USANA Health Sciences Inc (USNA) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the USANA Health Sciences Incorporated fourth quarter and year end 2003 earnings conference call.

[OPERATOR INSTRUCTIONS]

I will now turn the conference over to Mr. Riley Timmer, Manager of Investor Relations. Please go ahead, sir.

Thank you, Carol. Good morning and thank you for joining us this morning. Today's conference call is also available live via Web cast and can be accessed directly from our Web site at www.usanahealthsciences.com. Following the call, a replay will be available on our Web site. The purpose of today's conference call is to discuss financial results for the fourth quarter and year-end 2003.

Before we begin, 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 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 and financial data contained in the company's most recent filings with the SEC, including its most recent annual report on Form 10-K.

During the course of this call, management will discuss non-GAAP information. The non-GAAP measures we are providing, are net sales growth excluding impact of stronger foreign currencies, the impact of a lower tax rate in the fourth quarter of 2003 on earnings, and customer account data. We provide non-GAAP measures to assist investors in understanding our operating performance.

I will now turn the call over to Gilbert A. Fuller, Senior Vice President and Chief Financial Officer of USANA.

Thanks Riley, and good morning everyone, and thank you for joining us to review USANA's record fourth quarter and year-end results.

Yesterday, USANA reported record sales for the 6th consecutive quarter, record net earnings for the fifth consecutive quarter, record earnings per share for the fifth consecutive quarter, and the eighth straight quarter of year over year EPS gains of 100% or more. We are pleased with the progress we continue to see and I will now discuss the individual line items on the income statement.

Net sales for the fourth quarter of 2003 were $59.5 million, an increase of 55%, compared to the $38.3 million reported in the fourth quarter of 2002.

Again this quarter, we saw sales impacted positively from a continued weakening of the US dollar. Excluding the impact of stronger foreign currencies, sales growth would have been 44%. The year-over-year growth in net sales is due to the growth in the number of total active associates.

Sales in South Korea which did not open until the third quarter of 2003, the recent opening of the Singapore market and added sales from Wasatch product development, which was acquired in the third quarter of 2003.

Net sales in the fourth quarter were also impacted positively due to the nature of our accounting cycle. Fiscal 2003 comprised 53 weeks, rather than the normal 52 weeks with the extra week occurring in our fourth quarter.

As a result, net sales this quarter were affected positively by nearly $4 million. Absent the extra week, our top line in the fourth quarter would have been approximately $56 million, which is a 46% increase on a year over year basis.

Net sales for fiscal year 2003 were $200 million, a 50% increase over the $133.8 million reported in fiscal 2002. Cost of sales in the fourth quarter decreased as a percentage of net sales to 22.6%, compared to 23.2% in the fourth quarter of 2002.

Improvement in our gross margin was primarily due to improved production and procurement efficiencies, leverage from improved economies of scale associated with an increasing sales base and stronger foreign currencies.

On a consecutive quarter basis, costs of sales were up 100 basis points. The increase in cost of sales relative to net sales on a running quarter can primarily be attributed to larger portion of sales coming from Wasatch, which has a lower gross margin on USANA's network marketing channel.

We expect to see cost of sales, as a percentage of net sales remain at approximately this level in the first quarter of 2004.

In 2004, however, we have seen signs of pricing pressure on certain key raw materials. Additionally we could see some modest pressure, although not material, due to the minor changes to certain products because of mad cow disease related to issues in Japan.

Due to these issues, we do not anticipate that 2004 will see the same type of improvement in our gross margin as we achieved in 2003.

Associate incentive expense for the fourth quarter was 39.6% of net sales. This is an increase of 90 basis points compared to the fourth quarter of 2002. We anticipated higher associate incentives in the fourth quarter due to two separate promotions that were offered to our associates. These promotions provided assistance in driving the top line during a quarter that typically shows some seasonal weaknesses due to the holidays.

We believe that associate incentives, ex-Wasatch, will be approximately 39% in the first quarter of 2004. We continue to look for ways to motivate and reward our associates for growing their home-based businesses.

Selling, general and administrative spending decreased relative to net sales to 20.7% during the fourth quarter of 2003 compared to 25.2% in the prior year quarter. The year-over-year quarterly improvement can be attributed to operating leverage gained on increasing sales base and the leverage gained off the fiscal, physical and information technology infrastructure investments that we made over the last couple of years.

The extra week in the fourth quarter also added some additional leverage to SG&A. On a consecutive quarter basis, SG&A was down 200 basis points. This decrease was due to the leverage gain from overall higher sales to opening of and subsequent sales generated in Singapore and the extra week of sales in the fourth quarter.

We expect to see SG&A spending as a percentage of sales in the first quarter of 2004 to be modestly higher than the fourth quarter as we prepare for opening - the opening of Mexico. We do expect to see additional leverage coming from growing sales base for the remainder of 2004.

As a result of these line items, we saw operating income for the fourth quarter of 2003 increase to 16.5% of sales compared to 12% achieved during the fourth quarter of 2002. Let's now look at the bottom line for a moment.

EPS for the fourth quarter was 32 cents per share compared to 16 cents reported in the fourth quarter of 2002. As was mentioned in the press release, two cents of EPS can be attributed to an adjustment of the company's effective tax rate for the fiscal year 2003, bringing the tax rate to 29.5% for the quarter, and 33.5% for the fiscal year. EPS was also positively impacted in the fourth quarter by approximately 2 cents, due to the extra week of sales. We expect the tax rate for the first quarter and full year 2004 to be about 34%.

We also continue to improve our balance sheet during the fourth quarter. Our strong cash flow has allowed us to finance international expansion with cash, keeping our balance sheet free from bank debt and ending the year with $19 million in cash and cash equivalents.

Before I turn the time over to USANA's President, Dave Wentz to discuss our recent operating activities, I will comment on our future guidance. To reiterate what was said in the press release, we now expect the sales for the first quarter of 2004 will approach $60 million, with EPS of approximately 31 cents depending upon the timing and the success of our opening in Mexico.

As we noted earlier without the extra week in the fourth quarter, sales would have been approximately $56 million, with EPS being impacted positively by 2 cents. For the full year 2004, we are updating our guidance and now believe that sales will be in the range of $245 to $255 million, and EPS will be between $1.35 and $1.40 based on an estimated yearly tax rate of 34%.

I'll now turn the time over to Dave to comment on some recent operating activities.

Thanks, Gil. And thanks everyone for joining us to talk about the progress and growth of USANA. First half this morning, let me start by saying that the incredible results that Gil just talked about this year, our thanks to the amazingly loyal and hard-working employees who make up this great corporate team.

And of course, thanks to the thousands of associates who are sharing the USANA vision of true health through proper nutrition and true wealth through a rewarding business opportunity supplying residual income. What a quarter and what a year.

We saw double-digit year over year growth in all but one of our markets. Australia and New Zealand continue to see the most significant growth increasing by over 82% this last quarter compared to fourth quarter a year ago, some of which can be attributed to stronger foreign currencies.

Our associate leaders in these two markets have built very solid businesses are showing no signs of slowing down as they grow the businesses both locally and abroad. Japan is also beginning to gain from good traction. Sales were up over 53% this fourth quarter over last year.

To be successful in any market, you need solid associate leaders. Japan is starting to see local associate leaders emerge and grow, as we continue to focus on improving our position in what we know is a very important market for USANA.

It's also gratifying to see North America, our most mature market, grow at double-digit rates. We believe that we have many untapped regions in the U.S. and Canada, where our science based products and business opportunity are just beginning to flourish. Hong Kong continues to perform extremely well for us.

We have built a solid associate base in that market and are pleased with the strong sales for this small market. It also has proven to be the perfect launch pad for expansion into other Chinese markets, one of which is Taiwan. Taiwan is growing nicely with a quarterly increase in sales of 72% compared to the fourth quarter of 2002.

I would be remiss if I didn't say that we were disappointed with Korea this quarter. Unfortunately, we opened during difficult economic times in Korea, but we are committed to growing that market and have made a few changes that we believe will improve our position there. We have identified what we believe are key issues and are now moving forward.

We have hired a new Sales Manager with over 12 years of experience in the direct selling industry, who brings good leadership qualities to our team.

Our General Manager in Korea has been temporarily replaced by our Vice President of International Development, Bradford Richardson until a qualified permanent replacement is found.

In mid-November we opened our Singapore office, and are pleased to record over $900,000 in sales in the fourth quarter.

We are scheduled to open for business in Mexico on Monday, February 9. Mexico represents a significant opportunity for us, as it is the fourth largest market for direct sales in the world.

We will then be focusing our efforts during the remainder of the year on the successful launch of that market as well as building solid leadership and stability in the other three markets we have entered during the past year and a half, including Taiwan, South Korea and Singapore.

Keep in mind that we currently serve only six of the top 20 direct selling markets and we are prioritizing and preparing for the remaining 14. The first we must establish strong leadership in all existing countries, so that we have a foundation to allow our leaders to expand their businesses into the next wave of markets, we will begin opening in 2005 and beyond.

On the next topic I'll discuss this morning is on the issue of ephedra, which for us is the non-issue because we have never sold any products containing ephedra. Our philosophy, our products development is very simple. If there's not scientific evidence selling really is both safe and effective, we will not sell it. Our focus at USANA is on long-term health and to that end we only supply products that are designed to provide a complete and balanced spectrum of beneficial nutrients and antioxidants.

With that I will now turn the time over to the Operator to facilitate the Q&A. Thanks.

Thank you sir.

[OPERATOR INSTRUCTIONS].

Gentlemen, your first question comes from David Block of the Seidler Company. Your question, please.

Good morning gentlemen, great quarter. My first question is with South Korea. I guess you just mentioned that it was a general manager issue. I was wondering if there are any other problems in the quarter, if there was a lack of associate leadership that went down there or if you can give a little more color on South Korea?

Yes, thanks for your question. We, as you know, slow start in Japan, which is now starting to pick up, Korea we have been slow to establish leaders there, as we have seen with Japan, they come over time and we will continue to focus on Korea to build those leaders.

We also hit during a credit card crunch, which was very difficult to our business, with a lot of our new associates having difficulty with credit cards and problems financially as Korea has revamped their credit system and economic situation.

So we're hoping as times change, we will rebound and do extremely well there. We have seen a downturn overall in the industry in Korea, so for us it was just bad timing and we hope to wait out the storm and grow that business as soon as things start to turn.

OK. Also noticed in the quarter that associate count declined sequentially in two markets. I was wondering if this is a seasonality issue or I guess just more color on that would be great.

Yeah, this is Gil. I think occasionally you do see associate counts, particularly at the end of the year, the fourth quarter. Sometimes people will take a pause during the holidays in their activity levels and we attributed that to seasonality.

OK and then turning to the income statement. As you mentioned, gross profit margins were down sequentially, 100 basis points. I guess you primarily attributed that to Wasatch. I was wondering if there was any, any impact from Bovine in that or if the Wasatch was the primary reason, what were the some other reasons?

Wasatch is the reason there. As you know, Wasatch is a contract manufacturer, in effect. They will be manufacturing all of our personal care products as we transition to them, but they do have third party business and it's contract manufacturing.

So the margins are not as good as our regular channel margins are.

As to BFC or mad cow disease, that was not a significant issue and we don't expect it to be to us. But it is an issue right now in Japan, where they have limited, prohibited the importation of soft gel capsule that are cow-based. And we're working around that issue and don't see it as a major issue for us.

We have substituted some things and are working around it and hope to be I will have the problem completely behind us in the next several weeks.

OK. Next, with R&D, I notice that it was down both sequentially and year over year on both, as a percent of sales and a dollar basis. If you can maybe explain the reasons for that and kind of where that's going to be going forward or what your expectations are there?

I can respond to that. I think it's just due to such fast growth. We look to keep our research and development spending around 1% and we are looking for new ways to invest in R&D in our future going forward.

We will try to keep that around 1%, but we have grown so fast that we hadn't budgeted to spend to those amounts. So it's nice in some ways but we will look to the future to grow our R&D so that we are ahead of our competitors in science.

OK.

And David, you did see some timing too on some quarters, if, you know, depending on if we're doing clinical work or something, there may be, in absolute terms, may be a little bit of variance from quarter to quarter.

OK. And then I think my last question for now is, you closed the year with pretty impressive $19 million in cash, no debt. I guess a few weeks ago manufacturers, one of the bigger nutritional MLM public companies initiated a dividend, prior two to the top three, Nu Skin and manufacturers paying dividends. What are your plans with the cash you have and could we maybe anticipate a dividend in the near to mid-future?

I'll take a stab and then Dave, if you want to add to it. I think less than a year ago that we paid off our debt, so we haven't been debt-free quite a full year here.

So we're feeling good about although we never did have much debt, but it's nice to have that gone and not to see some cash reserves building.

Obviously this will be an issue that the board will look at on a regular basis and whether, you know, dividend is certainly one of the considerations.

Also in the past, we have done some share buyback efforts and certainly there's still a program out there to do that. And we have also done a couple of things in terms of vertical integrations, such as Wasatch acquisition.

So there are a number of things that we will be looking at, as our cash flow is very strong. We know that we need to address this issue as we go forward this year and so it's an issue that the board will be looking at on a very regular basis.

All right, guys. Thank you very much and great job.

Thank you, Sir. Gentlemen, your next question comes from Ralph Muller of UBS, your question, please Sir.

Good morning, great quarter. Let me ask you about the increase in associates by about 25%. Could you sort of give us a sense where that came from?

Was that mostly new markets or are you increasing associates in existing markets?

And would there be any guidance going forward this year or how many more you might increase? Just, you know, things along those lines. Thank you.

Ralph, this is Gill. I think, you know, we have not given guidance going forward on associate counts, but clearly there's a direct correlation on active customers and top lines via associates or preferred customers.

What was gratifying for us on a year over year basis was to see growth in everyone of our markets, although Hong Kong was flat on a year over year basis, but that was primarily due to launching of other markets out there in that area and the fact that we came off of a strong activity between Taiwan and Hong Kong. So we had associate growth in each of our markets year over year, which was very gratifying to us.

OK, thank you very much.

Thank you, sir.

[OPERATOR INSTRUCTIONS]

Gentlemen, at this time there are no further questions in queue. I will turn the presentation back to you for your closing remarks.

Thank you for your questions. We continue to remain confident in the future outlook of USANA and investment opportunity that 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, Manager of Investor Relations at 801-954-7922.

We really do appreciate your interest in USANA and thank you for joining us on our conference call this morning.