USANA Health Sciences Inc (USNA) 2012 Q1 法說會逐字稿

Welcome to the USANA Health Sciences first quarter earnings conference call. At this time all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (Operator Instructions). As a reminder this conference is being recorded today, Wednesday, April 25 of 2012.

OI would now like to turn the conference over to Mr. Patrique Richards. Please go ahead, sir.

Good morning, everyone. We appreciate you joining us this morning to review our first quarter results. Today's conference call is being broadcast live via webcast and can be accessed directly from our website at www.usanahealthsciences.com. Shortly following the call a replay will be available on the website.

As a reminder, during the course of this conference call, Management will make forward-looking statements regarding future events or future 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. Examples of these statements include our 2012 strategies for our North America region, China and other markets as well as updated outlook for 2012. 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.

I'm joined this morning by Dave Wentz, our Chief Executive Officer, Kevin Guest, our President of North America, and Doug Hekking, our Chief Financial Officer. We will hear first from Dave who will discuss our business activities during the quarter, as well as our strategies moving forward. We will then hear from Doug who will discuss our financial results and 2012 updated financial outlook. I will now turn the call over to Dave.

Thanks, Pat. Good morning, everyone. I am pleased to report that USANA began the year with a strong first quarter which set new records for both sales and EPS and exceeded our expectations. I will begin this morning with our regional results and discuss the initiatives that impacted these record results and then update you on our strategies and expectations for the remainder of 2012.

We continued to see positive momentum in our Asia Pacific region where sales increased by an impressive 14.3% while the number of active associates increased 9.2%. This growth is primarily due to strong results in southeast Asia and greater China. The Philippines was a primary contributor to our growth in southeast Asia, while Hong Kong and Taiwan drove growth in greater China. Additionally, we experienced nice growth in South Korea. Sales in greater China and southeast Asia benefited from a surge in sales ahead of price increases in several of our Asia Pacific markets.

As a reminder, when we implement a price increase in a particular market, we typically inform the market of the increase a few weeks ahead of time. As a result we often see sales trend up in the weeks leading up to the price increases -- especially in Asia Pacific, as our associates increase our product inventory at the lower prices to boost the retail component of the business. Our internal projections include what we believed were reasonable estimates to reflect the sales anticipated from the price increases. However, the surge in sales that we actually experienced has a price increase had meaningfully exceeded our forecast, particularly in Hong Kong where we estimate the surge in sales benefited sales by approximately $9 million. Following the price increases, product sales volume in each of these markets returned to typical run rate, so we believe we are a typical run rate after that surge and did not pull sales into the first quarter forward.

During the quarter we commenced operations in Thailand, which is our newest Asia Pacific market. The opening of this market is consistent with one of our key growth strategies, which is to pursue new market expansion. I am very pleased with the effort of our employees and associates who made the opening of Thailand possible under a very brief timeline and very challenging conditions in Thailand due to the highly publicized flooding in the country. Although we began operating in Thailand during the last week of January, our operations were limited for most of the quarter, as we worked to finalize all logistics. It was really not until the end of the quarter that Thailand became fully operational. Consequently we will report sales from this market in the second quarter of 2012.

During the quarter we continue to invest time and effort to help our associates understand how to appropriately drive growth in China. We opened a new branch in Shenzhen, a key city in southern China. Much of our training this quarter focused on our newly introduced adult nutritional products which have been eagerly anticipated by our associates and already among the best sellers in China. We also continue to educate our Chinese associates on our compensation plan in China as well as how to build a successful direct selling business. We continue to have high expectations for our China market as well as our Asia Pacific region, and believe the strategies we are executing are positioning the company for long-term growth.

Turning now to North America, although we saw modest sequential quarter improvement for the region, sales in the first quarter were down 2.3% compared to a year ago as a result of 7.2% fewer active associates. During the quarter our North American management team continued to execute growth strategy for this region, which remains our most mature and competitive region. To recap the strategies Kevin Guest laid out in our previous call, we are focusing on four key initiatives we believe will begin to have traction as early as the fourth quarter of this year.

First we continue strengthening the partnership between USANA and its North American sales force. This is currently as strong as it has ever been. During the first quarter we had several successful cross-regional conferences which allowed USANA management to work directly with associates to grow their business. We believe that an increased number of in-person events such as these conferences are important to help grow customer accounts in this region.

Second, and in line with our efforts to improve our relationship with our associates, we are spending significant amount of time developing the leadership, communication, and presentation ability of our sales force. We believe that improving the skillset of our sales force will lead to customer growth in North America.

Third we are introducing associate incentives and promotions specifically for our North America region. During the quarter we implemented a successful incentive offering in Mexico, which we believe lead to the sales and associates increase this quarter. We plan to follow the same strategy for our US and Canada markets in the coming months and are optimistic we will experience similar results.

Finally we have begun implementing our long-term marketing and growth strategy that will be rolled out at an international convention in August. Our North America management team is competent this new strategy will have a meaningful impact on the development of North America and its future growth. Although this global growth strategy touches nearly every aspect of our business, it is centered on two primary objectives. First and perhaps most importantly, it is focused on personalization and innovation in each of our markets. This initiative includes tailoring our product offerings, product delivery systems and technologies to meet the individual needs of our customers.

Additionally we will continue our efforts to enhance our global brand which includes strengthening our brand in North America. This includes professional athlete sponsorships, advertising, and partnering with credible organizations. Our relationship with Dr. Mehmet Oz is a great example of these efforts. In February Dr. Wentz and I had the pleasure in participating in the Health and Happiness Summit with Dr. Oz at Radio City Music Hall in New York City, which was a huge success and drew a significant amount of attention from our associates, their perspective customers and the public. Additionally this coming Saturday Dr. Oz will be on stage with Dr. Wentz and myself for a private event for USANA associates and guests in Hollywood, California. Our associate response for this event and our relationship with Dr. Oz in general has been overwhelming and as such we expect a sellout this weekend. After Saturday, we will look forward to Dr. Oz's participation at our International Convention in August, where we will celebrate our 20th anniversary.

In closing, I am also pleased to report that we also opened France and Belgium on schedule during the last week of the quarter. As I said before, I believe the opening of these new markets will give our North American associates an increased opportunity to expand their business in Europe. I also believe that these markets will act as a gateway for USANA to other European countries. I am pleased with the underlying strength of our business and remain confident that 2012 will be a monumental year for USANA. We are very excited about each of our initiatives and believe they present the right balance and approach for the long-term growth of USANA.

With that, I will ask Doug to review our financials and discuss our updated guidance.

Thanks, Dave, and good morning, everyone.

I will begin first by reviewing our first quarter financial highlights and how they differed from our expectations. I will then discuss our updated financial guidance before turning the call over for our question-and-answer session. One of the tasks we undertake each quarter is assessing the actual results delivered by the business relative to the guidance we provided.

For the first quarter the most meaningful difference we experienced was a surge in sales in several markets in our Asia Pacific region in advance of a price increase. As Dave noted earlier the surge in sales benefited sales by approximately $9 million. This surge, along with the continued weak US dollar, generated higher overall sales than we anticipated for the quarter. While gross margins for the quarter improved nominally on a year-over-year basis, the pressure on this line item we experienced on a sequential quarter basis was in line with our expectations and attributed to the increased cost of certain key raw materials.

Associate incentive expense for the quarter decreased 100 basis points to 44.1% of net sales compared to the first quarter of the prior year. This decrease was due to the lower relative payout of these base commissions and matching bonus largely as a result of surging sales I mentioned a moment ago. Although it may have seemed counterintuitive under our business model, temporary spikes in sales per associate are what we call associate productivity and actually result in lower incentives as a percentage of net sales. This is the case because as sales rapidly increase, the efficiency of earnings commission and bonuses on those sales decreases. While this is the case for commissions and bonuses, the potential to earn retail compensation meaningfully increases for our customers. This scenario was the primary reason that associate incentives decreased as a percentage of net sales for the quarter.

SG&A in the first quarter was in line with our expectations and down slightly on a relative basis to 24.7% of net sales. The absolute increase in SG&A expense was due to investments in our North American growth strategy, increased brand awareness and marketing expenses, as well as start up costs with our new markets.

Net earnings for the first quarter increased 21.2% to $13.8 million. The first quarter is typically the most difficult quarter from a profitability standpoint as a result of higher expenses from our Asia Pacific expenses and lower sales as a result of the Chinese New Year. Additionally, this year we had new market expenses as well as increased spending to support strategic initiatives. In light of these challenges, we were very pleased with our strong earnings results which were driven by higher net sales and lower relative associate incentive expense.

Earnings per share increased 28.6% to $0.90 per diluted share due to higher net earnings and a lower number of diluted shares outstanding from share repurchases that occurred in 2011. We did not repurchase any shares during the first quarter.

I would now like to provide some commentary on our updated guidance for 2012 following our better than expected first quarter results.

We now expect net sales to be in the range of $610 million to $625 million. Our top line forecast continues to anticipate local currency sales growth in most of our markets which with continued growth in our emerging markets and about a $10 million to $13 million contribution from the new markets we have opened this year. Our 2012 annual EPS guidance of $3.60 to $3.70 reflects the following assumptions -- some continued pressure on gross margins driven by higher raw material costs.

We continue to pursue sourcing strategy and potentially offset some of the pressures we have incurred and build that into our guidance going forward. A decrease in incentives to between 44% and 45% of net sales for the year as a result of initiatives put in place to manage incentives during the year. Keep in mind, however, that USANA intends to maintain the highest associate payout rate of reporting companies in the industry.

SG&A expense, slightly above 24% of net sales for the year, which reflects our investment in the long-term growth of USANA, including initial expenses associated with our global branding and marketing strategy, our North American strategy, convention expenses associated with our 20-year celebration and expenses related to our new market expansion as sales begin to ramp up.

Finally, we expect our effective tax rate to come in line with what you saw in the first quarter 34.5%.

Turning to the balance sheet, we continue to generate strong cash flow from operations at $22.6 million during the quarter and we ended the quarter with approximately $71 million in cash. Our EPS estimate reflects diluted share count of 15.2 million shares. Accordingly, we expect our cash balance to grow throughout the year as we explore various alternatives to invest our cash and to grow the business. With that, I will now turn the call over to the operator to facilitate the question-and-answer session.

(Operator Instructions). Our first question comes from the line of Scott Van Winkle with Canaccord Genuity. Please go ahead.

Hi, good morning, guys. Congratulations on a good quarter.

Thank you.

So the buy ahead of the price increase, a few questions around that. One, how do you measure that?

We look at the basic trend in sales and what we see incrementally for the two weeks leading up to it it is a simple regression -- anything above that regression line is what we consider the incremental.

And do you see a higher level of distributor activity? Or I should say a higher level of active distributors as a result, or just more volume per distributor?

More volume per distributor is the primary, but we see more additional associate activity as well.

I didn't expect the lower volume incentives, and I didn't know the phenomenon of more productivity and its impact. Would you see something like that reverse in the next quarter? Obviously you would need a little lower volume than you normally would after the buy ahead. But do you see volume incentives go up a little more and then settle in after the next quarter?

We don't expect a real spike from what you see historically in Q2. Usually it is a temporary thing, Scott, when we see this. It is related to the period in which you see the spike, but given the magnitude of the spike it did have an overall affect on the incentive.

Great.

What we expect incentives going forward between the 44% and 45% of net sales. That should help out a little bit there.

And can you break down any further detail on mainland China -- I'm sorry on the greater China region maybe between mainland China and how the progression is occurring?

Dave, do you want to talk about that?

Sorry, can you say the question again, Scott?

I was looking for a little more detail on how the transition is occurring and progressing in greater China? You gave some commentary, but I was wondering if there was quantitative numbers behind it.

We made a couple of changes earlier in the year to try and create an atmosphere that our USANA associates would be more comfortable in China and we are still working on helping them understand those modifications to create a model that they are more used to building it in a certain way -- a more personal consumption model, and less of a retail model, as they put in contact the customers and distributors directly with the company. That's different from what you saw in China doing prior because it is more of a retail model. The shift is a transition in education and trying to make that plan more into that consumption model and get everyone attached to the company. We definitely like our model when our customers are buying directly from the company because if you ever lose those distributors you still have those sales. That's the beautiful thing about shipping directly to our preferred customers and our associates as discount buyers.

The mentality of a lot of companies is the distributor takes care of 20 people and you don't know who those 20 people are. You just know that they disappeared with that one person when you lose the one person. We are shifting that model. It is tough for the Baby Care people to understand that, but they are working on it. We are hoping to do things that will encourage more people to start shipping their business toward the China area.

And then if I look at that $9 million buy ahead, should I kind of ratably put that against the southeast Asia and the greater China market? Maybe two-thirds in greater China and one-third in southeast Asia? Is that the right kind of thought?

It is more like 80% in the greater China region, Scott.

80% in the greater China region.

And please remember that we did have some of this anticipated in there, but just not to this magnitude.

Got you. And last question, also sticking on China -- last quarter you had real strong sales in Hong Kong around a promotion. This quarter you had some buy ahead of the price increase. Consistently the numbers are coming in ahead of your expectations. Is this the quarter where that does doesn't happen? I'm just trying to see if maybe you guy have been conservative these last couple quarters.

We will continue to have anomalies every quarter and hopefully in the positive direction. We will have events in each quarter and how well will each of them be received? Will it be more of a spike or less of a spike, it is hard to quantify exactly since they are one-time events. They are not historical things we can model and look at. But we have additional plans for a lot of different markets and hopefully depending on how effective we are we will see more anomalies and more surges and our bowl is to keep creating that excitement and those pushes, and the last couple were quite successful. Hopefully we can continue to do so.

And one last question, if you gave it, I apologize, but what was the US-only sales growth trend in the quarter?

US was off just a little bit north of 1%, Scott.

Thank you much.

Thank you. Our next question comes from the line of Rommel Dionisio with Wedbush Securities. Please go ahead.

Thank you. I was wondering if you could give a little more color on some of the incentives and the programs you will be having in place in the next few months here, especially with the convention coming up next quarter. What about the U.S. business, trying to rejuvenate the recruiting trends and the active associate pool in that market?

Rommel, we have things in the works right now, and in fact I think you heard in Dave's prepared comments we have an event coming up in Hollywood, California this Saturday where we are going to announce some changes that we believe are going to be very well received by our field which will allow us to go back and target North America. We have Kevin in the room with us. Maybe Kevin can add a little flavor on that.

Well, we don't want to say anything prior to the announcement coming up on Saturday. We are going to announce to our field through a worldwide webcast that will be broadcast to markets around the world simultaneously, so stay tuned for what is coming to be announced on Saturday. I will say we have found great success with an incentive that we have been executing in Mexico that we intend to further test and develop and try in our United States markets and in Canada. That promotion was a bonus that would allow people to receive cash in a more efficient and a quicker way to get a bonus as they enroll and grow their business which is being very well received.

Great. We look forward to Saturday. Congratulations on the quarter by the way, guys.

Thanks, Rommel.

Thank you. Our next question comes from the line of John San Marco with Janney Capital Markets. Please go ahead.

Thanks. Good morning and congratulations on the quarter.

Thank you.

Thanks for your comments on what drove the sharp decline in associate incentive margin. I was hoping you could explain maybe why historically that could be a little meaningfully lower in Q1, and whatever seasonal affect that is, did you feel a little of that in the first quarter as well?

Regarding the payout rate, absolutely, yes. The Chinese New Year is something that affects this company more and more with our base of associates out there. So typically we pay a higher matching bonus in many of the markets over in Asia Pacific. And so when they are taking time off to spend about their family they are not focusing as much on those types of incentives.

That's helpful. Thanks. And then a little follow-up on the $9 million sales lift you referenced a couple times. I just want to make sure I understand is that the incremental volume component, or does that include the sales benefit of higher prices?

No. It is just incremental volume.

Sorry if I missed this, but how large was the price increase and what impact did the pricing have?

It ranged from 6% to 10% and we did it in four markets in our Asia Pacific region.

Thanks. And then so lastly just want to clarify your comments about returning to -- your experience historically is you get back to run rate growth. First, did I get that right? Is that what you said? And when you said you get back to run rate growth does that mean Q2 in these regions you expect to look like something like Q4? Or does it teak longer to get back -- or does it take longer to get back to the run rate?

It is a combination of things. You are not going to see any remnants in Q2 what you saw in Q1. We have done several initiatives to go back and help manage the incentives line and try to go back and reward behavior that builds our business long-term. And we see the incentives line coming down perspectively. For the year as a whole we expect incentives in the 44% to 45% range which is a tick below what you saw last year.

Thank you for taking the questions and congratulations again.

Thanks, John.

Thank you. (Operator Instructions) Our next question comes from the line of Frank Camma with Sidoti & Company. Please go ahead.

Good morning, guys. Congratulations on a good quarter.

Thank you.

Most of my questions were answered, but I did have one big one and that was, so what do you plan to do on the impressive build up of cash?

We have a few things that we are working on, Frank. One is we see some opportunity for vertical integration. We see on an annual run rate that we have to put these things effectively. Right now what we manufacture in-house represents 74% of our sales. After we go back and execute some of these things we are investigating right now you would see us around 80%. We also have some facilities that we are looking at across the world and trying to go back and build a more solid infrastructure. Outside of that we would probably build cash for a little bit and look for some opportunities that will help grow and sustain the company long-term, but that is our initial plan right now.

Was there any reason why you -- that you can point to that you didn't buy back shares this quarter? Historically you bought back shares.

Just because we have been so active, the board wants to take a stall for a quarter and let things marinate for a little bit. They want to see how that played out a little bit. That was the reason we were idle in the first quarter.

Maybe you said this, but could you just break down -- I think someone asked this question, but a little more on breaking down the China -- the mainland China sales versus Hong Kong growth, could you just break that out again?

Dave didn't touch on it earlier, but greater China was roughly flat. The growth really came from Hong Kong and Taiwan, that market. But greater China was -- given what Dave talked about, the education program going on it was in line with our expectations and we understand there would be an adjustment period. It is roughly in line with what we expected for the quarter.

And were there any new products announced in China, or are you still at I think it was about 15 products, is that correct?

In mainland China, yes, I don't remember the exact count, but we brought in three waves of products which was four or five products each wave. 12, I think. It was 12 to 14. I don't remember exactly. We are definitely making a shift from baby and mother-child focused products to the full family product line so that we can expand from the smaller niche they had before into the bigger population . And we are seeing those products start to become more accepted and understood so that people can then sell them on. We will see a shift in the education process, and it is going to be -- take time for thousands of people to talk to and work with and to get them on board understanding. Change is always tough and takes longer than you want it

The nice thing to remember, Frank, real quick is the product registration process in mainland China is a very long process. We are fortunate enough to have done an acquisition several years ago of a small manufacturer over there where we had products registered in advance. That's why we were able to roll these products out so quick.

The 12 products that are USANA and then the Baby Care products on top of that, correct?

Correct. And we foresee those being the products for quite a few years because we have one of the highest product SKU offering of all of our competitors with the amount of products we have currently. It is partially due to the three to five years it takes to get a new product through registration and all of the costs and the difficulties. So we have a lot of SKUs for that market compared to billion dollar companies over there in our industry.

Great. Well, thanks again, guys.

Thanks, Frank.

Thank you. Our next question comes from the line of Scott Van Winkle with Canaccord Genuity. Please go ahead.

Thanks. So if I think about a 6% to 10% price increase across Asia, and let's just make the math work easy. You know it is affecting the majority of Asia and therefore half of your total volume. The mid-point of your guidance doesn't really assume a lot of volume growth if you are going to have maybe a four-point impact from price. Am I thinking about that right?

Scott, we had the price increases in four markets in Asia, so it wasn't in all of the markets in Asia. And you are thinking about it right. We are just trying to wait and kind of see how this plays out. What we see initially after the price increase is we have seen sales dollar volume flow in line with what we have seen in the recent weeks leading up to the price increase excluding the surge, of course. We expected a little unit volume decline as a result of the price increase, so yes, your interpretation is accurate.

And how does monthly sales volume get impacted when you have maybe a little buy ahead of a price increase for the distributors? I guess I always think about the distributors really being focused on consistent monthly personal sales volume. Is that somehow impacted by buying ahead of the price increase? I am trying to think how that would play out.

As you know with our business model, the qualification volumes they had to produce every month and those remain the same. People need to produce the same amount of volume each month to maintain their business, to maintain their lifestyle and the compensation they are used to. So those kind of stay pretty steady. There was a little buying that was going to retail that won't happen because they have that product to sell. but we believe the normal trends will continue on after this and they will fulfill their retail orders for a while. We will keep the business growing and strong and based on the business model itself.

Great, great. And then, Doug, your comments about gross margin , I think the term was remaining a little under pressure last year. Even after the price increase I would naturally assume the gross margin would be up sequentially a little bit, alleviating some of the pressure we had in commodities. Are we going to see incremental commodity pressures that mitigate the impacts of the price

That's roughly what we are expecting. I think you see in the first quarter roughly what we have modeled for the remainder of the year.

Great, thank you very much.

Thanks, Scott.

Thank you. There are no further questions in the queue. I would now like to turn the conference back over to management fore closing remarks.

Thank you for your questions and for your participation on today's conference call. If you have any remaining questions, please feel free to contact Investor Relations at 801-954-7961.

Thank you, ladies and gentlemen. This concludes the USANA Health Sciences first quarter earnings conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3030 or 800-406-7325 followed by the access code of 4532943. ACT would like to thank you for your participation.