USANA Health Sciences Inc (USNA) 2012 Q2 法說會逐字稿

Good morning ladies and gentlemen, and thank you for standing by. Welcome to the USANA Health Sciences second quarter earnings conference call. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session with instructions provided. (Operator Instructions).

I would like to remind everyone that this call is being recorded today, July 25, 2012 at 11.00 AM Eastern Time. I would now like to turn the conference over to Patrique Richards, Manager of Investor Relations. Please go ahead.

Good morning everyone. We appreciate you joining us this morning to review 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. Shortly following the call, a replay will be available on our website.

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. Examples of these statements include our 2012 Strategies for our North America Region, Greater China Region and Other Markets, as well as our 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, 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, and good morning everyone. I'm pleased to report that USANA delivered another quarter of record results both on the sales and EPS lines. While there were many positive developments during the quarter, the highlight was certainly the launch of our new Lifetime Matching Bonus.

For several years, USANA has offered a matching bonus to our associates around the world. However, many associates viewed it as a short-term incentive and did not result in the long-term benefits we had hoped for. Additionally, the old matching bonus was successful only in certain regions and underutilized in other regions, especially in North America.

We have attempted to change this dynamic with the introduction of a new Lifetime Matching Bonus. As the name suggests, the Lifetime Matching Bonus is a long-term incentive. It rewards associated associates for helping those they sponsor become successful over the life of their business.

This new bonus is intended to incent our associates to develop long-term, enduring sales organizations by developing and continuing to mentor new associates they bring into the business. We launched the Lifetime Matching Bonus at the end of April in front of thousands of associates worldwide. It has been received by our sales force with overwhelming support and enthusiasm, and we are confident that the associates in all of our regions will utilize the bonus to grow their organizations.

We also launched the Lifetime Matching Bonus with an eight-week promotion that we have offered with success in the past. The objective of this promotion will be to immediately increase the number of associates who will receive the Lifetime Matching Bonus. This eight-week promotion proved to be successful again, and helped fuel our record results for the quarter.

Operationally we expect that the Lifetime Matching Bonus will relieve pressure on associate incentives by reducing money being paid out for the wrong behaviors and provide us with flexibility to implement market-specific incentives to drive sales and customer growth in each of our regions. We intend to continue providing a rewarding compensation plan for our associates that is sustainable long-term.

I would now like to discuss original results and then update you on our strategies and expectations for the remainder of 2012. We continue to see strong momentum in our Asia-Pacific region, where sales increased by 11% and the number of active associates increased by 10%. This growth was driven by solid results in Southeast Asia-Pacific and greater China.

The Philippines, which increased 124.4% in sales, was a significant contributor to our growth in the region. We continue to see impressive growth in this market, where our Filipino associate leaders include highly educated professionals who have capitalized on the unique earning potential under the USANA compensation plan, which is often more rewarding than their current profession.

In addition to the Philippines, we saw growth in almost every other Asia-Pacific market in this quarter. Factors that led to this growth include increased associate counts in many markets, price increases in certain markets, and increased associate productivity from the introduction of the Lifetime Matching Bonus and the related short-term promotion we offered during the quarter.

Also included in our results for Southeast Asia-Pacific this quarter were sales for Thailand. Our initial results in this market were softer than expected, primarily because our customer base currently consists of more consumer-minded customers as opposed to the entrepreneurial associate leaders. Fortunately, we have a well-experienced Thailand management team that is focusing their efforts on developing associate leaders and organizations in this market.

In May, these efforts focused on grand opening event which is very well attended by our Thailand associates and prospects. Although growth in Thailand will come at a slower pace than we originally anticipated, we believe that this market will be a meaningful addition to the region.

In greater China we continue to invest time and effort in educating our associates on building successful direct seller organizations in China. We're emphasizing our newly introduced adult nutritional products as well as our compensation plan in China. During the quarter we held several product nutrition related events throughout China which were well attended by leaders and prospects.

We expect to launch two more skin care products by the end of Q4 2012 and are currently working on the registration of additional USANA nutritional products. We believe that the strategies we are executing are positioning the Company for long-term growth in greater China.

Turning now to North America, we're pleased to report that sales in this region increased 3.6% year-over-year and 5.7% sequentially. While associate accounts in North America were down modestly year-over-year, they were up 6.5% on a sequential quarter basis. We believe that the sales growth in North America is primarily due to excitement from the introduction of the Lifetime Matching Bonus and the related short-term promotion we offered during the quarter.

We also believe that much of the success in America is attributed to our continued efforts to strengthen the relationship between USANA management and associates. This is being accomplished through increased meetings, calls, and general interaction with our sales force, where management and associates work together to solve problems, exchange effective sales techniques and grow the business.

While we are pleased with our results in North America this quarter, we recognize that we still have work to do in this region. Our strategy focuses on strengthening our partnership with the sales force, developing new associate leaders, introducing North America-specific incentive offerings, and implementing our long-term branding and marketing strategy. During the first half of the year we made progress on each component of this strategy, but we must continue to execute going forward to return North America to consistent growth.

The component I mentioned last, our long-term branding and marketing strategy, is centered on personalization, innovation and strengthening our brand worldwide. While this is a global strategy, it will be introduced at our international convention, which is less than a month away here in Salt Lake City. This is our 20th anniversary celebration and it will be larger than any convention we have held in the past.

It will feature recognize keynote speakers such as Dr. Nemet Oz, John Maxwell and Larry King as well as several professional and Olympic athletes. We will be announcing a new and innovative approach to personalized nutrition, as well as several surprises that promise to make it an event that our associates will never forget.

In closing, I am pleased with USANA's performance during the first half of 2012 and I believe the second half of the year will be even better. I'm confident that momentum will continue to build in each of our regions as we continue to execute our long-term growth strategy. With that, I will ask Doug to review our financials and discuss our updated guidance.

Thanks, Dave, and good morning, everyone. I'm going to begin by reviewing our second quarter financial performance and commenting on the better-than-anticipated results for the quarter. I will then discuss our updated financial guidance before turning the call over for questions.

Sales for the quarter increased 8% and came in higher than our projections, due largely to the introduction of the Lifetime Matching Bonus and related promotion that we offered. We estimate that these events added around $5 million to the topline for the quarter. We had modeled for sales to trend up in light of these events, but our projections were a bit soft mainly because of the consideration we gave to the tough year-over-year comparison for the quarter.

As you might remember, we experienced about a $4 million increase in sales during the second quarter of 2011 relating to certain policy changes that were announced in our Hong Kong market but ultimately were not implemented. Additionally, changes in currency negatively impacted sales about $2.7 million on a year-over-year basis for the quarter, which was less than what we had projected.

Gross margins grew 20 basis points year-over-year largely as a result of the price increases that we implemented during the first quarter, and to a lesser extent, improved freight costs and leverage gain on fixed costs from higher sales on the line. As we anticipated, we continued to see increased costs on certain raw materials and pressure from changes in currency during the quarter, but at a lower level than previously anticipated. Overall, though, gross margins were better than we expected.

Associate incentive expense for the quarter decreased 140 basis points to 44.1% of net sales compared to the second quarter of the prior year. This increase was due to the lower relative payout of base commissions and matching bonus. Base commissions were lower due to price increases, and matching bonus was lower as a result of our continued efforts to manage this component of our associate compensation plan. Associate incentives were in line with our projections for the quarter.

SG&A expense in the second quarter was better than anticipated and came in at 22.8% of net sales, due primarily to leverage gain on the higher than anticipated net sales. The absolute increase in SG&A expense was due primarily to an increase in equity compensation, mostly attributed to low comparable in the prior year resulting from a cancellation adjustment.

Additionally, costs associated with the opening of our new markets added to the absolute increase in SG&A expense. The leverage we gained on SG&A from higher sales was meaningful in driving our bottom-line results higher than projections for the quarter.

Our effective tax rate for the second quarter was also better than expected at 32.8% of pretax profit. This [170] basis point improvement is the result of a one-time restructuring benefit we recognized in certain of our Asia-Pacific markets during the second quarter. The result of all this was record net earnings for the second quarter of $16.7 million.

Earnings per share for the second quarter increased 26.1% to $1.11 per diluted share and can be attributed to higher net earnings and a lower number of shares outstanding due to our share repurchases over the last 12 months. During the quarter the Company invested $26.6 million to repurchase just under 700,000 shares.

Turning to the balance sheet, we continued to generate strong cash flow from operations and ended the quarter with nearly $66 million in cash. Cash generated from operations totaled $21 million for the quarter and $44 million for the first six months of the year.

I would now like to provide some details on our updated guidance for the remainder of 2012. We now expect net sales for the year to be in the range of $630 million to $640 million.

We are taking sales up as a result of our strong second-quarter results and the general momentum in the business. We believe this momentum will continue as a result of the excitement surrounding the Lifetime Matching Bonus as well as initiatives we have planned for the second half of 2012.

We're also increasing our EPS guidance for the year to be in the range of $4.10 to $4.20. This increase in our guidance for earnings per share can be attributed to better-than-expected results for the second quarter, leverage benefits expected on higher sales and improved gross margin outlook, a lower effective tax rate due to benefits associated with a manufacturing tax [study] that is nearing completion. For the year we now expect the tax rate to be right around 32%.

Finally, a lower number of diluted shares from share buybacks in the second quarter are expected to have about a $0.06 benefit for the second half of the year. Note that our EPS estimates reflected diluted share count of about 14.8 million shares for the remainder of 2012 and we have not modeled for any significant share buybacks in the second half of 2012.

Please note that SG&A expenses in the third quarter will be noticeably higher due to the costs associated with our 20th anniversary celebration at our annual international convention held here in Salt Lake City. We expect our cash balances to continue to build by year-end and we explore various alternatives to invest our cash to grow the business long term.

With that, I will now ask the operator to facilitate the question and answers.

(Operator Instructions) John San Marco, Janney Montgomery Scott.

Good morning and congrats on the quarter. Can you explain what it takes to qualify for the Lifetime Matching Bonus? And then also, is that now a permanent fixture in the comp plan going forward?

Yes. The qualifications are the same as they were prior for the other matching bonus. It is just the payout plan is different for this matching bonus. It is over the lifetime of the business, a smaller percentage rather than a very large percentage for a short period of time.

Okay. And then I guess the related temporary promotion that you ran, at least I think you called it related, what was that and how did it relate?

Every time we've made modifications to the matching bonus and a few other times, we have allowed them to requalify those people who hadn't qualified for matching bonus in the past. And so, we see a lot of activity as people who don't have that status try and upgrade their status so that they can receive a higher percentage of Lifetime Matching Bonus going forward.

Great. And then sticking with the comp plan, as you keep -- I guess as new markets contribute more to the overall business, what impact on -- from mix, what impact should we expect on associate incentive comp? Or does it come out of the gates right at that 44% level?

Yes, you should see us roughly fall in line with what you've been seeing the last couple quarters. You have to remember, excluding China, we are worldwide [what will seamless cost plan]. So you will see the payout kind of approximately 44% and that is what we're modeling.

My last question was just on cash. It seems like you've got more than you normally keep on hand, and the business is still throwing off a lot of cash. If you can just sort of state for the record what your cash priorities are and maybe what is keeping you from using that more aggressively?

We would like to build it a little higher and get a good bank account sitting there in case an opportunity comes along. Some opportunities came up during the past where we've spent our cash down, but we like to get it back up a little higher than it is now before we look to start spending the excess.

And when you say opportunity, you mean acquisitions or big capital projects or --?

Yes.

Okay. All right, thank you.

(Operator Instructions) Rommel Dionisio, Wedbush Securities.

Dave, could you just walk us through the eight-week promotion in a little bit more granular detail in terms of how exactly did that increase in size the pool of people that were sort of qualified for the matching bonuses? Could you just walk us through that? (multiple speakers)

Just real high level, what the promotion is we are -- getting a certain status, they have to go out and bring a certain number of people into the business that meet certain criteria during a certain period of time. So it was an eight-week promotion where they are encouraged to go back and attract new people that generated certain sales volumes for those first eight weeks. And so it was kind of a short-term promotion to drive immediate behavior and give them an opportunity to go back and participate in this lifetime match at a higher level.

Okay. Did I hear that correctly that it was about $5 million in the quarter?

Yes, that is our estimate of what it contributed for the quarter.

Okay, great. Thanks very much.

Frank Camma, Sidoti & Company.

Congratulations on the quarter. Just a couple of questions. Can you speak in a little more detail about the effective tax rate going forward? Is that what we should model, the -- I believe you said 32% in your guidance. Is that correct?

Frank, you kind of broke up a little bit there but I think understand the question. We'd given you what we expect for the remainder of this year. I think moving forward in 2013 and beyond, at least what we currently have in the works, we're expecting that 34% tax rate roughly for 2013 and beyond.

We're always working on opportunities to go back and try to leverage that line item and get a little bit more of a lower tax rate. But that is what we are currently modeling, about 34% ongoing.

So it is 34% for 2013, but how about for the rest of 2012?

Well, like I said, for the year we expect 32%, so you would see the second half of the year be up a little bit lower than that 32%. This manufacturing tax study that we're getting close to wrapping up should go back and allow us to go back and run that through the second half of the year, as soon as we go back and see that nearing completion.

Okay, great. And what was the CapEx for the quarter?

Our CapEx for the quarter was about $1.2 million.

Great. And final question, what was the stock option expense for the quarter?

The option expense for the quarter was about $2.7 million -- $2.7 million, $2.8 million.

Are you able to give us just a little more color on the revenue that was achieved from the new markets, France and Thailand?

Between France and Thailand, we're at about $1.2 million between the two of them. So it is definitely lower than what we're expecting on the run rate. We're still optimistic but we see a high, high level of folks who are just interested in the product consumption and not a real business-minded group at this point. But I think we will see some of that evolve over time and better message to the markets over there, but it was definitely below where we thought it would be for the quarter.

Okay. But that means that North America was definitely up on a year-over-year basis if you strip that out of the total, since you combined Europe with North America right?

Yes, absolutely. We added roughly [0.5 million] from Europe in there, so, yes.

Okay. Thank you.

Tim Ramey, D.A. Davison.

Hi. Thanks so much. What an impressive quarter. I'm just trying to better understand the impact of the matching bonus.

First observation is that it sounds like it is an exciting thing, but you're actually telling us associated incentive expense will be slightly lower as a percent of sales going forward. So, was there an offset somewhere else that -- some other program that was -- I mean, I know the predecessor program was discontinued, but overall it looks like you are spending a little bit lower.

The primary contributor there was really that price decrease -- or price increase that you saw that we did in Asia-Pacific and a few other markets. That was the primary catalyst to the lower payout.

Okay, and just in terms of how the matching bonus -- Lifetime Matching Bonus thing works, I assume that it is just keyed off of future sales, and so if sales occur, there is bonus accruals that happen. Is that correct?

Real simply, what they do is if I personally sponsor someone and bring them in the business and they earn a check, I get a match on that as long as they meet certain criteria and I meet certain criteria. It's a way to go back and leverage their investment and time in the business.

Okay, so -- but it is ultimately performance-based?

Absolutely.

Terrific. And then just any further color on the Philippines -- it's not a brand-new market, but a pretty impressive number there. Maybe you gave it and I missed it.

It's pretty exciting to see if some markets get off to an extremely fast start, and from the day we open our doors they're flooded. And others take a little while to get going, but then when you pick up momentum, momentum is a beautiful thing. In the Philippines has picked up momentum in the last year or so, and they continue to fly high and grow at a great pace.

The events over there are amazing. If you go on a weekday you only get 4000 people. If you go on a weekend, you get 7000 or 8000 people in a meeting. So it's just a fantastic market full of energy and we're excited about the future.

Thanks, Dave.

You bet.

We have no further questions at this time. I will hand the call back over to you, Mr. Richards, for closing comments.

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.

Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation and you may now disconnect your lines.