USANA Health Sciences Inc (USNA) 2015 Q2 法說會逐字稿

Good day, and welcome to the USANA Health Sciences second-quarter conference call. Today's conference is being recorded.

At this time, I would like to turn the program over to Patrique Richards. Please go ahead.

Thanks, Lindy, and 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. 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. Examples of these statements include those regarding our strategies and outlook for 2015. We caution you that these statements should be considered in conjunction with 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, Kevin Guest, and Paul Jones.

Yesterday, after the market close, we announced our second-quarter results and posted our management commentary results and outlook document on the Company's website.

Before opening the call for questions, we'll hear first from Kevin, who will briefly review the quarter's highlights. Kevin?

Thanks, Patrique, and good morning everyone. The second quarter was another record quarter for USANA, with exceptional results on both the top and bottom line. We're excited about the overall momentum we are currently seeing in our business, particularly the continued customer growth worldwide.

Before taking your questions, let me give you a quick overview of the quarter.

First, net sales came in at over $233 million, representing a 23.9% increase from a year ago. The majority of this growth came by way of mainland China, where sales increased 84.4% and active associates increased 98% year-over-year. While success in China continues to be our primary driver of growth, I want to point out that we generated sales and customer growth in nearly all of our markets around the world during the quarter.

Second, we generated worldwide growth, notwithstanding continued headwinds from currency fluctuations, which negatively impacted sales by approximately $9.7 million year-over-year. Unfortunately, we expect currency to continue to impact our results in the second half of 2015.

Finally, we leveraged our sales growth this quarter by managing expense. Relative to sales, gross margins and SG&A expense improved both year-over-year and sequentially. While our associate incentives expense increased year-over-year, this expense decreased significantly on a sequential quarter basis as a result of our management of regional incentives and promotions.

In light of our better-than-expected second-quarter results, we've increased our top- and bottom-line outlook for fiscal year 2015. This updated outlook reflects the momentum we continue to see in our business. And I believe we have the appropriate strategies in place to position us for continued growth in the back half of the year.

Finally, before opening the call for questions, I'd like to welcome Dave back and turn the call over to him. Dave?

Thanks, Kevin, and good morning, everyone. It's great to be back full-time and to join all of you on this call this morning. Clearly I'm pleased with the results that you saw us produce over the last year and the overall direction of the Company. The management team has just done an amazing job, and Kevin has played a key role in our success. Kevin and I met with the Board recently to discuss the management structure of the Company as we approach $1 billion in sales.

Given our current expectations for growth, we recommended that the Board consider a Co-CEO structure that allowed Kevin and I to share in the growing CEO responsibilities. And I'm happy to say that the Board agreed with our recommendation.

This structure will allow Kevin and I to focus our attention on areas of the business where our individual strengths will yield the greatest returns for all of our stakeholders. Going forward, I will oversee our global operations and Kevin will lead our worldwide sales efforts.

Kevin and I have worked together for over 20 years and have formed a strong working partnership, which has the same vision and goal of empowering individuals and improving the health of USANA's customers around the world. I look forward to continuing to work with Kevin to help USANA capitalize on its growth potential going forward.

With that, I'll ask the operator to please open the line for questions.

(Operator Instructions). Tim Ramey, Pivotal Research Group.

Congratulations on just amazing results. I think those of us that are sitting here on the West Coast have a hard time picturing what the turmoil of the Chinese stock market, or disruptions in Korea and so on, meant for business. And that was really an open question of mine. But what is the backdrop of a Chinese economy that's faltering a bit, or the stock market that's in disarray mean for your business, if anything? Did it influence it in any way?

I don't think it has really any influence. As we've seen over the years, in slow economic times our business does well; and in strong economic times. Of course, if there's a huge cliff and a wall like we've had back in 2008 or something, then that's a little bit different situation, where there's a little more paralysis. But, in general, a down economy is good for us, as well as a good economy. It just changes our focus a little bit and our people's tactics.

But I don't see China -- the people who are joining our business are not worried about the stock market in China, or it seems like that. They are trying to feed their families; build a business; take the best products. Same with Korea. So I don't see it affecting our industry that significantly.

So Dave, the results really are spectacular. And so can you give us some sense of to what do you attribute the 84% growth in sales and 98% growth in active associates? That just doesn't happen every day.

I think we've got a great management team. And we've got great field distributors out there who are working hard and doing things right. We're just doing it right, and things are -- continue to grow, and we foresee that continuing to happen.

Tim, this is Paul. In addition to that, as you've seen the momentum through the first of the year, we had anticipated that those promotions we ran in first-quarter would continue. But it's been very strong, and continue to see that. So, we're still riding some great momentum, and it is a momentum business.

Okay. And just a question on -- I'm surprised that there wasn't any share repurchase now for the second quarter in a row. Obviously, with hindsight, it would have been good to have bought some stock in, and you have $150 million in cash. What are the thoughts that go into that?

Well, we are still authorized at $61 million in our repurchase that has not been used. And we continue to evaluate that based on the internal metrics that we use, looking at our current valuations, et cetera. And it's something that we're continually looking at. Dave is back, so we'll see how this goes. But we are continually evaluating that and looking at an opportunity when we believe it will be best to provide a return for our investors.

Okay, thanks.

Frank Camma, Sidoti.

Not to throw a damper on the results, but just a question on guidance. Obviously you had an amazing second quarter. The guide -- and you raised the guidance. It would suggest that the second half is slowing from a growth rate. And was just wondering if you could talk about that a little bit. It has still got good growth, but not in comparison to the first half. Was wondering if you could discuss that.

Certainly. And as we look at it, we want to remind everybody of some of the elements of the first half of the year that are key to look at. We had a stronger-than-expected result from the promotions that we ran in first quarter. We also had a $17 million buy-up ahead of some price changes that occurred. When you take those out of the mix, then that growth trajectory becomes quite a bit different.

Also, if we look at the second half, if we compare second half of 2015 with -- looking at what we've guided -- to the second half results of 2014, we see that up about -- right around 11%. Some of that is due to the currency headwinds that we see. We had originally projected in our model about $34 million at the first of the year. As we look at the back half, and we're looking at the projections of all of the sources that we use to determine that, we have increased that in our model to about -- right around $41 million.

Is that $41 million of negative FX in just the second half, or is it the full year?

Full year.

Full year, okay. So you gave the first half -- so, okay, I can back into that.

That's one week in the fourth quarter.

Okay, all right. Obviously China is not impacted by that, so what markets are you most impacted on the FX there?

We've seen A&E's been strong; Canada has been a big impact. Those are some of our major ones, and there are a few others. I can pull them out real quick here.

Good, good. While you're doing that, let's just talk about the associate growth. With China, would you expect -- because you had started to kind of recover in the third quarter of last year from the disruption you had there. Would you expect that growth, I would assume on the associate side, to slow? I'm assuming that's how you are modeling this.

We anticipate that it will continue to grow, but perhaps not at the accelerated rate that we have seen over the last couple quarters. Now, hopefully we are conservative in these things. But as we look at our model, that's how we're anticipating we'll see it unfold.

Okay. All right, that's all I had. Thanks.

Scott Van Winkle, Canaccord Genuity.

Congrats, guys, on the good results. In North America, was the US business up year-over-year? You didn't call it out as being up double digits. I'm wondering if it was up year-over-year.

For all intents and purposes, it's flat. It's not up. We didn't call out North America. But yes, it's very, very modestly up. So we'll call it flat.

And the preferred customer number continues to look real good year-over-year. Does that kind of fall in the same with the distributors as far as Canada and Mexico being sources of strength? Or is there a US piece in there that's showing some strength?

Go ahead, Paul.

Primarily Canada and Mexico, and not -- there's some growth in the US, but those are the other markets that are primarily where we're seeing the preferred customer growth.

And one of the things from my perspective, as we talk about preferred customers: it's a testament to our products and the products that we offer. And we do have tens of thousands of people around the world who are taking our products simply because they see the value in our products. And as we see our preferred customer counts grow around the world, and as I travel the world and meet with people, it truly is a solid customer base that truly is using our products because they see the value in them.

Okay. And then turning to China, you talked about still benefiting from the promotion back in Q4 and Q1. Is there something about that promotion that had a tail on it that drove activity, and continues to drive it for a couple quarters? Or is it simply the fact that you built a bunch of momentum and now you are feeding off the momentum? I think you know what I mean there. Like, you might have some volume commitment for 180 days or something to get an incentive. Is there something structurally that drives a tail on that promotion, or is it just the momentum?

It is really just the momentum. We did run a small promotion in the second quarter that helped with that. And we will continue to look at small, regional promotions that will drive that. But it really was just the momentum that carried forward as we saw the increase in associate counts, active customer accounts; having that effect exponentially has been positive.

And what's working? Is it sales incentives -- sell something, get an iPad? Or is it compensation tweaks? What is it that's really working?

It really is a couple things. One of them is, in China in particular, we have a strong team that's doing meetings on a very regular basis. And the momentum that's generated through those meetings is meaningful. And so you get the excitement of the people that are out talking. So we're doing a lot of those.

It has to do with the quality of the product and the brand image that it's out there with that product, as well as compensation plan around the world is one of the best compensation plans in the space.

Okay. And then when we look at all this growth in China, how does it compare to historical averages, with percentage of customers that might get on an automatic replenishment or automatic fulfillment plan?

We're seeing -- if we look at the bigger picture, we're right around 50% of all of our orders are coming in through the Auto Order system. And if we look in particular at our China region, it's a little bit below that, but we're right around 46%, 47%, right around there. So it's pretty close to consistent, worldwide.

Okay. And sticking with China, you talked about continuing to work on the new facility over there. Where do you stand from the standpoint of capacity to handle this short-term or this near-term growth that we're seeing in the market? Are you running into capacity limitations before you get a larger facility?

That's an excellent question that's been scrutinized very carefully by our operations team. We have just a phenomenal group who has -- we've done a lot of creative things to build up our inventories, to take some short gap measures on making sure that we have the inventory covered. We've been building up that inventory for a time now in order to transist into the new building.

So, we feel confident that we will not have any inventory problems, but it's something that we're watching very close and have some creative alternatives. We've actually leased out another floor in our existing [fifth] facility. We have bought ahead some of the equipment that we'll be using in the new facility to increase our productivity. So there are a lot of things that have been done already in place to make sure that we have no supply gaps.

And when does the new facility open?

We'd anticipate it will be operational in the first part of 2016.

Okay. And any update on Indonesia, timing of announcing the -- and maybe you did, and I didn't see it. Did you actually announce the entrance to the market? I know you announced the plans to enter, but I didn't see if it actually opened yet.

We have announced Q4, and we anticipate that we'll be able to be in that market early Q4 and operating.

The last market you opened was a couple European markets a couple years ago, is that correct?

Was it Thailand, or was it France and Belgium?

I'm trying to remember. Colombia was the last one (multiple speakers).

So this is probably the largest incremental opportunity from a new market since Thailand opened, correct?

I'd say it's the largest since China.

Okay.

The fourth-largest population in the world, good direct selling market. It's got a lot of potential.

Yes.

Great. Thank you, guys.

Eric Gottlieb, D.A. Davidson.

Congratulations on an excellent quarter. I first want to talk a little bit about these management changes. I'm wondering if there's any projects or goals that Kevin specifically is going to undertake with his -- regarding development and sales efforts, and if there's any change in strategy or direction there.

There isn't any change in strategy and direction. We are staying the course, and we've stayed the course throughout this last year. And we do have a long-term strategic plan that we are carefully following. Obviously we change it as needed.

You are not going to see any major changes and/or shifts. But for me personally it's more of a focus in my area of expertise, which would be field development and helping our field development teams around the world implement growth strategies to grow their markets.

And so, from my perspective, one of the things that's high on my list from a strategic perspective is -- how do we refine our promotional strategy? And as we look at from a global perspective as a company, what is localized versus what is global from a promotions perspective? And what makes the most sense? And so as we go into this next quarter with our senior management team, that topic is high on my list.

But Dave and I have met many, many times over the last several months and we're in a great place. We have great strategies in place for the future. And for the next several years the plans are in place and we're going to see them through to continue to build upon the successes we are already seeing right now in the Company.

All right. Looking at the results, if you could talk a little bit about Hong Kong. I'm wondering how they performed this quarter.

As we've discussed, we believe that Hong Kong has really hit its run rate. And we're -- as we get to our year-over-year comparisons, we're still down, if you look year-over-year, about 33%, 34%, which we anticipated; we've been talking about. But we believe that we have, over the last couple of quarters, really normalized that effort.

All right. Okay. You had mentioned on the release a 130 basis point gross margin improvement. And that was due to mix sales and price increases. Could you break that apart in any way and how much drove each part of the 130?

Sure. So maybe backing up and getting a little higher-level on the -- I know there have been some -- maybe a few challenges on just the model in general as we guide forward. We are anticipating that we'll see -- we're seeing some improvement in our gross profit margin. Some of that, if you look at our mix, has increased a little bit. Some of the increase is due to the mix. Some of that change is due to price increase. And then the currency has had a negative impact on that.

From a bigger-picture model, if you look forward, we are anticipating that we would see around -- we try to hover around a 15% earnings from operations. Based on what we're guiding, at this point we anticipate we'd be around a 15.5% earnings from operations ending the year.

Okay. Thank you. As far as associate incentives, what you guided is actually higher than the 43.7% that you had this quarter. Wondering why they are expected to increase as we move through the year.

It really has to do with local market promotions. We ran a few local market promotions in the second quarter, as I referred to, but not as robust as we had thought we may in the second quarter. We had the momentum, and so it made sense to do what we did. Going forward, we will look at the local market promotions, and that's why we anticipate we'd be around 44% to 44.5% still going forward.

Got it, okay. And then lastly, I know you moved the AP convention, the timing of it this year. Is it staying where it is or it's going to move back?

Staying where it is.

It's April next year.

Staying where it is. Got it. Okay, great. I'll pass it on. And, again, congratulations on the quarter.

And it appears we have no further questions at this time.

I'd like to turn the program back to our speakers for closing 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.

And this does conclude today's program. You may disconnect at this time. Thank you and have a great day.