USANA Health Sciences Inc (USNA) 2015 Q1 法說會逐字稿

Good day and welcome to the USANA Health Sciences first quarter conference call. Today's conference is being recorded. At this time I would like to turn the conference over to 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. A replay will be available on our website shortly following the call.

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. Samples of these statements include those regarding our strategies and outlook for 2015. 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 Kevin, our President, and Paul Jones, our Chief Financial Officer. Yesterday after the market closed we announced our first-quarter results and posted a management commentary, results, and outlook document on the Company's website. Before opening the call for questions, we will hear first from Kevin, who will briefly review the quarter results. Go ahead, Kevin.

Thanks, Patrique. And good morning, everyone. The first quarter was an excellent start to what we expect to be another record year for USANA. We are excited about the overall results or business produced during the quarter, particularly the better than expected sales results. We look forward to talking with you this morning.

Before we talk to all of you and take your questions, let me briefly review a few factors that had an impact on the quarter. First, when we talked with you a few months ago, we noted that the incentive program that we offered during the fourth quarter of 2014 would carry over several weeks into the first quarter of 2015 in China. This incentive continued to generate significant momentum for us during the quarter and helped offset the seasonality we typically see during Chinese New Year. While this incentive was very successful, it also generated additional associate incentive expense and is the primary reason we reported higher than anticipated incentives expense of 46.2% for the quarter. I think it's important to note that this incentive contributed to the strong active associate growth during the quarter. With the conclusion of this incentive, we expect our incentives expense to trend down over the next several quarters to a run rate of approximately 44% to 44.5% of net sales for the remainder of 2015.

Second, net sales for the quarter were positively impacted by incremental sales that occurred ahead of price increases announced in China during the quarter. This contributed to approximately $12 million.

Third, we experienced a more favorable operating environment in China during the first quarter of 2015 compared to the prior-year period. The improved operating environment allowed our associates to share our products and business opportunity with potential customers with a higher level of success. Additionally, the improvements we have made and are continuing to make to our business systems and infrastructure in China have meaningfully improved the experience of doing business with USANA in China. The completion of our branch remodels and state-of-the-art manufacturing facility will only continue to improve our customers' experience with USANA going forward.

Fourth, while the factors I just mentioned help explain how strong results in China, I want to point out that USANA generated sales and customer growth in most all of our markets during the quarter. We generated double-digit sales and customer growth in each region in Asia-Pacific. Additionally, the Americas and Europe region had several markets that experienced meaningful growth, notably Mexico and Canada. We generated worldwide growth, notwithstanding continued pressure from currency fluctuations, which negatively impacted sales by approximately $9.2 million year over year. We expect currency to continue to impact our year-over-year results through 2015.

Finally, please remember when considering our sequential quarter results that the fourth quarter of 2014 included an extra week of sales, which we estimate contributed an additional $16 million to net sales during that quarter.

In light of our first-quarter results and the general momentum we are seeing in our business, we have increased our top- and bottom-line outlook for fiscal year 2015 as noted in the release and management commentary we issued yesterday afternoon. This updated outlook reflects the strength of our worldwide business as well as our confidence in the strategies we plan on pursuing 2015. I believe we are uniquely positioned for continued growth and to report another record year for USANA in 2015.

With that, I will ask the operator to please open the lines for questions.

(Operator Instructions) Tim Ramey with Pivotal Research Group.

Congratulations on just an outstanding number. The Chinese performance was stunning in a lot of ways. And I guess it raises some levels of concern both in terms of ramping against that promotion as we go into next year as well as the sustainability of the average actives into the next couple of quarters. How do you think about that? Is it reasonable to that some of that growth ebbs away in 2Q and 3Q and then maybe builds back into 4Q? Or how are you thinking about that?

Well, we certainly as we look at that first quarter had slightly stronger-than-expected participation in the promotion that we ran. Very excited about that. And it did accomplish what we were hoping to. And as we mentioned, there's the $12 million buy-ahead in terms of the price changes that we announced. And so we saw that happen. But if you back that out, we still anticipate seeing some good growth through the year in that market and continue to see positive things happening through the end of the year.

It seems obvious that there will be growth. But sequentially, would we be prudent to think of -- the 2Q being down versus the 1Q almost seems like a lock to me, but I'd love to hear your thoughts on that. I mean relative to China alone.

With China, we still anticipate some strong growth. We have some things that we will be introducing in there over the next several quarters. But I think if you back some of those things out that we talked about, then you can look at a consistent strong run rate as we go through the end of those two quarters. We will see a $5 million carryforward from that buy-ahead that will go into the second quarter so there will be some impact there. And then you will see a fairly consistent going forward.

Right, and then just one more, if I could. No share repurchase in the current quarter. Obviously, that was brilliant in last year, I mean just extraordinary to have back so much stock at an average price of whatever it was -- $77, $78. Any thoughts on why you weren't active in the 1Q?

Well, certainly we still have around $61 million on our authorization for share repurchase. But as we analyze and look at that with the capital expenditures we have this year and looking at the share price and where we are being valued, we determined for that reason that it made sense to hold off. And we will continue to evaluate it in the same way going forward.

And are you still expect in CapEx to be in the 40s range this year?

Yes, we anticipate that that surround where we will be this year.

Okay, thank you.

Scott Van Winkle with Canaccord Genuity.

Congratulations on a good quarter. Can you explain to me the $6 million deferred revenue benefit during Q2 from China and the mechanics of that? Is this like the breakage you had a few quarters ago with product that hadn't been picked up and deferred revenue was realized?

No, not at all. This is strictly tied to the timing of the price change that we put into place in China. Last year we did our price changes a couple of weeks later into the second quarter. This year we made that effective right at the quarter end. And it was about a 5% increase and we gave a little bit more notice than we have in the past. And so that purchase was right up in the last two weeks, and so the deferral was really dealing with the timing of the delivery on the product.

Got you. So orders that were placed ahead of the price increase but not delivered until after the quarter closed and therefore it's deferred revenue. Is that right?

Exactly, that is correct. And just a note on that -- we didn't see a meaningful difference in our run rate following that. So as you are thinking of your model and looking at a pull forward, there really didn't appear to be much of a pool forward because we went right back to put our run rates had tended to be prior. So keep that in mind as you look forward.

Okay. And then the North Asian number surprised me positively. Is Korea -- is something caught hold their and turned that market up?

Yes. We are thrilled with what we are seeing in Korea. We have made, I don't know, I guess over the last year or a little over a year some significant changes from a management perspective. And that has made a dramatic impact on the market there. And we are excited, but Korea has definitely been a bright spot for us. And we continue to see it grow and grow. We just finished our Asia-Pacific convention a few weeks ago in Singapore. It was sold out. And the excitement for USANA in our Asia and Pacific markets is just continuing to grow. The strategies that we have in place from our personalization strategies and others are taking hold and resonating in those areas of the world. So very, very positive.

And should I assume it's more Korea than Japan?

Yes, that's correct.

Okay. And then what are the expectations on Indonesia? I can think act years and years ago where you had market entries that really took off from day one. And then Europe, the most recent entry, it sounded like you didn't take off quite as fast. What are your expectations as you enter that market later in the year?

Well, we are excited about the market. Indonesia is the fourth fastest growing market for direct selling right now. And we believe we have a good team being put into place over there. I think that you will see it as something similar to what we saw in the Philippines is what we were anticipating, that you will see some initial excitement and then it will ramp up over the next year or two, to be a very healthy market for us.

Just as a side note on Indonesia, we have some expertise there going into that marketplace. For instance, our general manager in the Philippines, who has helped drive that great growth in the Philippines, has years of experience in Indonesia in helping that market as a direct sales market. And we are going to take that expertise and help build the same sort of model in Indonesia. So we are very optimistic.

Okay. And then a couple more, if I could. So the associate incentive expense, talking about it coming down but not coming down towards historical levels is not necessarily the same promotion that was done at the end of Q4 and into Q1. But are there more of these sales promotions above what the historical run rate would be, planned out for the remainder of the year to keep the momentum going?

On the associate incentive line, due to sales mix we are seeing about a 50% or a 50 basis point increase in that from what we anticipated, again primarily due to sales mix, some elements of our program, of our incentive program we talked about a couple years where we went to a different form of matching bonus. And we anticipated that we would see a little bit of growth in that and I think we're right where we would anticipate from that. So that's why we are looking at a run rate of about between 44% to 44.5% going forward.

Keep in mind we made some significant changes at the end of 2013 in our pay plan. So it's a little tough comparison historically when you're looking at the percentages because we made some conscientious decisions to fuel the business which would have an effect on our pay plan.

Okay. And then as we look into the Americas, if we tried to pull out strong markets like Mexico and Canada during the quarter and we look into the US, it would seem like the active associate numbers are pretty good in the US and it would seem like the preferred customer numbers are probably pretty good in the US. But it doesn't seem like the revenue is growing in the US. One, am I getting to that number right? And then if you had anything else you wanted to add to that, it would be great.

So the revenue number is up year over year -- quarter over quarter, I'm sorry. And as we look at the US, we do feel like there's very positive momentum taking place. If you compare USANA versus reports that have been published by the Direct Selling Association as to activity that's happening in the United States, we are actually doing very well in the United States. But we are not where we want to be, obviously. But we see the correlation, especially quarter over quarter, in increased sales as we see our active customer account and preferred customer account stay strong. But again, that's an area of focus for us here and how do we regain momentum in this great market.

Okay. So you are up quarter over quarter, and it sounds like the sales growth might be consistent with the preferred customer and distributor figures?

Yes, yes, it's very close.

Excellent, thank you very much.

Frank Camma with Sidoti.

Is China the only market you had price increases?

No.

No. We will do annual price increases in all of our markets, and we will look at that a stone what's happening in the cost structure. We will look at the competitiveness of the product in the market, and we will work with local management as well as local associates to determine and to get thoughts on where that should be. So we will do a very thorough analysis and then we will make those changes worldwide, market by market.

Okay. I got you. And did you say 5% was the price increase, the average price increase?

It was just a little bit below 5% and that was only in China. Each market will vary depending on those factors that we just discussed.

Do you feel the incentives -- obviously, very successful with attracting new associates. Do you think -- I guess maybe it's too hard to tell in the short term. But is it the same level of quality that you have seen in the past as far as the associates go? Or does it attract an associate that tends to be shorter-term with the company? Just wondered if you could share any thoughts on that.

What we are seeing is that it's really similar to what we have seen in the past. They are following the same trends that we've seen in the past. They are good, strong customers. And part of the incentive tied it to a continual use of the product. So it wasn't -- while we are trying to reward for new customer growth, we also tied to that the need to continue on the product to get the benefits of the product. So, we are seeing similar trends to what we've seen in the past.

Great. And the last question is if you could talk about any new products that might be coming up and how you would stage that.

We haven't publicly spoken about any of our new products as it relates to specifically. We do have an R&D department that is very active, and we are excited about what the future holds from a product perspective. But we always tell our associates first, and we generally do that at our international convention or an event where our sales forces there, from an excitement level. So this wouldn't be the time for us to talk about new products.

Okay, great. Thanks, guys.

It appears there are no further questions at this time. I would like to turn the conference back to today's speakers for any additional remarks.

Well, thank you all 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.

This concludes today's call. Thank you for your participation.