USANA Health Sciences Inc (USNA) 2004 Q2 法說會逐字稿

Good morning and welcome to the USANA Health Sciences Incorporated second quarter 2004 earnings 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 will now turn the conference over to Mr. Riley Timmer. Please go ahead sir.

Thank you Sheana. Good morning everyone, 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 Web site at www.usanahealthsciences.com. Following the call, a replay will be available on our site. The purpose of today's call is to discuss financial results for the second quarter 2004. But 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 the disclosures including specific risk factors and financial data contained in the Company's most recent filings with the SEC. During the course of this call, management will discuss non-GAAP information. The non-GAAP measure we are providing a customer account data. We provide this non-GAAP measure to assist investors in understanding our operating performance. I will now turn the call over Gilbert A. Fuller, Senior Vice President and Chief Financial Officer.

Thanks Riley, and good morning everyone, and thank you for joining us for today's call to review USANA's record second quarter results. Joining me on the call today is Bradford Richardson, our Vice President of International Development; who will provide an update on the progress in our international market. And Dave Wentz, our President, who will discuss our recent operating results and our plan or strategy for the remainder of 2004. This morning, I planned to update you on USANA's continued strong progress achieved in the second quarter, as well as to update the guidance for the third quarter and full year 2004. Yesterday, USANA for the eighth consecutive quarter reported record sales. Earnings also came in at record levels, up 70% over the prior year quarter. For the second quarter of 2004, net sales were $67.2m, an increase of 42.6%, compared to the $47.2m reported in the second quarter of 2003. On a constant currency basis, sales were up 39% year-over-year. The year-over-year growth in net sales was due to the 35% increase in active Associates, and an increase third party sales from Wasatch, our personal care products manufacturing subsidiary. Our continued increase in active Associates has been boasted by recent openings of new markets in South Korea in July 2003, Singapore in November 2003 and most recently Mexico in March 2004. Cost of sales in the second quarter increased as a percentage of net sales to 24.1%, compared to 22.1% in the second quarter of 2003. The reduction of our gross margin was the result of increased third party sales from Wasatch, which has significantly lower gross margins than our direct selling business. We expect to see modest improvements to consolidated gross margins in the third quarter and remainder of 2004. Excluding Wasatch's sales, Associate incentive expense in the second quarter was 39.9%, compared to 39.6% in the second quarter last year. The $25.6m paid to the Associates in the second quarter was the highest payout in Company history. We believe that Associate incentives will be modestly lower in the third quarter as percentage of net sales because of increased sales of non-commissionable items at our international convention that will be held in mid-September. I commend an express appreciation to our dedicated associates throughout the world for their efforts in growing the USANA business.

Selling General & Administrative spending decreased relative to net sales to 20.3% during the second quarter of 2004, compared to 22.4% in the prior quarter. This can be mainly attributed to operating leverage we gained on our increased sales base, as well as relatively lower SG&A expenses at Wasatch. We expect that SG&A in the third quarter will be modestly higher as a percent of net sales due to increased expenses related to our upcoming international convention in mid September, and lower third quarter sales expected from Wasatch, which has lower SG&A cost. As result of these line of items, we saw operating income for the second quarter of 2004, increased 16.7% of sales as compared to 15.1% during the second quarter of 2003. EBITDA for the quarter increased to $12.5m compared to $8.1m recorded in the second quarter of 2003, and up $2.2m from the $10.3m in EBITDA reported in the first quarter. EBITDA representing the net sales for the quarter rose to a new high watermark of 18.5%, up from 16.7% in the first quarter of 2004, and up from 17.1% in the second quarter of 2003. Now let us look at the bottom line for a moment. Earnings per share for the second quarter came in at $0.36 compared to $0.20 in the second quarter of 2003. EPS for the second quarter exceeded the upper range of the forecast provided on April 20 by $0.02, due primarily to higher than anticipated net sales and improved operating results from Wasatch. Now turning to the balance sheet for a minute, cash and cash equivalents declined in the second quarter to about $14m from $19m at year-end. We were active buyers of our stock again in the second quarter, purchasing 239,000 shares at an investment of $6.6m. For the first six months of 2004, we have repurchased the total of 524,000 shares, and an investment of $14.9m. We have 476,000 shares, which are authorized for repurchase -- to be repurchased under the current plan. We continue to carry no debt on our book, and have minimal receivables as a result of our primary business model. Now looking ahead of the third quarter and reiterating the guidance that was updated in yesterday's press release, we expect third quarter sales to approach $69m, with earnings per share between $0.36 and $0.38. In addition, our outlook for the full year has increased. We now expect net sales to approach $270m, with earnings per share between $1.42 and $1.44 based on a 34% tax rate. I will now turn the call over to Bradford Richardson, Vice President of International Development.

Good morning everyone. It's a real pleasure to be on the call this morning to discuss the international operations of USANA. The global business for USANA continues to be a dynamic opportunity for both revenue and earnings growth. The Asia Pacific region, which includes Australia, New Zealand, Hong Kong, Japan, Taiwan, Korea, and Singapore accounted for about 32% of revenue in the first six months of 2004, and grew approximately 66% for the first six months of this year, compared to the same period last year. This growth came from both new market expansion and existing Asia Pacific markets. USANA's business models have proven successful worldwide, and it includes a focus on our leaders, targeted promotions, reliance on technology, and commitment to core products. We have opened four markets in the past two years, and we are now focused on moving beyond the launch stage to the leadership development stage in each of these markets. Two weeks ago, we held a regional meeting in Singapore that was attended by all of our Asia Pacific General Managers during which we began to outline a number of new regional initiatives focused on building teamwork and leadership throughout the Asia Pacific region. We believe these initiatives will pave the way for a strong consistent growth throughout the Asia Pacific region. Let's look at a couple of our key agent markets. Japan, as many you know is the second largest direct selling market in the world. Many of our competitors achieve over 50% of their revenues from this market. We opened in Japan in late 2001, but have not yet hit our stride. We believe the big challenge we have been facing in Japan is that we did not have a strong leader for the region, with the recent hiring of Cory Christensen as our new President and GM in Japan, we believe the right leader is now in place. Korea brings within the leadership and business skills necessary to accelerate growth in this market. We have met with associate leaders throughout the Japanese market, who are excited about this new change in management.

Our goal now is to take many of the programs that have been successful globally and aggressively integrate these into the Japanese market. Korea is a new market where we are focusing a lot of attention on. I personally spend 70% of my time in Korea during the first five months of 2004. My interactions with the fields and the staff have convinced me that the Korean market can be a significant opportunity for growth. This is the third largest market in the world for direct sales, but has been hit with some very significant economic challenges. The credit card crisis in Korea, specifically the rapid increase in the number of delinquent accounts representing 18% of adults has deeply impacted the drug selling industry. In addition, certain regulatory changes both in product and direct sign legislation have increased the cost and complexity of doing business in Korea. But due to aggressive management changes, training and promotions, we grew Korea by 42% compared to the first quarter of this year, and now have a base of field leadership that we hope for supporters with continued strong performance in the future. Taiwan continues to operate extremely well, but given its size and the strong base of leadership in the Chinese communities globally, we anticipate that we will see even stronger growth in this market. We have brought in the new General Manager for Taiwan, Mr. Sherman Ying, who has significant experience in direct selling. He is working with our regional General Manager of East-Asia, to take Taiwan to the next level. Future expansion in the region will continue to be a driver for growth, but our existing markets all have significant growth opportunities going forward. Under new management and with deeper integration into these sort of model, we look forward to strong performance. I will now turn the remainder of the time over to Dave Wentz, USANA's President.

Hello everyone. It is great to finally be to these calls, I like to thank whoever was the genius that moved this call to 9 am, it makes that much more enjoyable to talk about another incredible quarter for USANA. First of I like to say the primary scene I attribute to such great growth of the years, as then are focus on the partnership or relationship with the field. We have spend a lot of time and effort during the last few years, trying to build that trust, to buildup relationship with our field and it has paid big dividend over the last few years. We have even gone so far to change management, where we thought there were weaknesses with that communication and partnership. We will continue to focus on that and it is working quite well for us, as we are forming our social count over a 100 thousand packet distributors, which is very exciting with the number of them full time spending their -- all their time working there you saw in our business, and even as a career, and also we will use the part-time and are yet very successful looking for a part-time or supplemental income. We also attribute great earnings to our employee dedication and passion. As we've grown the Company, the employees have continued to find ways of some more efficient and productive so that we can leverage this growth, and we are excited about our earnings from the future. We are also excited about our international commissioning coming up in September, looking forward to our largest convention ever, where we will have associates from all around the world attending to learn more about the Company, new products, to be educated on the business, and to launch our new products for the upcoming year. We've got great team worldwide and we are looking forward to see all of them in Salt Lake in mid-September. Once again this quarter, we achieved double-digit year-over-year growth in each of our markets. North America continues to see robust growth and positive trends; in fact in May we held our regional gathering in Company's history in Quebec, Canada, while we had 2000 associates who attended the two-day event.

The second quarter marks the first full quarter of business in the Mexico market, where large number of our US and especially Canadian leaders spent significant time and effort in Mexico building our organization and training local leaders about the products and their benefits. We are pleased with the initial results posted in Mexico, with our quarter financing country, which leaves the strategy we've employed of registering a number of our nutritional products as over the counter medicine would be a distinct advantage that differentiates us from the competition. Now, I will briefly update you on our Wasatch's operation. The first quarter pose a bit of a challenge, that was set due to construction upgrades to get the facility operating at odd standards for good manufacturing practices. We got a great link to insure the performance we developed in our laboratories are produced consistently and with restricted quality standards when they are manufactured. The construction at Utah was completed early in the second quarter, and we were able to gain efficiencies in that operation. We will begin integrating our personal care products in the third quarter, and like to have full product line integration by year-end. We continued to plan or prepare for next wave of new action markets, sooner or later. Please keep in mind that we are not in a position to share our timetable with you for new markets today, but we continue to plan for new market expansion in the years ahead. We consistently feel questions concerning our plans to enter China. Our international team is keeping a close eye on the regulations governing direct plan in China and we believe the ruling will be announced by the end of the year. We hope that one day, China would prove to be a significant opportunity for USANA. While the second quarter delivered record results, we are optimistic about our long-term growth. We will continue to build on our strengths to create opportunity for Associates and value for our shareholders. I will now turn the call over to the operator to facilitate the question and answer session.

Thank you, sir. Ladies and gentlemen, if you wish to ask a question, please press star, followed by one on your touchtone telephone. If you wish to withdraw your question, press star followed by two. We'll pause a moment to compile the questions. And our first question will come form the line of Scott Van Winkle of Adam, Harkness. Please go ahead.

Hi, good morning guys. At least -- I am glad that Dave could wake up for the conference call. Congratulations, the quarter was very good. A couple of questions. First, the Canadian market was a little weaker than, in trying to increase growth rate, Dave you mentioned, a lot of Canadian distributors down in Mexico, was that it, maybe some Mexico revenue was just off-setting some of that Canadian revenue?

Yes. A lot of times when we see a new country open, we have some weakness in our local countries, because all of the leaders take up or move a lot of time to spend numerous months in another country. So, they are not focusing their time and effort in their local markets. We see that quite often, so, we'll probably attribute some of that to Mexico.

And, but there wasn't really any change in the US markets, does that imply that maybe there's some incremental US strength since there was no drop-off in that growth rate.

US was held strong, could be due to the fact that these are traveling between the two, could be -- and they were able to stay in both markets more. Lot of the Canadians moved down for quite a long period of time, which could have been the difference between the two. A lot of our Texas and southern states, our US distributors were able to just walk across the border quite easily, I would think.

Okay. And on the new product front per convention coming. I don't know if you could talk about any new products, if you can, could you give us indication maybe the pace of new product introductions, more or less than, say last year.

We are going to continue with our strategic plan to focus mainly on reformulation of existing products. We found adding products does not provide incremental sales, it just creates confusion and complexity for the field to work, lot of them part-time workers with USANA, they can't understand fully if you keep launching new products, understand all the ingredients and all the benefits. So, we've focused on just improving our existing products as the science comes along to provide new advancements and therefore we'll continue to do into the future. So, we are looking to reformulate and improve a number of our products, now and in the future.

And moving on to manufacturing. Two questions. First, there's a lot of talk about that the new GMP's going into place for nutritional supplement. I don't know if I can get your thoughts on that aspect and then second, the strong contract manufacturing business at Wasatch, what should we expect there, going forward?

GMP is - you are talking about future regulations?

Yes.

We are not concerned with those at all. In fact, we are looking forward to them cleaning up the industry soon and bringing people up to our standards. We feel quite confident that we are prepared for any new regulations that may come in this way. As for Wasatch, we have a very short history with Wasatch and we are not quite sure what to expect from the sales side, how much business they can bring in, could fluctuate for a while until we get a good handle on where the consistent run rate will be.

Scott, this is Gil. Maybe I can just show in a thought there on Wasatch as well. We, remember the reason we bought Wasatch was not that we want to get into the contract manufacturing business that was not our objective. Our objective was to help us ensure that there is premium quality of product coming out for our personal care line. So, as Dave said, it's a little bit unknown as the -- third party business that comes through there but, part of what happened in the second quarter was that we had an unusual amount of third party business, because it was a catch-up for the construction period we finished in the first quarter. So, there was a bit of a backlog that kind of flushed through in that second quarter.

So those sales should be probably a little lower in Q3 relative - -

Yes. When you see the Q, you'll see that it was at about $3.1m through in the second quarter and that's roughly probably a million dollars extra than what we might think as kind of normal run rate out there.

I'm sorry, one last question. If I calculate revenue per average distributor, just you know, beginning and ending of the quarter distributor count, it looks like we are down a little sequentially and there hasn't been a real trend sequentially over the last four to eight quarters. Is there any seasonal reason for that or does the new market come on and drag it down? Am I thinking about this right?

Yes, Scott, you are exactly right. What happens is, when you have a new market come on, like we did it with Mexico coming on, you have this burst of new applications, new distributors. And so, until that settles down, until our purchasing pattern settle in, you get a little bit of a distortion.

Great. Thank you.

Scott, one other thing that occurred to me, you asked about Canada. It's interesting, if you look at comps at local currency terms, the Canadian market was actually up on consecutive quarter basis by about 2.6%. It does get a little tricky, but what they have said certainly applies, we had a lot of Canadian leaders in Mexico and not in Canada during the quarter.

Thank you sir. Your next question comes from the line of Doug Lane of Avondale Partners. Please go ahead.

Hi, good morning everybody. Gil, you mentioned the distributor convention coming up in Salt Lake in September. Do you have a rough cost estimate for that convention, because obviously it is a sort of a one-time item, I mean you have them all the time but I imagine they move around throughout the year?

Good question Doug, but its one of those things -- what we have done is we have done is we accrue for that as we go along during the year. And so that by the time the convention comes we hope to be fully accrued. Now, sometimes we make line of scrimmage calls as to sponsoring specific events or circumstances, but may get outside the -- outside of the planned amount that we have accrued, but the convention typically costs us something north of a million dollars minus the revenues, net cost of the year roughly $600,000, but we accrue it evenly, near as we can throughout the year, so there is not a specific spike in the quarter although we tend to have a little bit of extra SG&A cost in the quarter related to it.

Okay. But that's helpful. So it is not going to be this lumpiness although --

No, you are not going to see a great big shock.

Then here goes my second question, you mentioned SG&A as a percentage of sales may be up a little bit in the third quarter, but you mean these will be in the second quarter of this year and not the third quarter of last year?

Yes, that's correct. That's correct and the reason again, part of the reason, one of them will be the probably a few things from the convention that we will be having that -- once that sales should be lower and their SG&A tends to be relatively fixed. They had higher sales in the second quarter as -- we went through this catch-up period due to the plant construction out there, and so that's the primary factor.

Okay, so we should still look for year-over-year improvement as you leverage your infrastructure with the higher sales.

Yes. Absolutely.

Switching gears here, do you have a number of the percentage of your sales that is on some sort of automatic replenishment program?

Yes. The autoship program?

Yes.

I think, overall that number is about 55%, 54.7% to be precise. And I think some are aware that tends to be lower in the newer markets. As people get used to it, we've opened up three new markets in the last year, nine months actually. And so, you tend to see it lower in those newer markets until they get established, then it starts to come up and -- the overall percentage to come up. So we would hope that that number would continue to see progress.

Is that a better number than the second quarter of last year?

Second quarter of last year was 57%.

I see.

But the reason this one is lower, the percentage, is simply because of the new markets that are opened. If you look at them at markets, they are steady and strong. So it's primarily a function of the fact that we've had new markets.

Got it. That makes sense. Then lastly -- you mentioned the reformulation of your products. Has there been -- what is the -- I mean the biggest market; the US, still shows very strong growth and very strong recruiting trends. And I'm wondering what it is, USANA specific that is driving this, you can't really hang our head on new products, but is there reformulations -- is there something going on from a product news standpoint? And then, broadly, if you can put this in the context of traditional retail sales of nutrition, we are one of the biggest players there, Natures Bounty or NBTY had a huge warning this quarter, certainly that trend is not speaking at all to what we are seeing in the US from USANA?

I attribute the growth in US to our associates and their activity level. We've got a great product, they believe and trust in us, they are not afraid of putting their good name out there representing USANA and so as long as we maintain a trust, their activity level will stay high. I think that is the main key to growth in the US is happy, trusting distributors who have a great relationship in partnership with the corporate.

And Dough, I'll take a try at this retail channel. I think one of the great things about the direct sales channel is that we don't get into the inventory issues and channel stuff and this kind of thing issues at sometimes you can get into in the retail markets, retail channel and we also don't have to deal with fighting for shelf space with some of the big box stores. And I think that's the great thing about the channel. The other thing I think I'm seeing is that our concept of very specifically focused nutritional products, that is our SKU count, for example, of nutritional products is 20, because they are very specifically focused and our core product, the Essentials is formulated to take all the guess work out of going to a typical vitamin store or something and having to worry about buying 6 or 7 bottles of this or that to get to what you need to have done. So, I think our concept of a very powerful, well-balanced, scientifically formulated product, I think is really an important aspect today that more and more people are embracing.

Makes sense. Okay, thank you.

Thank you. Your next question is from the line of David Block of Seidler Companies. Please go ahead.

Hi guys. Congrats on a great quarter. Most of my questions have been answered, the one I kind of have remaining is on Japan. Obviously, you recently announced that you replaced your GM there. We know that Japan is a huge market opportunity for you guys. I know you haven't been able to quite crack the code there. But, going back to, I guess, the last GM or now the ex-GM that you have, you guys were also very optimistic that, that will be the right set to drive the market forward. So, I guess, my question is what assurance is, if any, can you give Investors that this is the right person for the job, or put in other ways, there is something that this GM is bringing to the table that others in the past have not?

Well there is no assurances that we can give you that we've picked the perfect individual but we're hoping we have. The last individual looks great, sounded great, but just wasn't able to create that relationship with the field that I discussed earlier. Didn't have the connection with the field and didn't communicate with all of them very well, was a little bit off, focusing on the wrong things. Fortunately, with this new GM, we've been able to have this individual spend a lot of time with the field prior to becoming the President in Japan and the communication or relationships that this individual forms with the field so far have looked great, very respectful of the distributor base, very good listener, listening to their ideas, making them feel important, and letting them have a say in things, and we're very excited about the way he handles the relationship with the field. So we're very optimistic, no assurance, of course, we're very optimistic with -- hopefully we found the right one now.

All right, thank you.

Thank you. Your next question comes from line of David of . Please go ahead.

Hi guys, great quarter. Can you discuss the role of foreign currency in the numbers, and can you also give some color on pricing in Mexico. Thank you.

Let me take this question, if I can. Foreign currency-wise, let's see, the first -- on a year-over-year basis foreign -- the fact that currencies were higher, added about $1.5m in topline. So, some, but not a huge thing as we said in our call, when you take the 42% plus year-over-year, dollar-dollar comparison, that would drop down to about 39% year-over-year growth, if you take into the fact that the overall on a year-over-year basis in US dollar currency was a little weaker, relative to the foreign currencies. The running quarter basis, it had the opposite effect, going from Q1 to Q2, actually the dollar was stronger and it was a negative impact on the topline of about $1.1m. So, you have that kind of dynamic going on. As I mentioned and you had -- two markets that show a running quarter kind of flat, slightly negative, were Canada and Japan. But, if you look at both of those markets in a local currency basis, they're both up, be it small in Japan, but 2.6% in Canada. With regards to price in Mexico, we have priced those products and strategized those products to reflect margins that would be consistent with USANA elsewhere in the world. And thus far the strategies are working very well, as Dave mentioned in his remarks. We have registered three of our products as over-the-counter medicines there, kind of the new strategy and we believe that strategy will help differentiate us and help us effectively carry out the pricing strategies that we've undertaken.

Great. Thank you.

And sir, at this time there are no further questions.

Well, thank you for your questions. We recognize that this is an exciting time to be a part of USANA, and we look forward to having to stay with us for the long-term. We are delighted to note that on August 5, we will be presenting at the Adams, Harkness Summer Seminar in Boston. And 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, Investor Relations at 801-954-7100. Thanks again.

Thank you for joining today's conference call. This concludes the presentation, you may now disconnect and have a great day.