USANA Health Sciences Inc (USNA) 2004 Q1 法說會逐字稿

Ladies and gentleman thank you for standing by, your conference will begin shortly. Once again ladies and gentleman, thank you for standing by, your conference will begin shortly. Good morning and welcome to the USANA Health Science's Incorporated first quarter 2004 earnings conference call. At this time I'd like to inform you, that all participants are in a listen only mode. At the request of the company, we'll open the conference for questions and answers after the presentation. I'll now turn the conference over to Mr. Riley Timmer, please go ahead sir.

Thank you Mike. Good morning and thank you all 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 first quarter 2004. 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 that we are providing are net sales growth excluding the impact of stronger foreign currencies and customer count data. We provide non-GAAP measures to assist investors in understanding our operating performance. I'll now turn the call over to Gilbert A. Fuller, Senior Vice President and Chief Financial Officer of USANA.

Thanks Riley. Good morning everyone and thank you for joining us to review USANA'S record first quarter results. Here with me today is Dave Wentz, our President, who in a few minutes will talk about some of our operating results and outline our strategies for the remainder of 2004 and beyond. This morning I plan to update you on USANA'S continued progress in the first quarter, and the guidance for the second quarter in full year of 2004. Yesterday USANA reported its highest quarterly sales ever. The first quarter of 2004 is the seventh consecutive quarter we've achieved record sales. Net earnings also experienced considerable growth, up 74% over the prior year quarter. For the first quarter of 2004, net sales were $61.8m, an increase of 51% compared to the $40.9m reported in the first quarter of 2003. On a constant currency basis, sales were up 42% year-over-year. The year-over-year growth and net sales is due to the 37% increase in active associates and sales from Wasatch product development, which was acquired in the third quarter of 2003. The increase in active associates was bolstered by the opening of South Korea in July 2003, Singapore in November 2003, and Mexico in March 2004. Cost of sales in the first quarter increased as a percentage of net sales to 24.4%, compared to 22.6% in the first quarter of 2003. The reduced gross margin was primarily the result of higher than anticipated cost associated with integration effort at Wasatch operations. We expect to see modest improvement to cost of goods sold at Wasatch in the second quarter, and as we go forward in 2004. Furthermore, we anticipate fully integrating our personal care line into the Wasatch operation by the end of 2004, which should provide improved gross margin situation. After I include my remarks, Dave will talk about our strategy for improving cost and fully integrating our personal care line into our Wasatch operation. Associate and selling expense for the first quarter was 38.2% of net sales. This is a decrease of 120 basis points compared to the first quarter of 2003. This quarter saw decreases in Associates incentives compared to the prior year quarter due to added sales from our Wasatch operations, which does not have commission points associated with sales. Excluding Wasatch sales, Associate and selling expense was 39.2% of net sales in line with guidance provided in our fourth quarter 2003 conference call. We believe that the Associate incentives in the second quarter will remain consistent with the first quarter. By the way, we expect depreciation to our hard working associates for growing and developing their home based business. Selling, general, and administrative spending decreased relative to net sales to 21.5% during the first quarter of 2004, compared to 23.4% in the prior year quarter. This can fundamentally be attributed to operating leverage gained on an increasing sales base. SG&A in the first quarter was in line with company guidance as we expected SG&A was modestly higher than the fourth quarter due to the opening of Mexico. We expect to see benefits on the SG&A line in the second quarter relative to net sales as we continue to leverage on increasing sales base and the Physical and Information Technology infrastructure investments we've made over the last couple of years. As a result of these line items, we saw operating income for the first quarter of 2004 increase to 15% of sales, that's compared to 13.8% during the first quarter of 2003. Let's now look at the bottom line for a moment. Earnings per share for the first quarter came in at $0.30 compared to $0.17 in the first quarter of 2003. EPS for the quarter exceeded the forecast provided on March 30th by $0.01 due to higher than anticipated net sales in North America. EPS was $0.01 less than the guidance we provided in early February due to higher cost of goods sold at Wasatch and Mexico startup costs. Turning to the balance sheet for a minute. Cash and cash equivalents declined in the first quarter to about $15m from $19m at year-end. On February 10th, the company announced that the Board had increased the number of shares available under our repurchase program to a total of $1m shares. We were active buyers of the stock in the first quarter, purchasing 285,000 shares and spending approximately $8.2m. We also purchased and are in the process of integrating an immediate production company that will assist the company with its associate events including the annual convention and the training and promotional productions. We continue to carry no debt on our books and have minimal receivables as a result of our primary business model. Looking forward and reiterating the guidance that was updated in yesterday's press release, we expect second quarter sales to be in excess of $65m with earnings per share between $0.32 and $0.34. We now expect sales for the full-year 2004 to be in the range of $255m to $260m. With earnings per share at the high end of our previously forecasted range of $1.35 to a $1.40 based on a 34% tax rate. Now, before I turn the call over to Dave, I would like to take care of one housekeeping chore. Going forward, we will be focusing on our quarterly communications on our actual results and will no longer be routinely providing the preliminary operating results near quarter's end. I will now turn the time over to Dave's comment and some of our recent operating activities.

Thanks Gil. And thanks everyone for joining us to talk about the progress and growth of the -- Let me start off this morning by thanking the hundreds of loyal and hardworking employees who make up this great corporate team and the thousands of associates who are sharing the vision of true health through proper nutrition and true wealth through rewarding business opportunities supplying a residual income. USANA continues to operate on the two founding principles of true health and true wealth. I believe this was evidenced again this quarter by the excitement and enthusiasm we are seeing from our associates. We believe maintaining excitement and enthusiasm among our associates is the key to generating consistent double-digit sales and earnings growth over the next five years. For example, just last weekend, we held one of our regional celebrations in San Diego, California where there were over 1000 associates in attendance. In the first quarter, we had double-digit year-over-year growth in each of our markets. South Korea, one of our newest markets continues to see pressure from efforts to control consumer credit card expenditures, which is directly impacting our business and many of our competitors. We remain dedicated to that market as it represents the third largest market for direct selling in the world. Another market I would like to comment on is Japan. They had tremendous year-over-year growth in that market and I believe that as the number two market for direct sales in the world, there is ample opportunity to further expand our business.

The first operational topic I will discuss with you this morning is on our most recent market opening in Mexico. Our strategy for Mexico has been different than any other international market we have entered so far. For the first time in a new market we have chosen to register four of our nutritional products as medicamentos or medicines. We believe this will give us a distinct advantage and further distance us from the competition. Because of this strategy and the strict regulatory requirement for getting partnership into Mexico, the opening was delayed by three weeks. We now have the majority of our initially planned products in country including our core product, The ESSENTIALS. Overtime, we will continue to introduce new products into this market. Because we now have revenues to offset our expenses in Mexico, and now that the bulk of the registration process is behind us, we believe that the initial -- the additional costs that were incurred in the first quarter will not recur as we continue in 2004. We believe that our patented premium quality products will sell well in this new market and that people will benefit both from the improved health associated with our products and from the lifestyle enhancements that come from having a successful home-based business opportunity. Entering Mexico is a key strategic milestone for the company. Mexico is the fourth largest market in the world for direct sales. So, it is important for our continued long-term growth to enter this market and position ourselves as the leading science-based nutritional supplement company. Another operational topic that impact the results in the first quarter is the higher than anticipated costs due to the integration efforts that we have been putting into our Wasatch operation. As you may know, we acquired Wasatch in July of 2003 to manufacture our personal care products. Since then we have been working diligently to bring that facility up to the same standards of manufacturing that we have at our supplement facility. This has caused inefficiencies in that operation as we experienced increased volumes from third party customers while trying to set up the operation to our high standard of excellence and integrate the manufacturing of our personal care products. With the construction efforts near completion, we have now to find the key manufacturing executives to be full time at Wasatch. We believe that we will see gross margin improvements from Wasatch as we continue in 2004.

During our February conference call, I spoke to the point that following the opening of Mexico, we will not be opening any new markets in 2004. We will be focusing our efforts during the remainder of the year on successfully growing our presence in the Mexican market as well as building solid leadership and stability in the other three markets we entered during the past 18 months including Taiwan, South Korea, and Singapore, keeping in mind that we currently serve only seven of the top 20 direct selling markets and we are prioritizing and preparing for eventual entry into these markets. Please also keep in mind that we are prepared to share with you our timetable for new markets today, but we are aggressively planning for new market expansion in the years ahead. However, before we execute on those expansion plans, we want to make sure that we have established strong associate leadership in all of our existing countries. This strong foundation will then allow us and our associates to expand into new markets beginning in 2005. I will now turn the time over to the operator to facilitate the question and answer session.

Thank you. Ladies and gentleman, at this time, we would like to take your questions. If you wish to answer questions over the speakers, please key star one on your telephone. If your question has been answered or you wish to withdraw your question, please key star two. Once again, to ask a question, please key star one, allow one moment for our questions to queue. Our first question comes from Scott Van Winkle with Adams Harkness & Hill. Please go ahead.

Hi guys, congratulations. A couple of questions. First, Gil, regarding the gross margin, can you break out how much of that was just a mix shift with Wasatach, with normally lower growth margins and how much of that was just higher cost of goods sold in your plan?

Scott, I think the answer is that it was basically all just higher cost of goods sold that we had planned at Wasatach. At Wasatach, our gross margin went a bit about 22.4%. So, about 200 basis points better than when we consolidated Wasatach into it.

Okay.

As Dave mentioned in his remarks, we are busily and highly focused now on the integration process and I think we have been before, but I think the difference now is that we have got the construction out there complete, essentially complete, and I think we have a great little facility now, and now we've got to, you know, go back to the basics of producing, and shipping, and so forth in an efficient way.

Okay, and if you look at it the next year, what percentage of your sales will you manufacture internally?

Let's see, once we are fully integrated at Wasatch, we would go from about the 80's to maybe 95% of sales.

Okay.

I think that is a bit roughed up. But I think that is kind of the range we will be thinking of or seeing.

Okay. And, currently today on your personal care items, how do the gross margin compare to the gross margins you have in your nutritional products?

The gross margin on our personal care line overall is consistent with our gross margin on the nutritional product.

That would just pick up incrementally with Wasatch.

Right.

Right, okay. And, I am sorry Gil. I missed the numbers you gave on the share repurchase. What was your -- what's remaining on the authorization?

Well, the board approved a million shares. When we started the year out, I think we announced that on February 10, and we purchased 285,000 shares. So, 715,000 shares are still available on the current authorization, and as we mentioned, we have been very active in doing and buying back shares at these prices.

And one question on Mexico. Where was the -- it seems like the sales were, even without a good piece of your products later in the quarter was pretty good in Mexico. What was the key there? Was it the US-based distributors that really built that business? How did it get started so well?

The key was that we had the most leaders ever from existing markets go to Mexico and I would say even more were from Canada than the US. Canada had quite a few leaders go down to Mexico for long periods of time as well as the US, but it was the greatest amounts of leaders we've ever had to open a country. So, that was very exciting news for us.

I believe Dr. Vince has a clinic down there where he is working out at a clinic. Does that help you at all, because he is based in Mexico?

Some of these helps a little bit with credibility. I doubt if that is well known throughout Mexico City, where a lot of our drugs are coming from, but they used a story of the Health Center that he has in Mexico City and are selling, I'm sure.

Right, thank you.

Thank you.

The next question comes from David Block with Seidler Companies. Please go ahead.

Hi guys. Nice job in the quarter.

Thank you.

First question is just with SG&A. Just for clarification, I know you guys articulated in the press release that you do not believe the Mexico related costs will recur as '04 goes on, but I also know you built a pretty impressive technology-based infrastructure and you gave a leveraged SG&A as a result. So, given that Mexico from what I heard is, I guess the technologically inferior market compared to your other markets. Will there be any impact on SG&A as a result going forward?

You know, will Mexico add a kind of a higher relative component to SG&A than our other markets. Is that what you're asking?

Yes. Great.

I don't think so. What we try to do, it may even be lower. The only little nuance that we've seen down there is the banking system seems to be a little bit less efficient, and we've noticed a few little early glitches here and there on both the collection and the payment of commission side, but I think we worked through those. We actually have a system of routing many of the calls up here to a call center in Salt Lake City, and that's worked very well. So we have a Mexican, you know, Spanish-speaking team here in Salt Lake city in our call center, and so it's been very well in a way, you can argue that Mexico manufacturing is more efficient because of that. We have bi-lingual, in other words, we have English speakers, Spanish speakers and so they can take, you know, the English speaking calls or the Spanish speaking calls as the same. We've tried to leverage that, I think, that's been something that Dave has pushed very hard, you know, throughout he is on at it to leverage these kinds of costs wherever we can, I think at this point it's working very well.

Great. My next question is with R&D. As a percentage of sales R&D ramped up in the quarter. Can you, maybe, talk about what the extra for the ramp-up was spent on and what you guys were doing there?

I've encouraged Tim Wood, our Vice President of R&D to make sure that we stay on a leading edge with scientific products and so I've encouraged him to increase his clinical studies, increase his research to make sure that we're ahead of everyone else. And so I've asked him to continue to try and maintain a high percentage of R&D going forward, because at the fast pace of sales, that percentage would drop quickly and I want to maintain that we are a science-based and an advanced nutritional company. So we can't really tell you much about the clinical studies that we've just going on with our products and with possible future products.

Okay. Great.

Dave, remember our target there is about 1% of sales, and in the first quarter I think it was a little under that. Anyway, as Dave mentioned the sales and ramping. But I think our target remains 1%.

Okay. Another question with new market. Dave, you kind of alluded to this in your prepared remarks, but you have publicly stated that you anticipate opening one to two new markets in fiscal '05. Is this still the case? Is there any more visibility you can give on that?

Yes. In 2005 and 2004, it will be one to two markets depending on the size of the market. If we did a very large market, maybe, it'll only be one in a year, but if they're small markets, we'll be trying to get two in and spread them out a little bit. There are a number of ones that we're working on and as the product registrations and what not come through, we will look to open those markets.

And Dave remember we have to be a little careful. Our associates get pumped up about these kinds of things, and if the name gets - if a country gets identified too early, we can get what we call claim jumping, they will hit on there, should be real careful of that.

And then the last question is just the use of cash. You've got the $15m on the balance sheet note that - - I know you have some shares that you can buy back. Would you plan a buy back shares, maybe, distributing a dividend to shareholders? Could you talk on that?

We're looking to continue with the share buyback. We feel that the price is a good value right now. So we're looking to continue with that at this point and look to other options in the future.

Right guys. Thanks a lot.

Our next question comes from David with Kenneth Capital Management. Please go ahead.

Hi guys, great quarter.

Thank you.

Can you discuss what's going in South Korea? It seems like this was first to be an area of growth and that the growth has slowed down recently. In fact the associates have gone down from 4,000 to 3,000. Any color on this market?

Yes. South Korea has gone through a major restructuring of their credit program. They're seeing credit card debt getting to be

a major problem and so the country has basically, I think, black listed 18% of their credit card users which really changes the mindset of people over there. The economics was no longer having access to credit cards. The type of entrepreneurs that we will be after are restricted on what they can do. I think all companies over there have seen a major change after this crackdown on credit cards. So, I think, it will take a little while for them to stabilize and get their debt situation figured out, but then they are a very entrepreneurial group that will find a way to get the business growing again, and I think marketing will get going again fairly soon. But there is definitely a change that they are learning to deal with and work through and you mentioned you bought 285,000 shares this last quarter. Roughly, what was the average price for this purchase?

That's a number that we don't disclose. You could go back and see, if you look at the price between February 10 and when we blacked out for our quarterly release here a couple of weeks ago, you can get a rough sense of I think yourself and when we brought our 10-Q here - is that when we are going to file the Q and about.. Within the next three weeks, our Q will be out there and that information very specifically will be in the Q.

Okay. Final question. Just with your recent appreciation of the US dollar. Are you now fully hedged in terms of currency? Any comments on that?

Well, our approach is one that really we never fully hedged. First of all, let me just cover what our philosophy is generally. We hedge cash flows coming in from these various countries, where possible rather than topline or rather than balance sheet and so forth, we hedge cash flows, expected cash flows. And our approach there is to hedge about 50% of those flows using forward contract and another 25% of those flows by using options to give some flexibility and then we typically had gone there on the other 25%. That philosophy is the guiding philosophy that we use. There are some specific contracts in place. At any given point in time, we do not disclose that kind of information, but our committee that does this hedging meets regularly, and we discuss what our views are and generally speaking the outline that I gave you is the approach that we have in place. Therefore, hedging currency fluctuations.

Okay. Thank you.

Ladies and gentlemen, once again to ask a question, please key star one on your telephone. There are no questions at this time.

Thank you for your questions. We recognize that this is an exciting time in USANA's history. We look forward to staying -- having you stay the course with it as we go forward. We are delighted to note that during the quarter, two brokerage firms initiated coverage on the company, Avendale Partners and then just last week Adams, Harkness & Hill. Thank you for joining us on our conference call this morning. If you have remaining questions, please feel free to contact us at Investor. Relations@ us.usana.com or call Riley Timmer our manager of Investor Relations at 801-954-7100.

Ladies and gentlemen, thank you for your participation on today's conference call. You may now disconnect.