong, Japan, and Taiwan, your sales per active customer were down slightly sequentially. And I was just wondering if there was anything specific (technical difficulty) on there, or if there are any incentives you are putting in place to try and change that?

We do have -- we have announced a contest that we called "Share the Vision" that began here in the fourth quarter. And this is a contest that will ultimately have a payout of about 0.5 million US dollars. And the contest is structured such that it is almost independent of what position you may have in terms of associate ranking. In other words, our highest level distributors really don't have an advantage over those who are just a new to the business. It's really a fair-play kind of contest. It is available to all distributors around the world. And we are quite enthused about this contest. We said -- if you were not on some of the call, you know that we expect our associate incentive expense to increase in the fourth quarter a bit, maybe to as much as 40 percent of sales. And this contest is the reason that we are saying that. So we do hope to see this impact the top line and keep us moving forward. We have some other ideas that we will be rolling out. I can't comment on those yet because we have not gone public with them yet. But, we are certainly sensitive to the numbers that you refer to it and we're always looking for ways to make that happen.

I appreciate it. I did miss that earlier. Second question, can you comment, with respect to Hong Kong, Australia, New Zealand, and Taiwan, and certainly when you get into Singapore -- maybe if you can address the markets you're in first -- do you have any guesstimate or sense of how much of your sales end up going to mainland China?

No, we don't. We are not registered to do business in mainland China, and mainland China at the moment has some laws that make the traditional structure for network marketers not legal to operate there. So, it would not surprise me that maybe some products are getting there, but that is not our intent, we're not suggesting that our distributors do that. In fact, we encourage our distributors to only do business, to only sell the products in the markets where we are registered and doing business. We do have an employee in mainland China, in Shanghai, and he is doing research there for us and following what others are doing, and it is just a strategic effort on our part to make sure that we stay abreast of what is going on there. The market is huge, and someday perhaps when they change the rules there, we certainly would be remiss if we did not look very hard at participating in that market.

Okay. I appreciate it. Thank you.

(OPERATOR INSTRUCTIONS) David Block at Seidler Company.

Thank you. I have just one quick follow-up. With China, you see Nu Skin had some success going into the market at retail. Is that something if the laws and regulations didn't change to where they would allow direct sales, would you guys consider maybe going in through retail shops?

We will be looking at all of the opportunities there. Nu Skin has opened a number of stores from which they sell their product. So, it is a direct sales model, but it is not a multilevel model. That is the issue apparently there in China. We are certainly watching that. We actually have one store, if you will, in Hong Kong -- it's a Sense salon where we're kind of experimenting with the store model there. But at this point, I think what we are going to do is observe what is going on there carefully, and it is not just Nu Skin; it is others that are in there as well. We'll be monitoring those very closely and assessing that on a regular basis as to whether or not it's time for us to do something. And of course, when it is, we will go out and make that very public. But at this point, we are in the observation and analytical mode, and we will let some of the others kind of get on the bleeding edge there, if you will, and figure out what we're going to jump in.

Sir, it appears there are no further questions at this time. Please proceed with your closing remarks.

Thank you for your questions. We continue to remain confident in the future outlook of USANA and investment opportunity we provide. If you have any remaining questions, please feel free to contact us at Investor Relations at us.USANA.com, or call Riley Timmer, our Investor Relations Analyst, at 801-954-7100. We appreciate your interest in USANA and thank you for joining us on our conference call this morning.

Ladies and gentlemen, this concludes your conference call. Thank you for your participation today. You may now disconnect.