USANA Health Sciences Inc (USNA) 2016 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 conference over to Josh Foukas, Vice President of Legal and Investor Relations. Please go ahead, sir.

Good, morning, everyone. Thank you for 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 usanahealthsciences.com. Shortly following the call, a replay will be available on our website.

As a reminder, during the course of this 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 2016. 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, our Co-Chief Executive Officer; Paul Jones, our Chief Financial Officer; and Doug Hekking, our Executive Vice President of Finance. Yesterday, after the market closed, we announced our second-quarter results and posted our management commentary results and outlook on our website.

Before turning the call to questions, we'll first hear from Dave, who will briefly review the quarter's highlights. Dave?

Thanks, Josh, and good morning, everyone. It's great to be with you this morning. I'll keep my comments brief and then open the call for questions. The second quarter was another great quarter for USANA where we achieved record top-line and EPS results. Net sales grew 10.8%, notwithstanding a strong US dollar that reduced sales by more than $12 million for the quarter. On the bottom line, EPS grew 7.8% compared to a year ago, but would've increased an estimated 24% year-over-year, excluding the currency impact.

We also generated nearly 16% active associate growth, and 6.6% preferred customer growth during the quarter. Customer growth continues to be our primary objective as we seek to improve the health and nutrition of as many families and individuals as possible.

We also completed construction of our new manufacturing facility in Beijing during the quarter, and our team in China has continued to work through the permitting process for the facility. This process has proven to be more extensive and time-consuming than we originally expected. In light of this, we now believe that the permitting process will be completed in the next 3 to 5 months, and we anticipate shifting full production for China to this facility shortly thereafter. To ensure we are prepared for a smooth transition, we did not offer any sales incentives or promotions in China during the second quarter, and will not do so during -- going forward until the facility is operating at full production.

That said, we are pleased with the sales and customer growth that China continues to generate, and believe that China will drive our growth during the second half of the year.

During the quarter, we also introduced our new MySmart Foods products at our Asia Pacific Convention in Singapore. We have launched these products in several markets, and will continue to launch them in additional markets throughout 2016 and 2017.

We are following our MySmart launch with an even more significant product launch to a record-breaking number of attendees next month at our sold-out International Convention in Salt Lake City. These new products, like all USANA's products, are based on the leading science and will continue to differentiate USANA from others in the marketplace. Science-based products have always been at the core of our business, and we believe that these new products will build on this legacy and keep USANA at the forefront of nutritional supplementation.

Finally, we are reiterating our top-line guidance and increasing and narrowing the range of our EPS guidance to $7.90 and $8.20. This guidance represents solid top-line and EPS growth for our business in a year that includes several significant investments. Our guidance reflects the strength of USANA's business around the world.

And I will finish by telling you that I am very excited about our international convention next month, and the product launches we will make there.

Now I will ask the operator to please open the lines for questions.

(Operator Instructions). Frank Camma, Sidoti.

You spoke about the permits. Obviously you are disappointed in them. But is there a way to quantify or estimate what that might have -- or how that will impact or curtail any growth in China? Or is it just a matter that you have to build inventory from your old factory?

We continue to build inventory from the old factory at a degree to make sure that we don't have any problems with supply. But we are certainly not taking or putting any brakes on, and we see a good momentum in the growth over there.

Yes. Because it still was your fastest-growing market. But you said you had no promotions. I was just wondering, did that prevent you from maybe growing your salesforce even faster than you wanted to?

Yes, absolutely. We are not -- we don't want to do anything that would create bad customer service or bad customer experience. And crazy thing to say, we don't want to be too successful if we were to put out anything, and have a backorder situation. So we are putting in the infrastructure. We are building the management team over there. We'll really have everything in place, I believe, this year, to really start pushing again in 2017.

Okay. You mentioned that you've obviously launched the MySmart Foods in several markets now. I know it's not been a long time. But out of those markets that you've launched them in, can you talk about maybe some markets where they've been particularly successful, and what you've learned so far?

They've been fairly consistent across the markets that we been able to introduce them in. It's a little bit hard for us to judge it right now because we're in a transition period. We still have the old products up for sale as we are running that inventory down. We are not throwing anything away. We're letting people who still want some of the old products to buy them. And so we have that on top of the new ones as people transition, start to taste them, and get used to them. So we feel good about it. The numbers are looking good. But until we have clean data without both of them in there, we can't make a complete determination on how much bigger these will be than the old.

My last question is, can you talk about the US market in particular? It looks like that was the only individual market that had a decline, if I'm right about that. And sort of what's going on there other than the fact that obviously direct selling in general is difficult in the US.

Yes, that continues to be our challenge. We continue to focus and look at new ideas and ways to get it growing, but it has definitely been a challenge for us. It's great to have the diversity of 20 markets so that we can spend the time figuring out this market, while others are continuing to grow and perform. And we'll get it figured out one of these days, but we haven't cracked that nut yet. It's been a tough marketplace.

There have been a lot of new players to the area with a lot of excitement, a lot of energy shooting up; unfortunately, not lasting and sustaining. But it does create a big distraction for our leaders when they are constantly playing defense against the latest and greatest. So there is even a possibility, with the changes in the FTC starting to become more involved, and maybe we'll see fewer of those. And it will allow more of the established companies to prosper more than we've seen in the past. Don't know for sure but (multiple speakers).

That's certainly should play in your favor, as far as the quality of your manufacturing, I would think.

Yes, we hope so. So, we need to get the energy. We need to find the next level of hungry leaders who are going to push our old leaders by just increasing the competition and excitement and energy. And we are continuing to search through the database and talk to people to find those who will be the next wave. You see the momentums a lot in this business, where you will see a wave of leaders just come up and challenge the top ones, and that creates a lot of excitement.

We've also hoping, of course, the new products will get the US talking again, going back to those people they've talked to before who weren't interested; but now with a new, even more exciting story, that hopefully they will be able to get reenergized. And a very product-focused market, so they will be very excited about the science and the new products.

Great, thanks very much.

Eric Gottlieb, D.A. Davidson.

I'm looking at the net cash balance. It seemed to climb a lot, like $2 to $3 per share. What drove that? It looks like you paid off your short-term debt. And I'm wondering what was CapEx, and some of the other drivers there?

As you note, Eric, we paid off the line of credit in the second quarter. CapEx was about $13.7 million through the first six months of the year. From a perspective standpoint, I think we now expect somewhere between $35 million and $45 million in CapEx for the year. But cash is down on a per-share basis. So the primary thing, if you are looking at it from a per-share basis is just the impact of the buyback that you've seen historically would be the only catalyst to do that. Because the balance of cash is down, based upon what we've done with the paying off the note -- the line of credit.

I was looking at net. Okay. So, 3 to 5 months in China -- what would make that on the lower high-end? What kind of things are we exactly waiting for?

Government approvals. We've got a number of permits for the building. And as we get those permits for the building, we then have to queue up the registrations for the products, to manufacture the products in that facility. And so it's just a long line of items that go in series one after another; and how fast will the government move along and improve them? We feel we are doing things as fast as we can. But we don't have control over their side of it, so it could be three months; it could be five months. It just depends on how quickly they respond to our request.

Is that your estimate or theirs?

Just experts in the industry, and what we've heard from others; and just talking to our consultants, and getting a feel for what's normal and typical, and hoping that applies to us. We don't know for sure, but that's our best guess.

Got it. And then the incentive program, we assume that those are going to be in place, and those are going to accelerate the second that you get those approvals, right?

If you are referring to China, we believe that we can stoke the fire more, once -- we've put together a great management team over there. We've hired half a dozen high-level people in China for the next -- for the new size of the business, the next level of growth. We've put more infrastructure in from the facility, but also from the IT standpoint. So we are just taking advantage, in a sense, of this time period to get everything in place so that we are prepared to take it for great growth in the future.

Got it. And the growth in China, it seems to have stabilized a bit. I'm wondering if there is anything that the new management is doing differently.

No. Well, the management team -- we are just bringing in more resources, more experience. We had the same couple people trying to talk to all the field people when we were $30 million versus $370 million, and we didn't have enough people to service and take care of. And so as we are able to hire more people, we'll just create better customer service. When we are ready to do some promotions and incentive, will be able to handle it with good service and just have a great reputation over there. So, it's tough when you are growing at 200%, 100%, to staff up and build infrastructure that fast. And so this has allowed us a little reprieve to get ready for the next wave of growth.

Got it, okay. And then the inventory, I assume they are going to come back in line once that facility comes online. Is that right?

We have a combination of new product launches and building up for China; all of those combined together after we have -- with the Smart Foods being launched, and transitioning out of the old product line with the new product launch; the convention; with the China build-up so that we can handle one or two month transition in production. All of those are putting a little pressure on the inventory that we'll bring back in line in 2017.

Okay. And then you said that CapEx was $13.7 million for the first six months, but you are expecting it to be $35 million to $45 million, right?

Correct, yes.

What kind of ramp are we going to see in the second half? What are the projects that's a significant uptick?

We still have a host of payments to do at the China facility that we haven't made. You have some investments with the IT infrastructure here at the corporate office. And we have a few one-off projects we are pursuing as well.

Got it. Okay. With that, I'll pass it on. Thanks for the commentary.

(Operator Instructions). Tim Ramey, Pivotal Research.

Another decent quarter of preferred customer growth. And I'm guessing with the Herbalife order stressing preferred customers, you're putting renewed energy into that. Can you give us color on that? Will your approach to preferred customers change on a prospective basis? Will you try to take a harder look at who qualifies for active associate versus preferred customer? Or how should we think about preferred customer outlook?

Absolutely. We've been talking about those things three, four years, even before any of the Herbalife enactment things. We've been talking about how we want to move the business over time. We are curious to see what the focus will be of the FTC. We have strategies set and planned, based on what the emphasis is. And we are able to -- I don't have any concerns with the different areas because we have a strategy, a solution for each of the areas they may focus on. But customers are critical.

We need to make sure that more of our people who are going to act as distributors join as distributors; that the barrier to go distributor versus preferred customers is so small that it's an easy upsell for that possible opportunity in the future. And we need to just change that mentality. And that will be easy to do and understood by the field, in light of what's going on.

So we have a number of strategies that we are working on, programming, getting prepared for. But also curious to see what the focus of the generalities the FTC will talk about for the industry, and feel we are well, well prepared for whatever direction they decide to put their focus on.

Got it. And is there any preliminary view on CapEx for 2017? Should we assume that it normalizes back to maybe a 20-ish kind of number, once we get the China plant behind us?

Yes, I think that's the expectation, Tim. I think we'd expect somewhere between 1.5%, 2% of sales, prospectively. You are going to have some years a little bit higher, some years a little bit lower. But with maintaining two full-level production facilities, and kind of the level of IT and stuff, you will still see that maintenance CapEx really flow with the size of the business. And every once in a while, there's some that will pop up, and we'll narrate those things specifically as those events unfold.

Okay. And then just finally on share repurchase, I know you didn't do any in the 2Q. You were aggressive in the 1Q at lower prices, so that's smart. But was there any particular reason? Were you precluded from share repurchase in the 2Q? Or it was just the way the timing worked out?

That really had to do more with just the timing with investment spending that we were looking at, and the CapEx expense that we were looking at; also the location and timing of the cash -- all those things played into the decision. We continually look at that, and we will continue going forward looking at that. But those were primarily the reasons.

Okay. Terrific, thanks for your help.

And seeing that we have no other questions at this time, I will go ahead and turn the call back over to Mr. Foukas for any additional or closing remarks.

Thanks for your questions and participation on today's call. If you have remaining questions, please feel free to contact Investor Relations at 801-954-7823. Thanks.

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation.