USANA Health Sciences Inc (USNA) 2012 Q3 法說會逐字稿

Ladies and gentlemen, good morning and welcome to the USANA Health Sciences third-quarter earnings conference call held on October 24, 2012. Throughout today's conference all participants will be in a listen-only mode. After the conference there will be an opportunity to ask questions. (Operator Instructions).

I would now like to hand the conference over to Patrique Richards. Please go ahead, sir.

Good morning, everyone. We appreciate you joining us this morning to review our third-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 American region, Greater China region and Other markets as well as our update -- our updated outlook for 2012. We caution you that these things 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 am joined this morning by Dave Wentz, our Chief Executive Officer, and Doug Hekking, our Chief Financial Officer. We'll hear first from Dave, who will discuss our business strategy during the quarter as well as our strategies moving forward. We'll 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. For the third straight quarter USANA has achieved record results. In the third quarter, we generated 15% topline growth and 41% net earnings growth. These results were driven by the momentum in our underlying normal course of business which continues to build in most of our markets worldwide. I believe that this momentum is an indication that strategies we have put in place are working to grow our business.

The height of the quarter was certainly our International Convention where we held our 20th anniversary celebration with our Associates sales force. At this event we had record Associate attendance, record convention sales, and a world class lineup of speakers and events. The most significant part of the convention was the unveiling of our personalization strategy, which focuses on our customer and our unique experience with us.

To launch this strategy at the convention, we announced that our personalized MyHealthPak product will be made available to our markets around the world. We introduced two new applications that are designed to help our Associates customize USANA products and business opportunities for their potential customers, and we unveiled a fresh new look and message for our Company and its products.

You may have heard that we also gave a free iPad to every distributorship at the Convention. The iPad was in part a gift for our Associates' dedication to USANA, but more importantly the iPad giveaway was a great way to introduce the technology and apps that support our new personalization strategy to our Associates and I will explain why in a moment.

First, I want to discuss the expansion of our MyHealthPak product to our countries, to other countries because I truly believe our personalization strategy starts with this product. MyHealthPak is our premier supplement pack that allows our customers to create their own personalized combination of USANA supplements in a convenient to-go package. Our customers create these customized packs online by selecting the supplements they want in our easy-to-use interactive application. After they have customized their MyHealthPak, our state-of-the-art production line assembles their personalized product pack in a conveniently daily to go pack with their name printed on the box and each individual AM and PM sachet.

Until now MyHealthPak has only been available in the US and Canada where it has become a key part of our business and our message as a company. The availability of this important product in our Asia-Pacific region is significant not only to our customers there, but to us here at USANA as well. Our Asia-Pacific region represents about 62% of our total sales. And I am excited about the potential of MyHealthPak in this region.

In addition to expanding MyHealthPak's availability, we introduced two exciting new apps at Convention that promote personalization. These apps, which were launched in beta version, are our proprietary True Health Assessment and True Health Companion. And they are designed for use on iPads and other platforms throughout the Web. This is one reason we gave away free iPads at our 20th anniversary celebration.

The True Health Assessment is a short interactive questionnaire for our associates to evaluate their health needs and the needs of their customers. However, the True Health Assessment is not your typical questionnaire. This questionnaire uses minimal written text and instead provides graphic intensive images to gather information. Customers respond to the images through an interactive drag-and-drop point-and-click process. The app is very intuitive and asks you about lifestyle, daily activities, eating habits, health goals and more.

After you respond to the apps questions it gives you a list of your top health risk areas, a customized lifestyle plan and a personalized nutrition program. It is intended to be a roadmap to health and wellness for our customers. This will create the belief in the products from the beginning. Because we are giving them the right products -- the right products for them that they value.

If the True Health Assessment is a roadmap, the True Health Companion is the GPS that helps get our customers to their destination. In simple terms it is a wellness app that helps our customers manage, maintain, and monitor their health progress on a daily basis. It will create a meal plan for you, provide you with endless healthy recipes and remind you to take your supplements. You can also plug your fitness and weight loss goals into the app and it will help you achieve them by charting your weekly nutrient intake and providing daily exercise recommendations, along with helpful videos.

There is also a social media component to the app that allows you to share your success with friends, families or teammates which is the all important accountability factor.

Both the True Health Assessment and the True Health Companion use the latest technology and are free and easy to use for our Associates and definitely captures the cool factor. These apps along with the iPads are intended to change the way our Associates introduce USANA to customers.

Instead of approaching a potential customer with just a conversation about our products and business opportunities, these apps allow our Associates to transform their initial conversation into something that is personalized to the wants and needs of that customer. I am excited about these new apps and what that will mean to our sales force and the Company going forward.

Finally at our Convention, we unveiled a new look and message for USANA and its products. This message of course is centered on personalization. Our look is represented through new branding, our new logo and new packaging. Each of these has been professionally designed to reflect USANA's strength and focus on personalization. Our new tagline is -- Your Health. Your Life. Your Way.

We have been saying for some time now that we believe personalization is the future of nutritional supplements and direct selling. Our new look and message will help us personalize every aspect of our Associates' experience with USANA. While we believe that the initiatives we have launched at the Convention are a strong part of USANA's personalization focus, they are only the beginning.

Now I would like to take you through our regional results for the first quarter -- for the third quarter, excuse me. Momentum continues to build in our Asia-Pacific region where both sales and the number of active Associates increased by 21.6%. This growth was driven by double-digit sales and Associate growth in Southeast Asia-Pacific and Greater China as well as local currency sales growth in nearly all of our Asia-Pacific markets.

Factors that led to this growth include increased Associate counts in many markets and price increases that were implemented in certain markets back in the first quarter. The Philippines, which increased 73.8% in sales, was again a significant contributor to the growth in this region.

We are pleased with our results in Greater China this quarter and believe that the plan we have put in place for this important region is beginning to take hold and build momentum. As discussed on previous calls, this plan is centered on educating our sales force on our products and opportunity in China, integrating our overall systems, and improving our sales and training processes -- all to personalize and improve our customers' experience with us.

USANA branded products that are available in China continue to be very -- to do very well and feedback from our Associates is positive. During the fourth quarter, we anticipate continued momentum in this region as we hold our Annual Convention and launch two more skin care products in China.

Turning now to North America. We are pleased to report that sales in this region increased 5.9% year over year and were up modestly on a sequential quarter basis. Associate accounts in North America were down slightly year over year which also is an improvement over the historical trend. Sales growth in North America is being driven mainly by increased Associate productivity in the US and continued customer growth in Mexico.

In the US, an increasing number of our Associate leaders are increasing their personal activity as well as developing their sales organization. The plan we have in place for North America is to continue strengthening the workroom relationship between USANA and its Associate leaders and to identify and develop specific incentive offerings for North America designed to spur long-term growth in this region.

While we are optimistic with the progress that we are seeing in North America, there is still significant work to be done to get North America where we believe it should be. And we are committed to doing that.

In closing, I want to reiterate that I am pleased with the momentum we are seeing in our business and I am confident that this momentum will drive USANA to another record year for 2012 and beyond.

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

Thanks, Dave, and good morning, everyone. I will begin by reviewing our third-quarter financial results and commenting once again on the better-than-anticipated results. I'll then discussed our updated financial guidance before turning the call over for questions.

As Dave mentioned, sales were up 15% in the third quarter and came in better than we projected. Our active Associate base increased 13% during the quarter and was primarily the result of strong growth in the Asia-Pacific region as well as Mexico. Other notable items that contributed net sales growth include the price increase we did in certain Asia-Pacific markets at the end of the first quarter, increased productivity from Associates in North America, sales contributed from our new markets is about $1.1 million and sales from our international convention held here in Salt Lake City, were about $760,000 better than what we did last year.

These benefits were partially offset by changes in currency that negatively impact sales on a year-on-year basis by about $1 million. Gross margins during the quarter declined 80 basis points largely as a result of increases in material costs and the negative impact of changes in currency. These increases were offset in part by price increases that we -- that I mentioned previously. And the ones that were implemented in the first quarter. Associate incentive expense for the quarter decreased to 42.6% of net sales compared to 46.1% in the prior year quarter. This decrease can primarily be attributed to the price increase I've noted above and also the change to the Lifetime Matching Bonus.

Please keep in mind that we expect to pay out into the Lifetime Matching Bonus to increase relative to sales over time. These benefits in Associate incentives were partially offset by spending on contests and promotions that we ran during the quarter.

SG&A expense in the third quarter from a relative perspective was in line with our expectations and came in at 24.4% of net sales, up 110 basis points from the third quarter of 2011. The year-over-year increase in absolute spending can primarily be attributed to expense associated with our 20th anniversary event at our International Convention held in August. Costs associated with the opening of our new markets; increased staffing to support our growth objectives; increased public relations and marketing activities; and general increased spending on costs that fluctuate with the variable nature with sales.

Our effective tax rate for the third quarter was in line with our expectations at around 28% of pretax income and meaningfully better than the last year. This decrease was due to a favorable adjustment in our manufacturing deduction for the 2011 and 2012 tax years which was recognized during the current year quarter following the completion of a formal study. We expect our effective tax rate to be approximately 33.5% in the fourth quarter and just over 32% for the year.

Earnings per share for the third quarter increased 45.7% to $1.18 per diluted share. This increase can be attributed to higher net earnings and a lower number of shares outstanding from share repurchases over the last 12 months. For the quarter, the Company invested $8.9 million to repurchase 200,000 shares. At the end of the quarter there was approximately $14.5 million remaining in the Board authorized repurchase program.

As a matter of note, at our quarterly Board meeting held yesterday, the Board approved an increase of $50 million to the existing authorization. Therefore we now have approximately $64.5 million authorized under the share repurchase program. You should see a press release later today on that.

Turning to the balance sheet, we continued to generate strong cash flow from operations and end of the quarter was $77 million in cash. Cash generated from operations totaled just under $20 million for the quarter and $64 million for the first nine months of the year.

I would now like to provide some detail on our updated guidance for the remainder of 2012. We now expect net sales for the year to be approximately $645 million. We are taking sales up as a result of strong Q3 results and continued momentum in the business. We believe this momentum will continue into Q4 as a result of the excitement surrounding the Lifetime Matching Bonus, the iPad giveaway and related apps, as well as initiatives and promotions we have planned for the remainder of 2012.

We are also increasing our earnings per share guidance for the year to be between $4.35 and $4.40. This increase in our guidance for earnings per share can be attributed to the strong third-quarter results, an anticipated reduction in SG&A spending during the fourth quarter relative to what we spent in Q3, and leverage benefits on an increased topline outlook for the year.

Our EPS estimate reflects a diluted share count of about 14.9 million shares for the fourth quarter of 2012. And although we don't provide 2013 guidance until we come out with our fourth-quarter results, I want to go back and make sure that everybody has plugged in the fact that on an ongoing and long-term basis we expect our operating margin -- or we target our operating margin -- to be within the 14% to 15% area. And we plan to go back and invest in growing our customer count in our more mature markets. We plan to continue to invest in our personalization strategy and we are still waiting to go back and get all the feedback on the material costs that we expect for the upcoming year.

With that, I would now turn the time over to the operator to facilitate the question-and-answer session.

(Operator Instructions). Tim Ramey, D.A. Davidson.

Good morning and congratulations on just an amazing year. Not even just a quarter, but year. Hey, I may have missed it and I know you had strong results in Greater China, but would you mind giving us a little granularity over what happened with Mainland versus Hong Kong? Because that has kind of been a source of interesting shifts in sales in previous periods.

We saw north of $0.20 growth in each of those markets and also strong growth in Taiwan. So we continue to see growth overall in the Greater China region.

Can you give us a little more specificity than just north of 20%? I mean I think you're up, what, 27% overall.

We see the Mainland China outpacing the rest of the markets, but like I said we are running essentially one region now and we look at it as one, but --.

Great. And would you say the same for -- I mean, obviously a big increase in recruitment as well. Does that track the sales pattern?

Yes. The active customer count you see are well correlated in the Greater China region. Absolutely.

Got you. You didn't spend a lot of time talking about the performance of the new markets and maybe that is because the existing markets were so interesting. But is there anything else that we should really be talking about from the new market entries this year?

It is going slower than we anticipated, Tim. I think we are moving in the right direction. But it definitely hasn't jumped out of the gate as we anticipated, but we are seeing slow and steady progress. But it is progress.

Good.

We had some unusual experiences in both those markets with some of the situations that were before and during. So, had some more computer glitches in some places than normal which was strange. And so we are getting all of the bugs worked out and we believe that we will get them going. But we didn't have those jump out of the gate that we were hoping for. We did just have a fantastic event in Paris a month or so ago where we had great attendance and great guest count, which was great to see. Usually you don't have so many guests at an early launch of a meeting. so that means they were bringing up lots of people that hopefully get rolling and we have started to see some good things after that meeting. So we are very optimistic.

I didn't get my invitation to that, but I'll look for it. Dave, it would be great if we could argue that North America is back to a growth trajectory and some of the innovation, the personalization, the apps and so on make me hopeful for that. But how would you react to that comment? Have we got the right recipe for growth in the North American region at this point?

I think we have -- I do feel like we have turned things, but we just need to continue to make additional adjustments to grow that momentum not into just a little bit of momentum, but to get it really cranking. And we have got a good trust relationship going with the field right now which is, I think, the most critical thing. But with the other just cool factor with what we've been launching I think people are starting to talk and we really believe that we can get a lot of excitement and momentum rolling. But keeps tweak -- takes the tweaking of a number of different things to get all cylinders firing great. Good attendance at meetings, good response to the convention. I mean to rechange your whole look and feel and not get hardly a complaint is unusual because change is really tough.

People are excited about the new USANA and we feel that energy. So we are looking forward to getting it rolling a lot faster. And that is going to take time because it is a big ship to move.

Thank you.

Frank Camma, Sidoti.

Good morning. Just a quick question. You had -- last quarter you had called out Philippines as particularly strong growth. Was just wondering what happened in this quarter in that market.

If you look at the last several quarters, the Philippines has been knocking the cover off of the ball. They have been doing very well for several quarters in a row now. So it is just a continuation of that same.

so the flooding that occurred there didn't really have any issues on your business?

We have not seen that.

Great. Were there any markets that -- you mentioned that in Greater China the growth was pretty balanced. Were there any markets in particular outside of Greater China that really did well, exclusive of the -- what you -- you know, Philippines?

Yes. I think Mexico has been running pretty consistent as well.

Was there anything unique about Mexico that would have accounted for that?

Yes. We have had some problems, but it is general momentum, the thing that we have seen that builds down there. It is sometimes tough to put your finger on, but it seems like it is a very optimistic associate base down there. We are pleased with the topline in the US, but I think as Dave mentioned, we have got some work to do. The customer accounts we need to see moving in the right direction, but we are working on it.

And as I mentioned in my opening comments, the underlying business there's nothing really unusual, which is nice to not have any extreme events or one-time events. It just seems to be nice building momentum as the underlying business to general business, which is great to see.

Good. Just a final question with clarification really. You mentioned that on a long-term basis, although you don't -- obviously you're not giving guidance for next year, but you are looking at operating margins in the 14% to 15% range. And that was based off of reinvesting some money back into the business. Can you just clarify that a little bit? Like specifically how you -- why that would occur if you -- traditionally you have been expanding the operating income margin pretty nicely?

Yes. I think the two primary focuses you see is continued investment in this personalization strategy as well as going back and investing in some of these more mature markets, where we have seen a little bit more stagnant customer account. Those are the real emphasis that you see.

We also -- even though we haven't gotten the final prices then, we expect to general inflation, the cost of the [raws]. I think the drought had some impact there. We have seen some pressure, but we still haven't got all that information in. But the general concept here is that we think the business and the long-term growth of the business is dependent on us going back and reinvesting that money back in the business either through the Associates or the infrastructure of the Company.

Rommel Dionisio, Wedbush Securities.

Congratulations on the quarter again.

Thanks.

Could I just touch base on the active preferred customers by region? I just noticed the dropoff on a sequential basis on a year-over-year basis in Asia-Pacific in particular. And with that market sort of posting 22% sales growth could you just help me reconcile that number?

Yes, for whatever reason that we really see the preferred customer just resonate better in North America, 80% of our preferred customers in North America and all, we all think it is imported. I think we do have some Associates over in Asia-Pacific that act like preferred customers like we do here. But I think it is just a different mentality with how we approach -- how they approach the --.

The barrier to go from preferred customer to distributor is so small that a lot of people just decided it's safer to go to the distributor level just in case somewhere down the road they change their mind and decide they want to build the business. But for an extra $20, $25 they are willing to invest that to be preferred customers or discount buyers, but take that distributor status. So that if they find that they are referring products because they enjoyed them and like them to their friends, family, people they meet, then they can decide to start a business because they are already there and ready to go.

And just one quick follow-up. Any update on the weight management? I know you guys have mentioned recently that you may look to expand their product line sometime next year. Any updates on that?

Nothing to update at this time. We know it is a big market so we can continue to look at it, but we want to make sure we do it right. And we can do it with personalization. And so I don't know when it will get done, but we are working on it. I don't think it will be too soon. We have got a lot to put together. Personalization add some complexities, which will add some costs as we talked about with the earnings line as we invest in more technology and IT, because we want to be the best at it and own that space. So it is going to take some investment some time to redo our weight management with that personalization in mind.

Scott Van Winkle, Canaccord Genuity.

Sticking on the preferred customer question that Rommel had. If you look at the North American number, it was up year over year and it has been quite some time since preferred customers were up year over year in North America. Is that an indication of the healthy turn that we are seeing in the market?

That or the elections. I don't know. No. Yes we are starting to see -- we are seeing that renewed confidence and excitement and I think that gets our Associates active and it is great to see the preferred customer go up in this region since it is a significant part of our business, where Asia-Pacific, it is a pretty small part of our business go up or down. It doesn't really have as much of an effect. So, it's starting to see a turn here in North America we hope when we see that preferred customer count turn. We need to really get the Associate count number moving here and we know that. And that is what we're focused on. And we have got a number of strategies we are working on to bring in more people, but keep them longer and so we hope personalization will be a huge factor in that.

With the Matching Bonus you have got experience for almost a year with playing with that in the US, obviously in a different model prior than the Lifetime one now. Has that had any impact on retention? I would assume that the sponsoring distributor is more engaged.

Well, we are actually coming up on six months in about three weeks. We will be six months since the new Lifetime Matching Bonus. And we gave our grandfathered people the choice of staying with the old Matching Bonus or switching to the new Matching Bonus. So we still have some of each on each plan until November 17. So it is really too early for us to make any predictions or really make any conclusions from it. But we believe it is moving us in the right direction and we are starting to see that in general from the market.

So, we will need a little more time to evaluate when the other one actually ends in three weeks. And we are to one plan only, the new plan.

And then looking at the productivity in North America, can you put your finger on one specific driver? Is it better tools? Or is it the shrinking Associate count is really taking off the lower productivity Associates? Is there one thing we can point to on the productivity side?

Each time we have gone through a cycle that I've seen in the business, it is really when the leaders become reengaged, get active, have the confidence and the trust and get not just managing their business, but get active in building their business. We can see the difference in their actions by what they are doing. They talk a lot about managing their groups, but then there is the times when they are leading by example. When they are leading by example, that's when we know that the duplication will happen. And we are starting to see that because the people have the confidence that are excited about personalization. And so I think that is a bigger factor than anything. And I have seen it a couple of times as we have gone through cycles over the years where we flatten out for a little while, but then we take off into a new wave of momentum which we have done a couple of times. Usually about a six-year cycle, six- or seven-year cycle average.

And there were questions about Greater China and you talk about your strategy starting to take effect. The big sequential increase and very robust year-over-year growth in Greater China, was there something this quarter that created a catalyst? I know there was a price increase but it seemed like a lot more than a price increase that drove this jump up we saw in Q3 in that market.

What we're doing, we had some meetings and done some training to really get people focused on the Mainland part of Greater China. And nothing really large happened in this quarter. But just a number of events we will continue to grow and build on and we think we will see more moment as we make that transition in our strategy. We put it together and finalized it to get China growing to the level we know it could. It is going to be our biggest market. We know that. It is going to be huge. And it has taken some time and some effort, but I think we are starting to see the beginnings of it and we are excited about that.

I think the other thing to note is on a year-over-year basis you have got to understand that the Q3 of 2011 was a little bit softer than we typically see because of the run-up in Q2 with the communication strategies with Hong Kong and China.

Yes you have got to pull forward. But you think even with a pullforward, you know it was [$45 million] last year, 60 over 45 is a darned good number.

And then last question would be on the new markets. The Philippines which you talk about has been flying here for the last three quarters, that market started real slow too. What what was the inflection point in a market like Philippines that might give you maybe a roadmap for what is going to happen in Thailand?

That's the beautiful thing about this business when you have momentum. I mean yes, there are still things to go on, to keep going, but when you have momentum it speeds up off of itself. And when you go from one leader, one diamond to five diamonds, it really magnifies or multiplies what potential there. And so we need to develop some leaders in France. We need to get some more leaders in Thailand. And when we do that, we'll get one, but until we started at multiples, then that is what you get that multiplying effect. And it takes a little time to build leadership and sift through to find the people that have that hunger and will build a huge business. So we'll keep looking and sifting through to find those leaders in both areas and then we'll have to multiply them when we do get them. And support them.

And, Dave, how many people were at that Paris meeting? I mean is it 200 at this kind of stage or 100?

I have heard 500 to 600. I was unable to attend, so, 500 to 600 people.

Excellent. Great. Thank you very much.

Thank you. There are currently no further questions. Please go ahead with any other points you wish to raise.

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 does conclude the USANA Health Sciences third-quarter earnings conference call. Thank you for your participation. You may now disconnect.