USANA Health Sciences Inc (USNA) 2005 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the USANA second quarter health sciences earnings conference call. My name is Gregory, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We’ll be facilitating a question and answer session toward the end of today’s conference. [Operator instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Mr. Riley Timmer. Please proceed, sir.

Thanks, Greg. Good morning, everyone, and thank you for joining us today to discuss our second quarter results. Today’s conference call is being broadcast live via webcast and can be accessed directly from our website at www.usanahealthsciences.com. Following the call, a replay will be available on our website.

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 our 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 our most recent filings with the SEC. During the course of this call, management will discuss non-GAAP information. An example of a non-GAAP measure we provide is customer count data. We provide this and other non-GAAP measures to assist investors in understanding our operating performance. I’ll now turn the call over to our Gil Fuller, our Senior VP and CFO.

Okay. Thanks, Riley. Good morning, everyone. Thank you for joining us to discuss USANA’s terrific second quarter operating results. I’m pleased to be here this morning with Dave Wentz, our President, who’ll address you shortly. This morning, I plan to update you on our record financial results and solid operational progress we achieved in the second quarter. I will also provide an update to our guidance for the third quarter and full year 2005.

In terms of second quarter results, net sales for the quarter came in higher than expected. We are pleased to report record net sales of $82 million, an increase of 22% compared with the $67.2 million reported in the second quarter of 2004. Our sales growth in the quarter was driven by a 20% increase in number of active associates. We are pleased to report double-digit year-over-year growth in all of our markets except Korea. We now have 125,000 active associates who are pursuing a home-based business opportunity. Additionally, sales were positively impacted by foreign currency, which added about $3 million to our second quarter revenue when compared with last year.

Monthly autoship orders continued their consistent pace, representing 54% of our total product sales during the second quarter. Earnings per share for the second quarter increased to 48 cents compared with 36 cents per share in the second quarter of 2004. We were once again pleased with operating leverage that we achieved during the quarter, which allowed us to reach year-over-year EPS growth of 33%.

I will now take a few minutes to discuss the P&L operating lines. Our gross margin in the second quarter of 2005 improved as a percentage of net sales to 76.2%, an increase of 30 basis points compared with 75.9% in the second quarter of 2004. Sequentially, gross margin was down 30 basis points from 76.5% in the first quarter. The year-over-year improvement to our gross margin was due to the diminished impact that our third-party contract manufacturing had on the overall business. Looking forward, we expect gross margin in the third quarter of 2005 as a percentage of net sales to modestly improve.

Associate incentive expense in the second quarter was 40% of direct selling revenue compared with 39.9% of direct selling revenue in the second quarter of last year, and 39.6% in the first quarter of 2005. We believe that associate incentive expense will be up by about 1% to approximately 41% of revenues in our direct selling business for the third quarter of 2005. Dave will comment on our strategy behind increasing this expense in a few moments.

Selling, general, and administrative spending decreased relative to net sales to 18.5% during the second quarter of 2005 compared with 20.3% in the prior-year second quarter. The year-over-year quarterly improvement can be attributed to the operating leverage gained from our growing sales space. We expect the SG&A in the third quarter, as a percent of net sales, to be modestly higher than the second quarter due to additional spending related to our international convention in September and continued preparation for our new market opening.

Second quarter operating income was 18 percent of net sales. This is an increase of 130 basis over the second quarter of 2004, and an increase of 30 basis points compared with the first quarter of 2005. Overall, our operating margin was very strong.

For the six-month period ended July 2nd, 2005, net sales were $158.6 million, an increase of 22.9% compared with $129 million in the first six months of 2004. Earnings from operation for the first six months of 2005 were $28.3 million, an increase of 38.2% compared with $20.5 million for the same period in 2004.

The company achieved net earnings in the first six months of 2005 of $18.5 million, an increase of 35% as compared with net earnings of $13.6 million in the first six months of 2004. Earnings per share increased 41% in the first six months of 2005 to 93 cents compared with 66 cents for the first six months of 2004.

With regards to share repurchase during the second quarter, we purchased and retired 352,000 shares, for an investment of $15 million. We currently have approximately $25 million remaining under the share buy-back authorization.

Now, before I turn the time over to Dave, I’ll comment on our projected guidance. To reiterate the guidance that was provided in yesterday’s press release, we now expect net sales in the third quarter of 2005 to be between $82 and $84 million, which is an increase of up to 22% over the third quarter of 2004. I would like to emphasize that, historically, we experience some seasonality during the third quarter, and it is usually our softest reporting period during the year. We expect that earnings per share in the third quarter of 2005 will be 47 to 49 cents as we begin our initiative of increasing the investment in our associates.

We are increasing our previously announced guidance for 2005 and now believe that net sales for the full year will be between $325 and $330 million. This represents 19 to 21% sales growth compared with 2004.

And finally, we now believe earnings per share for 2005 will be between $1.88 and $1.92, representing 25 to 27% growth compared with 2004. I’ll now turn the time over to Dave.

Good morning, everyone. It was another very strong quarter for USANA. Second quarter of 2005 marked the 12th consecutive quarter of record sales. For three straight years, we have posted record sales in every quarter, a remarkable accomplishment. Sales in the second quarter were particularly strong in our East Asia markets. Taiwan and Singapore were both up approximately 38% year over year. Hong Kong posted sales gains of nearly 23% compared with the prior year quarter and 11% on a sequential basis. We continue to gain more market share as our associate leadership continues to grow and expand in this region. Australia and New Zealand were also key contributors in the second quarter, generating sales growth of nearly 33% compared with the second quarter of last year.

Although we were down on a year-over-year comparison in Korea, sequential sales increased nearly 27%. Over the past few quarters, we have restructured our operations in this market, and now it is mostly profitable. Our local staff there is working closely with our Korean associates and we are committed to making that a successful market.

Our North American markets continued their steady growth as well. The U.S. was up nearly 19% in the second quarter while Canada posted solid growth of 23.5%. And Mexico, which is our newest market, outpaced all of our countries with year-over-year growth of over 76% and sequential growth of 22.5%. It was also gratifying to see sequential sales gains in all of our markets.

Now, let’s turn to our strategy. In the third quarter, we will begin increasing the investment in our associates. We will reward our top-performing associates by offering better contests, promotions, and other incentives to grow their business. Those associates who are actively bringing in new customers will be financially rewarded. We believe this initiative will bring additional associates into the business and accelerate top-line growth. We feel that now is the time to make additional investments in our associates as we focus on growing our existing markets.

Sales of Sensé in the second quarter came in at 15% of product sales. This compares with 13% in the second quarter of last year and 16% last quarter. During the second quarter, we increased our marketing efforts for Sensé. We developed a four-page advertorial that was featured in the June issue of Prevention magazine. We were also mentioned in a piece about natural health products in the July issue of Self magazine. We believe this type of coverage will help associates in building their USANA business. Keep in mind that these marketing initiatives took place in the second half of the second quarter. We believe sampling with Sensé will continue to be a great door-opener for associates to introduce prospects to all of our products and the opportunity. We will continue to promote sampling and the distribution of our sales tools, which we believe increases the comfort level of our inexperienced associates when approaching a new prospect.

As announced in our press release, we now plan to open our new market in the fourth quarter, and will make an announcement as we get closer to that market’s opening. This market opening has been delayed because of what we believe is a relatively minor business requirement issue.

In regards to China, China remains a market of significant interest for USANA. We continue to await final legislation regarding the laws that will govern direct selling. We’re in the process of developing a specific entry strategy based on the current information we know about the direct selling rules. Our objective is to be able to move quickly once these rules have been issued.

Finally, this quarter we will be celebrating our annual international convention held in Salt Lake City. We are anticipating a sold out event of over 8,000 associates, which will be our largest USANA event ever held. At this year’s convention, we’ll introduce new products, new sales tools, and launch contests and promotions that will help motivate our associates to actively grow their businesses. With that, I’ll now turn the call back to the operator to facilitate the Q&A.

Thank you, sir. [Operator instructions] And your first question comes from the line of Tim Raimi of DA Davidson. Please proceed. [static] Sorry about that, sir. Please pause for your next question. And your next question comes from Courtney Coles of Adams, Harkness. Please proceed.

Hi, guys. Congratulations on a decent quarter. A couple of questions, hoping to get some clarity on the volume incentives and the change to that. It looks like we saw a little bit of the uptick happen this quarter and we can expect it, obviously, going forward into the 41% range. Can we get a little more detail on what, exactly, those initiatives are? I understand contests and promotions and maybe some bonuses, but a little bit more detail on what that might look like?

We have a number of things in mind, a number of different promotions, contests. I mean, they range all over the board. But mainly, we are just increasing the incentives for more enrollments to bring more associates into the business. And so we’re going to make it richer contests than we’ve made in the past, some new ideas that we’re going to try. We’re just going to start putting back more into the field to push activity levels to a higher level. And we’ve got some exciting plans for that.

Okay. And it sounds like there won’t be any specific change to the structure of the model, just the bonuses associated?

Exactly.

Okay. Okay, good. And it sounds like, moving on to Sensé, that the advertising has obviously been taking hold. We saw also an advertisement in the Shape magazine this months. Is that going to be a significant investment going forward, and can you put any numbers to sort of what that investment might look like?

No, I don’t see any significant investment in that direction. We’ve got some PR out there. The field will take it and run with it, hopefully. The credibility is there. I think with those three magazines, they’re three top magazines. So our associates will be able to use those credibility pieces as they talk to people about Sensé and USANA as a whole.

Okay. And then, finally, just on the country push-back. It sounds like a business requirement. Is it safe to say that might be a product licensing issue or a-- can you give any more clarity on that?

It’s a business registration, and we didn’t think it would take this long, but it’s gone into the black box of the government and we are just waiting for it to come out. [chuckles] We believe it will, and we have no-- we don’t have any concerns about it coming out, it’s just the timeframe of how long it will delay us.

And, Courtney, one other little thought on that is that in one sense, we’re okay with the delay. At this point, we’re getting so close to our international convention that we’d like to make sure that we’re not so involved in the international convention that we don’t give the new country opening our full energy. So in that sense, we’re not-- this is okay.

And Q4 will be a busy one for you guys. Okay, then. Thanks very much.

And your next question comes from the line of Doug Lane of Avondale Partners. Please proceed. [static]

Operator, we’re getting just static. Is there anything you can do to either repeat the question or clear up the line?

I’m sorry, sir. It’s coming from his line. I can have somebody else speak with him, and I will get you anther question. And your next question comes from the line of David Block of The Seidler Companies. Please proceed.

Hey, good morning, guys. Congratulations on a solid quarter. Generating sequential revenue growth in every market is very impressive, so congrats on that.

Thank you.

Hopefully, you can hear me; it’s not staticky.

We can.

Okay, great. First question, just with Sensé. I guess I was a little surprised that, as a percentage of sales, it was down sequentially over the first quarter, given some of the initiatives that you guys have in place, the quality of your product line, and the story that the associates have to go out to the field with on that line. Maybe, I guess starting with inventory, if my memory’s correct, I think 50% of inventory at the end of last quarter was Sensé. And you worked through a little bit of inventory this quarter, but it’s still higher than historical norms. Where did Sensé stand as a percentage of inventory at the end of Q2?

Percent of inventory -- I don’t have that number in front of me. We have seen some-- you saw our overall inventory go down about 400,000-- or, no, 600,000, I think it was, on a sequential basis. (And by the way, we look for that to continue to improve.) But I don’t have off the top of my head and handy with me the percent of inventory that’s Sensé. With regard to the other aspects of your question, Dave, do you want to comment on Sensé as percent of sales?

Well, in the first quarter we had a lot of catch-up with Sensé as we were taking care of back orders, getting the product out, as we were getting it manufactured. And the other thing to take into consideration -- Sensé’s a great door-opener. It’s a 3-month product, unlike our nutritional products, which are a 1-month product. So a lot of times, people come in, they buy the Sensé, but then for the following two months, they’ll purchase nutritionals or foods [ph] products to maintain their status and level and product consumption. So Sensé is a 3-month-- every 3-month purchase. So we expect it to be a great door-opener and get people introduced to USANA, the nutritionals and the opportunity, but we don’t see it taking over greatly in the percentage of sales.

Okay. So in theory, then, the nutritionals should still outpace Sensé as a percentage of sales in the growth with the cross-selling, even with cross-selling opportunities.

Yes. I mean, people come into USANA and they pretty much use all the lines of product. Unfortunately, with Sensé, it’s a 3-month supply, so that changes that percentage down from where it would be if it was a 1-month like our other products.

Okay, great. Cost of control [ph] the second quarter was up sequentially a little bit, and I was wondering if there’s any inefficiencies that are still remaining that are Wasatch-related. And can you touch on any issues you had in the quarter and maybe some inefficiencies in the [unintelligible] line?

Yeah. This is Gil, Dave. There are still a few inefficiencies, and mostly at Wasatch. We were-- as you know, we spent great effort in the first quarter catching up, and some of that catch-up carried over to the second quarter. In addition, we were also implementing a new ERP program and getting used to that. In the process, between catching up and some of the new systems implications and implementation issues, there’s a little bit of friction there. But we believe that we’ll see some progress as we go forward starting here in the third quarter.

Okay, great. And then, just touching on the new market on the expense side. What expenses have you accrued to date? I guess I’m just trying to get a feel for what Q3 should look like on the expense side.

Expense side for the new market. I don’t have the absolute number here, but what we have done is the following. We have a facility leased, we have that facility being fit out as we speak with things like telephone switches and PCs and so forth. And we’ve started the process of interviewing some of the key people that will be managing the place. And some inventories prepared and shipped. And I think actually on site so we’ll be ready to go. So those kinds of things.

Remember, these market openings are not huge in expenses for us. I think that’s one of the great things about this model. But there will be some expenses in there. That’s why I think we said in our comments that we’ll see SG&A a bit higher. Not dramatically higher, but a bit higher, in the third quarter as we-- both for the convention and our convention side and from getting this market geared up with the opening delayed a little bit.

Okay. And then my last question, just on the initiative of increasing investment in your associates. Just looking at the payout as a percentage of sales, it’s-- if everyone’s taking advantage of the kind of bonus operations where do you think that bonus incentives will cap out, or max out?

We’re thinking in the area of 41%. I mean, it always fluctuates a little bit around that point. But the company’s become very profitable, and our field has worked hard to get us here, along with the leverage that we’ve done internally. We want to give back some, and we wanted to increase our profits through increasing the top line, and so we’re going to focus more efforts in doing that.

Okay. And I imagine getting that 41% number is going to be contingent on really driving in new associates and getting that enhanced revenue.

Oh, yeah. We won’t spend it if we’re not seeing-- that’s the nice thing about-- this is in addition and controllable, more controllable than the regular commissions. This is something we can do on a 1-month basis. If it works, great -- do more of it. If it doesn’t work, try something new. So it’s spending that we can continually modify and improve to see which gets us the largest increase in associates. And it’s not a permanent fixture, so if it’s not increasing our growth rate -- if we’re staying with the current growth rate -- we won’t be spending the money and we’ll be around 40%.

Okay, great. Thank you very much.

Thanks, Dave.

And your next question comes from the line of Tim Raimi of DA Davidson. Please proceed. [static] Sorry about that, sir. And your next question comes from the line of Mimi Sokolowski of Sidoti and Company. Please proceed.

Thank you. Dave, I just have one quick question. The new incentives for the sales associates -- is that in response to anything, or are you being more proactive? Is it simply part of the natural evolution of the company?

It’s in a sense Dr. Wentz’s vision of getting the products to more people. We want to do whatever we can to push that number and that rate higher and higher. So with all the efficiencies that we’ve achieved, we feel that we have more available to us to put into the growth of the company. And so, anything to reach more people, we’re interested in pursuing.

So it has to do with just more resources available to you and redeploying them.

Yes.

And Mimi, this is Gil. I want to make it clear here, we’re not throwing in the towel on profitability here. It really is an effort to push that top line. We’ve got this great momentum going; we want to add to it, if we can.

And when you say you’re not throwing in the towel on profitability, that means that you still think that there’s leverage in the model and you’re just attacking the business from another end as well?

That’s certainly my view.

Okay

My view. You know, we had a goal a couple of years ago to get to 18% operating margins and we’ve gotten there. And so I think it’s a balance. It’s focusing now on, as Dave said, reinvesting in these great leaders we have in the field and giving them the opportunity, by performing, to earn a bit more.

Okay, and there’s still room to leverage the model, in your opinion?

I think there is. There’ll be step function -- as we address some of these other new market issues and so forth, it’ll go perhaps in a step function. But certainly, there’s leverage opportunities there.

Okay, just wanted to be clear on that. Thank you.

[Operator instructions] And your next question comes from the line of Nancy Koaka [ph] from Avalon Global Assets. Please proceed.

--as opposed to the average, and how many shares have you bought back year to date, and at what average price?

The $15 million we spent in the second quarter I believe was our entire investment this year. That is, in the first quarter we bought no shares back and we bought back 352,000 shares, so if you do the math, that’s about $42.60.

Okay. And then, so the actual shares outstanding at the end of the quarter versus the average? If you have it.

Let’s see if I’ve got that handy here. It’s 19-- Is it-- 18 million 953-- no, I’m sorry -- 816,00 shares.

18 spot 816.

18, 8-1-6. That’s right.

Nancy Koaka; Okay, great. And when is the convention?

September 14th through the 17th.

Great. Thanks.

And you next question comes from the line of Kevin Foll of Magnetar. Please proceed.

Hi, guys. Just a quick question on your interest expense expectations for the balance of the year on the back half.

On interest expense, we have no borrowed money, so we anticipate that being zero, unless some events took place, and there’s no plans at this time for any kind of event that would put debt on the balance sheet. So we should have some modest interest income, which is built into our guidance.

Okay. And then--

We’ve been investing in the stock, really, is what we’ve been doing with our excess cash, as well as preparing for the new market opening, that kind of thing.

And since you’re marketing kind of hit late second quarter, have you seen trends accelerate as a result of that?

We can’t comment on-- other than what we’ve got out there right now, but we’re certainly optimistic that this advertorial and this other advertising we’ve done, as Dave mentioned, will give the tools, additional tools, to our field force to be much more aggressive out there in recruiting new customers.

Okay, great. Thanks.

And your next question comes from the line of Phil Fisher of Trauffolet [ph]. Please proceed.

Yeah, great quarter, guys.

Gilbert Fuller and David Wentz: Thank you, Phil.

Question about China potential. Would you-- do you have a sense for whether they’re going to allow multi-level marketing and accept a model like yours? And if they don’t, would you make adjustments to your model in order to enter China, or would you wait for them to allow multi-level before entering?

Well, currently, it doesn’t look like they are going to, but the lobbying efforts are very heavy to try and get them to open that up. They may not do it initially. They may start off without multi-level and then, as they get more comfortable, create more allowances and modify the rules, is what we’re hoping.

We’ve brainstormed and strategized on ways to make our plan work in whatever arena they provide for us. So we could go in, and we’d have to modify things quite a bit for that particular market, but we still see a way for it to be a viable market with a comp plan that is different just for China and allow our other associates to still participate, but in a different method than they have as we’ve opened other markets. It won’t be quite as seamless as we’ve had in the past, which is unfortunate, but the potential is still so great there that we look-- we’re looking for ways to make it work.

Okay, thank you.

And your next question comes from the line of Dan Thorn of Manchester Management. Please proceed.

Good morning. Just a quick question. I don’t know if you can tell us anything about the new products you’re anticipating introducing in September -- if they’re new product lines, product refreshes, kind of adds to the current line?

I’m afraid we can’t. We’ve got some exciting things coming out, but it’s going to be a surprise for everybody on September 15th when we launch our new products to our field and let them take off with them. We always make it a big surprise for everyone involved.

All right, thanks. Thought I would ask.

And your next question comes from the line of Tim Raimi of DA Davidson. Please proceed. [static] And sir, you have no further questions at this time. I would now like to turn the presentation back over to Gil Fuller for closing remarks.

Well, thanks for your questions. And sorry that we didn’t get Tim Raimi’s questions from [inaudible]. I apologize for that; I’m not sure what the issue was. But we’re delighted to note that, on August 4th, we’ll be presenting at the Adams, Harkness Summer Seminar in Boston. Also, if you have any remaining questions, please feel free to contact us at investor.relations at us.usana.com, or call Riley Timmer, Manager, Investor Relations, at 801-954-7922. We do appreciate your interest in USANA, and thank you for joining us on our conference call this morning.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.