USANA Health Sciences Inc (USNA) 2015 Q3 法說會逐字稿

Good day and welcome to the USANA Health Sciences third-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 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. A replay will be available on our website directly following the call.

As a reminder, during portions 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 our 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 Kevin Guest and Paul Jones. Yesterday after the market closed, we announced our third-quarter results and posted our management commentary results and outlook document on our website.

Before we open the call for questions, we will hear first from Kevin, who is going to briefly review the quarter's highlights. Kevin?

Thanks Patrique and good morning everyone. The third quarter was another excellent quarter for USANA with strong results on both the top and bottom line. We are excited about the continued momentum we are seeing in our worldwide business, particularly with the continued customer growth around the world.

Let me highlight a few things before we move on to questions. First, during the quarter, we held our Annual International Convention in Salt Lake City where a record number of associates were in attendance. We are happy with the overwhelming success of our convention and the momentum we've continued to see following the event. At convention, we introduced USANA's new My Smart Foods line of products which continues our strategy of personalization by allowing our customers to personalize these products according to their own specific needs, tastes and desires.

Looking forward, we have several exciting event and announcements ahead of us. Next week, we will hold our national China meeting, which will be another sold-out event with record attendance. This event has always generated a lot of excitement and momentum, and we expect this year to be the same.

Next, on November 16, we will officially open Indonesia. As the fourth most populous country with the fifth fastest growing economy, this new market will be a great fit for our business, and we are optimistic about our long-term growth potential there.

Next, we are looking forward to opening our new state-of-the-art facility in Beijing during the first part of 2016. We are excited about this facility and the capacity it will give us for continued growth in China.

Finally, while it is still early, I will say that we plan to make several exciting announcements and product introductions during the upcoming year, which we believe will keep USANA at the forefront of the industry.

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

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

Good morning and congratulations on another outstanding quarter. Several questions. I don't think I noted it anywhere in the release, but do you happen to know what the FX impact is for the full-year topline based on your guidance? That would be helpful to know.

Yes. Year-to-date we've had about a $38 million drag on the top line from FX.

Okay. And do we have a forecast for the fourth quarter, or sort of consistent with the first three?

Well, we anticipate we will have just around $15 million on headwind in the fourth quarter.

Okay. And relative to the two events you just mentioned, opening Indonesia and the mainland China event, would it be reasonable to assume that SG&A is going to be a little bit higher before the fourth quarter as a percentage of sales? I assume there are some discreet costs associated with that.

There are some minor costs associated with it. In opening of Indonesia for example, we've already seen a lot of those costs getting that set up and we shouldn't see any -- much extra drag on that. Certainly we anticipate it would start to be offset by the revenues coming in. So no real concern on that one.

The international -- or the national convention in China is something that is relative to the sales that we gain from ticket sales, etc. We don't expect a whole lot of drag on that either. So not a real impact, meaningful impact, on SG&A from either of those two.

Okay. And I was surprised that you didn't repurchase shares in the third quarter, given you probably have been one of the best repurchasers of shares of shares of any company I've ever followed. Just historically shrinking your cap and strong balance sheet position. Were you conflicted out from possession of some information, or was it just a choice that you made?

No, really more just a choice that we made. We have our capital expenses in China that we've been looking at as far as our new facility, and just looking at our internal metrics on what makes the most sense to do that share repurchase. But that is certainly something we are constantly looking at and will continue to be a very important part of our way of returning shareholder value. So it's certainly something that we consider very strongly.

Okay. And then finally, on promotions, your sales line has been remarkably not lumpy. And you have run a series of promotions. Can you give us any kind of color on what those promotions look like, or kind of how you're continuing to consistently breathe life into the sales process?

We do have some promotions planned in the fourth quarter, and we are certainly working on promotions for next year to help stimulate growth and motivate and excite our sales field and continue the opportunity for them to share and acquire new customers in their business from a product perspective.

We do have a strategy in place, and one of the areas we are moving into is the notion of a centralized approach from a promotional perspective versus a decentralized approach in allowing our individual markets to allow their culture to speak more to the promotions. And we are in the midst of that plan right now. We believe that as we grow and continue to grow more internationally, that that international flair and focus is critical.

And so as we move forward into the future, we're going to see more localized contests and promotions versus a centralized one promotion for the entire world. As we have studied our past promotions, we have seen certainly where some areas they work beautifully and other areas it's just a flush of money, frankly. And so our strategy is to continue promotions, to continue to grow the business, so that will continue in the fourth quarter and into next year. But we are going to proceed in a more localized fashion as we continue to grow.

Okay. I recall that the fourth quarter really benefited from promotions last year. Should we be thinking that's a tough comp? I mean, obviously, you've sustained growth starting with that quarter, but how should we think about that? And I know it's a shorter quarter, one week les, so that will play a role.

Yes, you've pointed out something important, because I think a lot of people have missed the fact that, last year, we had a 14 week quarter. So if you look at the year-over-year comp, you take out that 14 week, we would be at $211 million in revenues in 2014 for the quarter. And so if you look at the impact in 2015 from FX of about $15 million down, you're really looking at about a $248 million comparison. So it's, again, very strong growth year-over-year, and so the momentum continues.

Good. Thanks so much.

Frank Camma, Sidoti.

Good morning guys. Could you -- obviously China, the numbers were amazing. But could you just talk a little more color on what you are seeing from your guys on the ground there as with respect to what impact the whole economic disruption is causing?

We still see the momentum in the business there, and while -- as we've talked in the past, this industry and this business tends to be less affected by macro events than others. In fact, we can sometimes see positive growth in our industry when the macro business starts to struggle a little bit. So we are not seeing a huge impact still from that on our micro-look at the economy. So, we are excited still, enthusiastic about China, and we are looking forward to the national convention that's coming up here in a week.

Yes, speaking of that, you said it's record numbers. Can you just give us a sense of how big in thousands?

There are pretty strong limits around how big those can be, so we are -- we will have a convention that will have around 8,500 to 9,000. But the thing sells out in a couple of weeks, months in advance, which makes it challenging. But what we then are able to do is, on the heels of that, go out and do regionalized meetings where we will have very large meetings in several regions around China which creates some real enthusiasm and excitement.

Right, right. Now, correct me if I'm wrong, but that 8,500, 9,000 level is roughly in line with your Salt Lake City convention, is it not?

Correct.

Okay. And just staying on China, so baby care, just to talk about that for a second, is there any opportunity to take advantage of the fact that initially the Company sold products related towards obviously infants? Any plans there? Would you be able to leverage that with the fact that obviously they are loosening their policies?

As far as within China itself, or --

Yes, within China specifically, yes.

There is still -- as far as new products, there is still a rigorous amount of regulation around that. But as we go to the fact that the policy on -- where it was a single child, now you've got a two-child policy, and we hope to see some advantage and take advantage of that. Certainly there's a strong -- that will over time ramp up a little bit.

But I think the large amount of growth you'll still see will be from the philosophy of being able to take care of the individual from a health standpoint from prior to birth until they're 110 years old. That's really the emphasis and the focus. So we are looking at a lifelong approach.

Okay. And just to round it out, I think you explained it, but I just want to make sure I understand this. Obviously, there was a pretty big build in inventory. Is that related to the factory switch-overs? If you can go into detail on that?

Yes. It's really two things. One of them is our sales certainly have continued to grow, and so to sustain that and making sure that we are not having any mark-outs, etc., we have grown that relative to the sales. But also we are planning on that transition in China. We are doing a build up there to make sure that as we move the equipment from the one facility to the new facility, that we have plenty of inventory. So you will see that come down.

Even still where we are at, we are maintaining the same turns in our inventory that we typically have seen in the past. So, you'll see that continue to grow through the fourth quarter, and then it will come down towards the end of the first quarter, second quarter, back to a more normalized level for our level of sales.

Okay. Thank you.

Scott Van Winkle, Canaccord Genuity.

Thanks. Following up on that last one, how much of that inventory is in China?

Roughly about -- I don't have that number right in front of me. We will get that real quick.

The majority of the build has been there, I assume?

If you're looking at the increase, yes, 90% of the increase is in China. If you're looking at total inventory, I would need to pull that number out. But the build, 90% of that build is in China.

Perfect. And I apologize, I missed the first few minutes, and then I caught a comment that if you adjust last year for the extra week, and I think you are adjusting currency this year, you came up with like a guidance compare of like $248 million versus $211 million. Did I get those numbers right or am I way off?

That's correct.

Okay. So that's obviously good numbers, 15% growth. I would assume, with the strong growth you've seen in all your markets, you're just assuming the law of large numbers takes into effect here in China going up against a tough compare and we are not going to see kind of 90% growth in mainland China. Is that the expectation?

That's a fair comparison. Again, we anticipate -- we will give guidance for the 2016 in our next meeting, but we would anticipate still strong growth. But you're not going to see the triple-digit growth, I don't believe, that we've seen in the past, but still very positive and bullish on that.

Great. And then if we look at the China numbers again, you reported -- and I'm just going to round numbers -- 45% growth for greater China, 90% for mainland. I would have assumed by now that more than half of that greater China business is mainland. So are we seeing the shrinkage still in Hong Kong? It looks like Taiwan was probably pretty good given the currency impact you talked about. The Taiwan dollar has been the one that's been most impacted from a standpoint of currency.

Yes. We have seen Hong Kong really level out fairly consistent. We think we found where our market is in Hong Kong, and we anticipate that we will now start to see that grow like any of our markets would. And yes, the China is growing.

And Taiwan would be the one that's most impacted by currency. Obviously the yuan was down 1% year-over-year, but is that fair? Taiwan is where you're seeing the real impact on currency?

Correct. There was some impact of about $2 million from China just because of the adjustments they made. I believe it was around $2 million in the third quarter.

And as we start thinking about Chinese currency risk with a little more of a floating methodology there, how much of your cost of goods sold in China is coming from China? Obviously, you are manufacturing there, but is everything being sourced in that market? Should we consider a good match of cost to sales if we were to see any volatility, incremental volatility, in the RMB?

Virtually almost all of that is in China, so it's matching currency to currency. So we have -- yes, we have the natural hedge over there with the fact that you have raw materials and product being sourced and manufactured in China and sold in China.

And with a market like in Indonesia, where those products be produced? Is that something that would come out of China? Do you have capacity or is that something that's coming from the US?

We'll have capacity? We will not do that. One of our competitive advantages is shipping product from the US to the rest of the world, with the exception of China. And so the product for Indonesia will definitely come out of the US.

Okay. And a couple more. On the incentives line being down a little bit -- I guess it was down just a touch sequentially, certainly off that 46% level in Q1 -- is the variance there really just being driven by promotions, or should we consider periods of really exceptional growth that there is a little higher incentive rate, or is it purely the promotions that kind of drive the changes in that line?

One of the beauties about this model is it really is a pay-for-performance. And so it doesn't vary -- it really is given by promotions. That's the difference. It's the level and expense that we are putting into the promotions.

As you look at our year-over-year customer growth, you can see that we have been very successful in growing in all of our regions and markets year-over-year our customer growth. And so there hasn't been the same need or emphasis to put a lot of money into the promotions. As Kevin said, that is still something we're going to do, but we've been able to see those incentive lines come down a little bit just strictly due to promotions run.

Okay. And then I'm really pleased to see the US market posting growth year-over-year. It's probably been a question I've had in the call for the last many, many quarters. Anymore -- any commentary you would add on that US business to growth, what you're seeing there, the catalyst for change, something like that?

Yes, a few things. One, we've allocated a few more resources from a human resources perspective in our field development group in North America. And one of those areas is for our Hispanic market and Hispanic initiatives, and we are seeing some traction there with some expected great results, relatively speaking, over the next year. And so we see that as an opportunity for us.

We're going to continue to pursue a strategy that would help us more or less open a new country within a country, which is the Hispanic market. We've also taken that approach in the United States from a Chinese perspective. As you know, there are millions of Chinese in the United States, and the Filipinos as well. There are a few other demographics like that that really love our products. And we are seeing some traction in those areas.

Lastly, we see have seen a re-engagement with some of our top leaders who have been with the business for years and years and years and years who are outgrowing and building. And as we all know, this is a momentum business. And if we can get our leaders to really be engaged, which they are, through our field development group and through meetings that we are holding, just the fundamentals of the business, we are seeing it work. We are seeing traction and we are excited.

But I love the strategy of the notion of opening markets within markets. It's very cost-effective.

And then the last part is our strategy of personalization is also an area where we are differentiating ourselves from the rest of the pack and truly able to deliver personalization just not only from a product perspective but how they are handled when they call in to how we deal with them on a day-to-day basis and so forth and so on. So we are seeing the strategies that we put in place over the last few years starting to move the needle, which is exciting.

If I can add to that, you look at all of our mature markets, not just the US, but you look at Canada, which had a 20% year-over-year growth in active customer account, you look at Australia and New Zealand, which was at a 16% growth year-over-year, we've just had some tremendous growth in our mature markets. So I want to point out that that again is showing the momentum of this business. And China's growth has certainly overshadowed all of it, but I think it's a very good indicator of the exceptional products and the personalization, and all the things that Kevin alluded to. So, I think that's an important thing to not be missed.

Thanks. I'll squeeze one more in if I could, the Smart Foods launch, I didn't get a chance to attend your convention. Can you expand a little bit on it. Is this something that, like the recent launch several years ago on weight loss? I know you tried a high antioxidant bar one time. Is this weight loss focused? What do you think this kind of brings to the distributor toolkit, so to speak?

So, the focus is lifestyle. It's not weight loss. We have surging groups from Gen Y all the way to Baby Boomers, and they'll have different and various needs. And so the My Smart Foods is a way for them to customize or personalize their products based upon their individual needs, for instance how much protein they may need in their diet. That changes based upon where you are at in your age and so forth and so on.

The other issue is we now have the ability to customize flavors. So, in Hong Kong, the flavor preference is much different than it is here in the United States. We've been able to centralize a formula as a product base, have more of a centralized worldwide global formula, and then we have flavor packs that go with it. So it helps from an economies of scale perspective, but also helps customize by region on a global business that is supplied out of Salt Lake City on the personalization side. But again, it's the lifestyle that we are approaching, and it's not a focus on weight loss, although there is a weight loss component, and we haven't taken away the reset with the My Smart products and we will still have a very similar program that they can use as they consume the My Smart products.

Lastly, we feel like we have made a very, very good step in the direction of health. USANA is a health company. The vision of the Company is health. And these products have reduced the amount of sugar that we are delivering in the products. We have incorporated coconut oil, which is a healthy saturated fat, and we believe that this new launch is further delivering on our mission or our vision of a health company delivering the healthiest products on the planet to customize to your lifestyle. So in a nutshell, that's the My Smart Foods information.

Thanks. Do you produce powders and bars, or is that third-party?

We have some supply agreements with third party on both of those, and so one of the uses of capital is to make sure we are locking down supply agreements and our cost structure. So, on the foods, because of the volume, it makes most sense to partner with an external supplier.

Great, thank you very much.

Eric Gottlieb, D.A. Davidson.

Good morning and congratulations on the great quarter. I want to talk a little bit more on FX. When do we start to lap some of the major impacts, assuming that there's no further changes from here?

If I had the answer to that, we could get together and make a lot of money. But just if there's no further changes from here, we would think in the first quarter you're going to start to see some of the change. That's when the bulk of those things really -- the dollar started to strengthen. But even into the third quarter this year, with China's move on their currency, we had some impact. And because of the percent of business we have over there, that will continue to impact us for four quarters until we cross over the third quarter next year.

Right. Do you have like, looking at FX for 2016, do you have any expectations? I mean we were [18%] in the third this quarter, and then [15%] for the fourth quarter? Are we expected to see that trickle down as we go through the year, or what is your expectation?

We will analyze that and look at that as we go through this quarter, and then we'll talk about that in the call next quarter with our guidance for 2016.

Got it. And to counter some of the FX, I think now might be a decent time from putting in some price increases. I know you do that I think once a year in January if I'm not mistaken. Will they be larger this year? Would you run the risk of losing volume and recouping more of the FX, or would you count on associate growth and volume to help you through that, and not offset all that much?

There are several components to that, and one of them is the associate incentive. One of them is the pricing of course, and the cost structure going into the product. So we will analyze all of that. And we are certainly very sensitive to not want to damage our momentum because of an excessive price increase. So, we will look at all of those factors, and typically yes, we will make those determinations in the first of the year, right around the first quarter. So those are all the factors we will be considering, but we will be very careful to do everything we can not to hurt our momentum in the process.

Got it, okay. And then Smart Food, since you're using third-party suppliers, are you allowed to sell that in China? (multiple speakers) locally there.

That's not a product that will be introduced in China in the near term.

Got it, okay. And then I was extremely encouraged by the US and Americas, particularly Canada and Mexico and also the US. I know you touched on it a little bit in regards to the US, but could you give a little bit more color on the Canadian and Mexican trend?

I think we are seeing the same kinds of things happen. And they are somewhat interconnected, for instance with Mexico, seeing some of our leaders in Mexico come into the United States and work and build our Hispanic market. We have incredible leadership in Mexico that continues to help lead the charge of a growing business in Mexico.

In Canada, Canada has always been a market that is very product-driven. And our products speak to that marketplace as we continue to grow. Our product consumption customer acquisition of those who are taking our products has really been fueling what is driving up in Canada. And we have another resurgence, which was part of our strategy when we opened France several years ago, such a strong market in the Quebec area or French and Quebec and many have been working France, but got them off the dime again back in Quebec. And we are seeing a resurgence there in that region, which has been a lot of fun.

That's great. Lastly, you're sitting on a huge cash balance that continues to grow. And we've been waiting to see that being put to good use. I'm wondering if you had any thoughts on your sort of cash going forward.

Yes. As we continue to talk about, share repurchases continue to be a part of our strategy and we will continue to look at that going forward when the conditions meet what we believe is the best interest of the shareholders. We still anticipate the CapEx that we talked about earlier in the year. We had looked at -- we talked about $45 million in the year. All of that will still happen. There may be some timing of some of that moving into the next year, which will be on top of anything we do in 2016. But that's the next priority.

The priorities beyond that would be looking at infrastructure, continuing to look at infrastructure in China and continuing to invest in -- as we grow as quickly as we are growing, we need to continue to keep up with all of our systems. So you will continue to see our investment into IT and some of those key infrastructures for us.

And then we are always looking for strategic opportunities from a merger-acquisition if anything comes up and makes sense similar to what we have done either to bring in supply chain or to look at something like a babycare in the market. Those are the types of things that strategically we would look at.

Okay, great. And then lastly Indonesia and then I'll pass it on, if you have a certain timetable on expectations for associate count at certain points or revenue contributions?

We certainly have some internal goals and expectations, but I would just say that we would anticipate a similar experience to what we have seen in the Philippines. The first quarter, our plan is to open it on the 16th is when we are opening that up -- of November. There will be some impact in the fourth quarter, but we would anticipate over the first year that's going to grow steadily, and then within two to three years, we would anticipate that providing some meaningful sales into our business. But I would look at really what happened in the Philippines, that's kind of what we are anticipating.

Got it. Okay, thanks so much. I'll pass it on.

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

Hi. Thanks for the follow-up. Just on My Smart Foods, how broadly or how many markets will that be available in 2016 or fourth quarter, however you want to quantify it?

It will be available probably in -- just in my mind, I don't have it in front of me, but I'm guessing for sure the majority of our markets. And it will probably be maybe 17 out of 20.

Okay. And on the other income line, was there anything like currency hedging gains there, or was that just interest income?

The majority of that was in interest income that we were able to generate in some of our investments around the world, primarily some of the cash that we are holding in China to be able to help with our CapEx, etc., over there. So we have seen better rates there than we have seen there, not great rates anywhere, but that's primarily what that is.

Okay. And any thoughts on how the tax rate finishes up for the year?

I think we will be -- some of it depends on the US government and they are holding out to the last hour on approving the manufacturing, the R&D exemptions. But we would anticipate maybe dropping 30 basis points or so from where we are at. (technical difficulty)

So something like 33% flat?

About 33.7%. I think we are at about 34% right now. So 33.7%, right in there.

Okay. Terrific. Thanks.

That does conclude the Q&A session for today. There is nobody else in queue. I will leave the call up to you for additional comments or closing remarks.

Thanks Ron, and 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 801-954-7967.

Ladies and gentlemen, this does conclude the conference call for today. Thanks for participating. You may now disconnect your lines.