USANA Health Sciences Inc (USNA) 2009 Q2 法說會逐字稿

Good morning, ladies and gentleman. Thank you for standing by. Welcome to the USANA Health Sciences Second Quarter Conference Call. (Operator Instructions.) This conference is being recorded today, Wednesday, July 29th, 2009. I would now like to turn the conference over to Riley Timmer. Please go ahead, sir.

Hi, good morning everyone. Today's conference call is being broadcast live via Webcast and can be accessed directly from our Web site at www.usanahealthsciences.com. Shortly following the call, a replay will be available on our Web site.

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 our most recent filings with the SEC.

With that, I'll turn the call over to Fred Cooper, our President and Chief Operating Officer.

Thanks, Riley. Good morning, everybody. Hey, it's a pleasure to be here this morning to report a fantastic quarter for USANA. You know, these calls are always more enjoyable for me when we're reporting good news and record-setting results. Let me quickly take you through the highlights of our quarter before I turn the call over to Jeff Yates, who is our Chief Financial Officer, to go through the details with you.

During the second quarter, USANA reported a record quarter in terms of sales, at $112.1 million, and a record increase in the number of active associates. This number grew by 18.3% to 200,000. These records were achieved notwithstanding the current economic recession and negative impact of currency exchange rates. As you saw in the press release, excluding currency, sales would have been as high as $121.2 million for this quarter. These figures indicate that our two primary associate incentive programs, the Elite Bonus and Matching Bonus, are working as intended.

During the second quarter we reduced the amount of spend on SG&A when compared to either last year at this time or our first quarter. I feel this decrease demonstrates our ability and our commitment to manage costs and SG&A expenses.

So with that, I'd like to turn the time over to Jeff, to provide you with the financial details for the quarter.

Thank you, Fred, and good morning everyone. As Fred indicated, the second quarter was a great quarter for USANA. I am personally pleased with our financial results and impressed with the performance of the company in light of the challenges that Fred has mentioned.

As Fred indicated, we are reporting record numbers in both sales and active associate counts. Net sales for the second quarter reached $112.1 million, which is an increase of 2.6% when compared with $109.2 million reported for the second quarter of 2008.

That growth in net sales would have been higher had currency exchange rates remained at the same levels as in the second quarter of last year. As you are well aware, the US dollar has strengthened significantly since then. Consequently, our net sales for the second quarter of 2009 were reduced by 7.5% or $9.1 million. As Fred mentioned, excluding the impact of currency, net sales for the quarter would have been just over $121 million.

We have mentioned before the significant impact unfavorable exchange rates has on our top line. Through the first six months of 2009 this has reduced our net sales by almost $20 million. For the balance of the year, we are modeling for currency to negatively affect net sales by an additional $4.5 million. In the fourth quarter, however, we expect that the currency comparison for most of our markets will be about even or slightly favorable. All told, we expect the full year impact on sales from the stronger US dollar to be about $24 million. Of course, and importantly, these estimates are based on exchange rates as of the end of the second quarter.

Now, let's cover the second quarter regional results. Net sales for the second quarter in North America decreased by 4.8% or $3.2 million to $62.7 million, compared with the prior year. Once again, negative changes in exchange rates were the primary cause of this decrease, reducing sales by $4.2 million. Excluding the currency effect, net sales in North America increased by 1.6%. Notably, local currency sales increased 29.5% in Mexico, while sales in Canada decreased by 3% and sales in the US remained relatively flat, decreasing by only 0.5%.

Active associates in this region increased year over year by 10.4% to 106,000. I must say, I am most pleased with this performance as growth in active associates is a leading indicator of our momentum. Sequential quarter net sales in North America increased 12.2% and active associates increased 9.3%. Most of this growth came in the US where net sales increased 9.4% and active associates increased by 7,000. Once again, we're delighted to see this increase in active associates, which can be primarily attributed to the recent compensation plan enhancements.

Now, turning to our Asia Pacific region. For the second quarter, net sales in Asia Pacific increased just over $6 million or 14%, to $49.4 million. Excluding the impact of foreign currency, sales in Asia Pacific increased by 25.2%. This increase was due primarily to double-digit growth in Hong Kong, South Korea, Malaysia, and Japan. Sales in the Philippines during the second quarter totaled $1.6 million. The number of active associates in Asia Pacific increased almost 29% to 94,000. That's up from 73,000 during the same period in 2008. Once again, Hong Kong, Malaysia, and South Korea were the main contributors to this growth. The Philippines also added 5,000 new associates.

Sequential quarter net sales results in Asia Pacific were also impressive, increasing 19.2%. Additionally, active associates were up 8% on a sequential quarter basis. Clearly, this region is continuing to set the pace for growth for our Company.

Earnings per share for the second quarter were $0.57, a decrease of $0.04 compared with the second quarter of 2008. As with net sales, EPS was impacted negatively by a stronger US dollar. In fact, we estimate that currency fluctuations reduced EPS by approximately $0.14 for the second quarter alone.

Additionally, higher associate incentives and a lower gross margin contributed to the decrease in EPS, and this decrease was partially offset by lower absolute and relative SG&A costs, a $0.04 benefit due to fewer diluted shares outstanding and we benefited by $0.02 from a lower effective tax rate.

Now, looking through the major line items on the income statement, you'll see that gross margin for the second quarter decreased as a percentage of net sales to 78.8%, compared with 80% for the second quarter of 2008. This decline of 120 basis points can be attributed to the negative impact of currency changes, coupled with a slight increase in product costs, and this decrease was partially offset by price increases on a few of our products, mostly in Asia Pacific, and lower freight costs.

Associate incentives for the second quarter of 2009 were 44.9% of sales, compared with 41.8% for the second quarter of last year. This increase was due to the two compensation plan enhancements introduced in August of 2008, which were designed to drive top line growth, and as we can see, are effectively doing just that.

Selling, General, & Administrative expenses relative to net sales decreased to 22.1% for the second quarter of 2009 compared with 23.6% for the second quarter of the prior year. On an absolute basis this represents a decrease of about $1 million. The year over year decrease in SG&A was due mainly to a decrease in legal and other professional services, lower promotional expenses, and a decrease in rent, travel, and wage-related expenses. Partially offsetting these decreases in SG&A were an increase in equity compensation expense and maintenance and deprecation expenses.

The effective tax rate for the quarter was 34.5%, representing a 220-basis point improvement from a year ago, and we are modeling for a 34.5% tax rate for the full year 2009.

Now, regarding the balance sheet, cash at the end of the second quarter was $11.2 million compared with $13.3 million at the end of 2008. During the quarter, we used our excess cash to pay down the balance on our line, and we did not repurchase any shares this quarter.

We finished the quarter with inventories of $24.7 million compared with $23.9 million at the end of 2008, and capital expenditures for the second quarter totaled about $940,000. We still expect CapEx to be less than $6 million for the entire year.

Finally, in our press release yesterday, we updated guidance for the full year of 2009, and once again we are optimistic about our second quarter results and are raising our financial guidance for the year. We anticipate, however, continued headwinds from unfavorable currency exchange rates and difficult economic conditions, particularly in North America. Accordingly, we now project consolidated net sales for 2009 to be between $415 million and $425 million, and although we anticipate local currency sales growth in most markets during the year, we do expect unfavorable currency exchange rates to reduce sales, as I mentioned, by as much as $24 million on the year.

We now estimate earnings per share for 2009 to be between $1.95 and $2.00. Notably, this projection reflects a reduction in EPS of as much as $0.24 as a result of currency. All right, Fred, now back to you.

Thanks, Jeff. You know, as President of USANA I'm responsible for the sales and growth of those sales. And as Chief Operating Officer I'm obviously responsible for operations and delivering efficiencies in that area. So, I'd like to take a few minutes and discuss these areas of jurisdiction, and I'll begin with sales.

Now, we reported that sales in all of our markets were up sequentially, except for two of our smaller markets, the Philippines and Japan. The Philippines, which is our newest market, is delivering a similar pattern which we anticipated based on past market openings. When a new market opens, in this case the Philippines, the announcement of the new market produces immediate interest from our worldwide associates who have family and connections in that market. Once the market is officially open for business, this queue of individuals waiting to join and travel to the Philippines to build the business causes an initial spike in both enrollments and sales. This spike is also followed by a period of lower sales and enrollments as the queue is eliminated and associates worldwide return home.

We expect sales and associate growth to begin to trend upward in this market as our native associate leadership now establishes itself in the Philippines and that market beings to mature on its own.

As for Japan, it's the second-largest direct selling market in the world. That's one of the main reasons why we're so committed to trying to make that market work. USANA has averaged a new general manager in that market every year and a half since we entered the market, as we've tried to fill this role with an experienced individual. This turnover has created unrest in the minds of our associates there in Japan. We've recently hired a new general manager who has excellent leadership skills, and he's assembling a strong management team which we believe will bring stability to the market.

Given that the US is our largest market, I should note that second quarter sales were basically flat, decreasing only 0.5% compared with the prior year. However, sales were up an impressive 9.4% from the first quarter. Active associates had a corresponding increase of 14% over last year and are up 12.1% from our first quarter.

The increase in both sales and associates is encouraging because the US was the market hardest hit by the current economic recession. We believe this growth stems from the introduction of our two new compensation plan enhancements, and I'm going to address both of those enhancements momentarily.

These results indicate that interest in USANA's products and its home-based business model remains high. However, the fact that our sales growth is lagging associate growth indicates that new associates are spending a little less when making their initial purchase with us. We believe this is related to the difficult economic environment they find themselves in.

We're pleased to see the number of preferred customers increase on a sequential quarter basis. These are loyal customers who play an important role in our business and who are simply consumers of our products. Over the last couple of quarters we've experienced a decline in the number of repeat orders from these preferred customers, and hence a decline in the number of preferred customers. Again, we believe this also is a reflection of the tough economic times.

To address this issue, during the second quarter we implemented new initiatives to keep these customers consistently purchasing our products. Additionally, we are incorporating targeted marketing campaigns that are designed to entice individuals to purchase on a more regular basis. Again, we are pleased to see that our PC count increase is over the first quarter.

Now, in other markets, not only did sales grow, but we report double-digit sales in associate growth in many of our markets. This growth is in large part due the compensation plan enhancements that I've noted earlier, specifically the Elite Bonus and the Matching Bonus. We have spent the last few quarters educating and training our associates on these enhancements and we are now seeing these enhancements produce the intended results, overall sales and associate growth. The Elite Bonus was developed to drive sales growth from our best leaders through a sizeable bonus. This result is the Elite Bonus doing exactly what we anticipated it to do. It is promoting competition among our very best leaders and driving growth as they strive to qualify for the bonus.

Because the bonus is only paid to the top 25 leaders in any one quarter, room at the top is limited and leaders are extremely motivated to continually grow their organizations to participate in this pool. We think of this bonus as a pay-for-performance mentality. The associates who take initiative, and grow their business, and deliver sales will move into a top 25 position and receive a portion of this significant incentive pay.

Matching Bonus is the other key driver in our sales and associate growth. This new bonus pays additional commissions to associates who begin building their business relatively quickly within a deadline of six weeks after joining USANA. Based on their initial and subsequent efforts, associates can receive a Matching Bonus up to an amount equal to commissions earned by individuals they introduce to USANA. Individuals who are eligible for an equal or 100% match from associates they sponsor are called Platinum Pacesetters. Those attaining this status is up in all markets an average of 250% since we introduced the program.

Now, I'm sure many of you are wondering about the increase to the associate incentive line, which is the result of the two bonuses that I've just described. We recognize that this expense is now higher than our historical incentive payout, but believe me that it was important to increase this investment in our associates.

USANA competes in our industry, as well as any independent business owner industry, for the very best talent. To attract talent we must offer the most competitive compensation plan for an individual who wants to own their own business. These new incentives, in addition to our existing program, is in my opinion the most rewarding in the industry, and having the most rewarding plan entails expense.

This expense, however, is manageable. And let me assure you, we watch the associate incentive line very carefully and manage that line depending on sales results. For the next couple of quarters we believe associate incentive as a percentage of net sales will remain at about 45% as we continue to leverage the compensation plan enchantments to drive top line growth. After that, however, we expect this expense to trend downward somewhat as we manage this incentive to balance the compensation we pay to our sales force with the value we return to our shareholders.

I am committed to continue to look for ways to gain operational efficiency through improved gross margins, and to the tight management of SG&A expenses.

Regarding our focus for the remainder of 2009, our key long-term business drivers remain. We're going to continue to promote USANA's outstanding home-based business opportunity, including the benefits of the new Elite and Matching Bonus. We're going to continue to help associates build their USANA business by enhancing their experience with us in utilizing business building tools. We're going to introduce a broader spectrum of products into markets where only a limited number of products are currently offered. And, we will continue to evaluate new market opportunities.

Keep in mind that in the third quarter we will be hosting our annual international convention here in Salt Lake City. This event always helps to build excitement among our associates. We spend four days training and motivating, celebrating and recognizing them for their efforts.

As always, we will also be making several exciting new announcements at this event which we believe will have a meaningful and positive impact on USANA and our associates going forward. We work hard to keep these announcements a surprise for the event-goers, so I can't share the details with you at this time, but we will look forward to a great convention this year.

With that, I'll now ask the operator to open the lines to facilitate the question and answer session.

Thank you, sir. (Operator Instructions). And our first question comes from the line of Tim Ramey with D.A. Davidson. Please go ahead.

Good morning, guys, congratulations on some good results there.

Thank you, Tim.

Thank you.

I guess, to congratulate you and then to take a little shot, we called down guidance just, I guess, 90 days ago, and that makes me worry about your level of visibility of the business. Can you talk a little bit about your visibility and whether we should just be taking guidance with a grain of salt at this point? Or, whether there was -- I do know, of course, that the currency changed quite a bit during the quarter. That probably had a meaningful contributing effect. Can you discuss that a little bit?

Of course, Tim. Thank you for the question. I think you nailed it. Currency is a significant factor and played well into the guidance that we provided in the first quarter. Needless to say, we've had a nice improvement sequentially from Q1 to Q2. We're reflecting that, but given those fluctuations it's hard to predict what's going to happen in Q3 and Q4. And we've tried to take that into consideration, but we've also had a nice growth in our associate counts, and that reflects the impact of that going forward.

Thanks for that. And, would you expect the associate growth to start to more closely -- or, to say it the other way -- sales growth to start to more closely mirror the associate growth? In years past they were a pretty good mirror of each other, but there has been some disconnect here recently.

This is Fred, and yes, we would expect that those two numbers will align better going forward.

Thanks a bunch, guys.

Yes.

Thank you. (Operator Instructions). And our next question comes from the line of Scott Van Winkle with Canaccord Adams. Please go ahead.

Hey, guys. Congratulations as well.

Thank you, Scott. Welcome.

Okay, first question. On distributors -- and I don't know how you answer this, because it's not a metric you've given out in the past -- how much of the distributor growth sequential was new distributors coming in, rather than -- and here's my thinking. My thinking is that some of the distributors just didn't purchase in the first quarter because of the economy. And I would assume that some of those people have become active again, are back in, in the second quarter, and that drove a good chunk of that distributor total at the end of the quarter. And I think you see where I'm going with this, is how much of it was kind of new distributors, new to the system, driven by recruiting, that we kind of see that momentum in new distributors continue? Or, how much is kind of a catch-up from the first quarter, and maybe people just kind of sat on their hands?

While it's true we have been doing targeted campaigns with a big emphasis on preferred customers -- and so naturally we're going to pick up some buyers who don't buy on a quite as regular basis as we prefer -- but as you can see, the growth line of our enrollment is greater than the growth line of our sales. So, a big pickup on that in momentum is the enrollment activity that we are seeing from our associates.

Okay, am I kind of completely wrong in assuming that there might have been a lot of active distributors in the fourth quarter of last year that just went inactive in the first quarter? Is that an anomaly, or am I way off on this? I just have to assume that would have been the case to some extent. And I don't mean preferred customers, I mean people who were in the comp plan, driving business in the fourth quarter of last year that maybe just fell off because of the economy, and now they're back, they're active again, they're back in the comp plan? Not so much a preferred customer kind of moving up, but more so just kind of a-- kind of a lost quarter in there for some of the distributors who maybe just kind of panicked with the market?

Certainly your statement is true, and there are some individuals that do that, and we don't have that exact number of the number of -- we call that a "win-back" -- of individuals that have done that in the fourth quarter and first quarter. So, I wouldn't argue with your statement, but I would try to temper that statement with the majority of that coming from new growth.

Okay, thank you. And then on the volume incentive line, maybe I missed it. Did you mention currency driving some of that growth as a percentage of sales year over year as well?

Not year over year. Year over year we had still a compression, it was $9.1 million. But sequentially we were up almost $4 million.

In absolute dollars on the volume incentives? I'm sorry, I was thinking, volume incentives as a percentage of sales rose? And maybe I just misread that?

The associate incentive increase was due to the two compensation plan enhancements.

But there was no impact in currency? In the last quarter, I think we talked about how you're still paying out at the same rate despite currency, and in some cases it's kind of gone against you. Or, is it a benefit?

The FX impact on that, Scott, is negligible.

Okay, great. And what specifically was in those kind of buckets of SG&A control you talked about? You talked about legal. Obviously, we can see that pretty easy. But, you mentioned some salary-based types of items? You didn't change staffing. What type of SG&A control did you do in the quarter? And then, how replicable is that going forward?

Yes, overall, the lower promotional expenses -- keep in mind that our focus to motivate and incent the field is focused on these bonuses. The ad hoc, onetime special type of promotions, we've backed off significantly because those enhancements are driving that growth adequately and in fact famously for us. Otherwise, the overall effort to reduce SG&A just as an operating model, we're seeing benefits across the board including rent, travel, and some wage-related expenses. We're managing health plans better and so forth.

Okay, so, would it be fair to say in kind of looking forward into the future that as long as the higher volume incentives translate into stronger sales, you know, the promotions that would normally flow into SG&A are going to be tempered? And maybe that picks back up if the revenue growth doesn't continue to be driven so well by the compensation plan changes?

Yes, you know how well the leverage works for our model, Scott. And that's what we anticipate. Our effort is to continue to manage those costs. We believe we run a very lean and efficient organization. We anticipate doing so going forward and reaping the benefit of that leverage.

And on that note, for years USANA kind of led the industry -- at least among the public companies -- as far as the profitability levels, operating margins, and such. Do you look at the new model now with incentives where they are, and maybe you don't get back to an 18% margin? But, have you kind of changed long-term what you think the profitability level as a percentage of sales can be in the business because of these comp plan changes?

I'd take that question. I'd say, no. I believe it's still stepped, and there's still room to improve that on operating leverage, it's just in an economic time where you're competing for new associates you're going to spend a little more to make sure you get those. But, gross margins still have room that we can improve, some pricing strategies that we're putting into place still improve, and there's still room on SG&A. So, yes, I still think we can be the most operationally efficient as well.

And probably a tough question to answer, but is there any impact from all this marketing by Amway Global? I mean, you know, it's just an odd amount historically. I've never seen anything like that traditional advertising from Amway. Is there talk about it in the distributor force? What's been your perception or impact?

As one who gets out in the field quite a bit and travels across the world, I don't believe I have ever had anyone in five years tell me Amway is pushing hard and is a competitor to them in their region. Ever.

Okay, fair enough. And then, kind of a big picture question for you. One of the remarkably strong consumer categories in retail is the national supplement industry. You know, ACNielsen, IRI reporting 10% type of growth in the mass market. Do you have an opinion on that? Do you think maybe there's some kind of trading down from some of the more premium price channels towards the mass? Or, are you kind of getting -- even in your customer and distributor force -- that supplements are just kind of in vogue or are just not being impacted by the economy? It's a remarkable growth we're seeing in the industry. I'm just wondering what your thoughts are.

Speaking to that end, I don't believe a premium product in terms of quality and potency is ever going to go out of vogue to the mass. It will always be a market that attracts a significant portion of individuals. In fact, in our targeted win-back campaigns, if that statement were i.e., kind of towards the demise of USANA because everyone's going to go to mass purchasing of vitamins and nutritional supplements, we wouldn't have had such an effective impact on our win-back campaign.

USANA enjoys an excellent reputation as the finest nutritional supplement in the industry. We have a slogan that we use that's called, "In good company," with many, many endorsements that are unpaid or solicited for the use of our products and nutritional vitamins. So, I think the growth is just in the industry as a whole, an awareness for the need for nutritional supplementation. Those can only afford mid-range quality purchase that. But, as a whole, everyone is starting to have a better appreciation for the need of nutritional supplementation.

Okay, and just a last question. I apologize for so many. Was there anything specifically done to target preferred customers, you know, from the win-back? Did you target them differently? Obviously, no comp plan changes are going to affect the preferred customers unless it's affecting the distributors who are driving those customers. Was there anything specifically done towards those customers?

Yes. We actually look at how long ago they had purchased, what items that they had purchased, what items we believe they would have an interest in, and then targeted them with emails, flyers, and catalogues to see which class and substrata of the target market would be the most receptive to sending back that information to them. And we are very fastidious in keeping track of which campaigns are the most effective and which ones aren't, so that we can further refine our target market.

Great, thank you very much.

You're welcome.

Thank you. And our next question comes from the line of Rommel Dionisio with Wedbush Morgan. Please go ahead.

Yes, good morning. A question on the gross margins. I think in your prepared comments, you talked about how there was a slight increase in product costs. From other companies that are reporting in this sector, I think we've noticed that some of them are saying they've seen a stabilization of product costs. Is that just a function of burning off some older inventory that was higher cost? Or is there something unusual? I understand every company is different. Could you just talk to that point?

No, generally speaking, we've had just subtle product cost increases depending on the product that we're talking about, and keep in mind that we're sourcing some of the finest quality product in the entire world. And most of those product costs have been subtle and not significant. The increase has been mostly attributable to the FX impact.

Okay, so, we're not talking a major magnitude?

Oh, no, no.

Fair enough. That's all I had. Congratulations on the quarter, again.

Thank you very much. Appreciate your calling in.

Thank you. And our next question comes from the line of Mimi Noel with Sidoti & Company. Please go ahead.

Thank you. Good morning. Fred, I think I just have two for you. If you can disclose, between the new compensation plans, the bonus and the matching, which of the two is more potent to total revenue in the quarter?

Matching Bonus.

The Matching. Okay, then that would seem to make sense. Now, as I think of getting greater leverage out of those bonus programs, why would I assume that? Particularly since most of the benefit stems from the Matching. Without taking that away, and just realizing some lagging benefit, how can you actually leverage that cost better? I mean, I understand on the Elite side, perhaps the competition for that intensifies as more people try to attain that goal, but on the Matching side I'm having a difficult time seeing how that expense ratio could come down.

Oh, the Matching Bonus is limited to 32 weeks.

Okay.

So, that will answer your question. So, as a result, right, as we get more individuals attain the rank of Platinum Pacesetter status, especially because it's new, people will gravitate towards that status. Then they go for 32 weeks getting bonuses on the individuals they introduce to USANA, and then as those people drop off their match payroll, if you will, they have to bring new individuals into USANA to maintain that same level.

Okay, okay, I think that's clear. Thank you for clarifying that.

Thank you. And gentlemen, at this time there are no further questions.

Okay. Well, everybody thank you for your questions. If you have any remaining questions, please feel free to contact Patrick Richards in Investor Relations, and his phone number is (801) 954-7961.

Thank you. Ladies and gentlemen, this concludes the USANA Health Sciences Second Quarter Conference Call. If you would like to listen to a replay of today's conference, please dial (303) 590-3030 or 1-800-406-7325, using the access code 4116100#. ACT would like to thank you for your participation. You may now disconnect.