USANA Health Sciences, Inc.
Q4 2015 Earnings Call Transcript

Published: 5 May 2016

[Operator:]

Good day and welcome to the USANA Health Sciences First Quarter Conference Call. Today's conference is being recorded. This time I would like to turn the conference over to Patrique Richards. Please go ahead.

[Patrique Richards:]

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 access directly from our website at www.usanahealthsciences.com. Shortly after 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. The outcome of these statements includes those regarding our strategy and outlook for fiscal year 2016. We caution you that these statements should be considered in conjunction with disclosures including specific risk backyards and financial tally containing the enormous recent filings as we see. Joining us this morning by our Chief Executive Officers, Dave Wentz and Kevin Guest as well as Paul Jones, the company's Chief Financial Officer. Yesterday, after the market closed, we now start first quarter results imported management commentary results and outlook on the company's website. Before we're up any call for questions, we'll hear first from Dave who will briefly review the quarter's highlight, Dave.

[Dave Wentz:]

Thanks that. Good morning everyone! We're pleased to be with you this morning to review our first quarter results. I will keep my comments free for questions. First quarter was certainly a great start to another exciting year for USANA. We generated top line growth of 9.6%, a reported record net sale which particularly impressive given the tough year-over-year comparable to continue head wins from a strengthening U.S. dollar, a reduced net sale by more than $14 million. On a cost basis, net sales for the quarter increased 16%. On the bottom line, EPS grew 80% compared to a year ago. Excluding the trend of impact, earnings-per-share would have increased an estimated 38% year-over-year. More importantly, we ended the quarter with a record number of associates per customers. In fact, our total active associate base is up by more than 16% from a year ago. Ending the second quarter at 437,000 active associates. This is a significant accomplishment as our primary goal remains to improve the health and nutrition of as many families and individuals as possible. During the quarter, we also continue preparing to move to our new manufacturing building in Beijing. This new building is a state of the art and significantly increases our manufacturing capacity and office space in China. To manage inventory and help ensure a smooth transition, we did not offer any failed [indiscernible] or promotions in China during the quarter. We are on schedule to begin shipping production to this new facility later this year and are prepared with sufficient inventory [ph] and headcount to make the transitions in the coming months. Recently, release a news of My Smart Food Protocline [ph] to a record number of associates and customers at our Asia Pacific Convention in Singapore last week. This carts will be launch in the U.S. and Canada market this month and many other markets throughout the remainder of 2016. Additionally, we're especially looking forward to making another new and exciting frontline announcement later this year, which we believe will take USANA's stocks to the next level and keep USANA at the forefront of nutritional supplementation. Finally, we are reiterating our guidance. This guidance represents solid topline growth in the range of 11% to 14% and given the strategic investments from making 2016 to accomplish several key issues, we expect EPS growth as 6% to 13%. I'll finish by telling you that I'm confident in the strength of USANA's business around the world and excited about the progress we'll make in the coming months. Now, I ask the operator to please open the line for questions.

[Operator:]

[Operator Instructions] We'll go first to Tim Ramey with Pivotal Research Group.

[Tim Ramey:]

Good morning and congratulations on another great quarter. I was curious, a news was reported last week and make a chiz [ph] their guidance this time, sort of stabilizing FX and I would appear that you would have same sort of benefits, I didn't see any call out in terms of what your thoughts were in terms of changes in FX for the remainder of the year. Would you have any moment to talk about that?

[Dave Wentz:]

Sure, thanks Tim! As we look at the first quarter, we certainly saw some modest improvements in what we have projected but not enough of an improvement over our projections to cause us to go outside to where we are originally guided.

[Tim Ramey:]

Okay. Obviously, everybody's watching China, China performed very well. Can you talk about what's striving the number of products that are authorized in China? Is it more geographic reach, is it you know, because normally there are some - 5

[Dave Wentz:]

As we continues to grow organically, as we've mentioned the, putting fuel in the fire when I do a lot of promotions and contests, another incentives right now just give it a transition to the new manufacturing facility wanting to maintain good customer service. We are also working really hard to build up our management chain we grown from our $15 million to a $370 million company over there extremely fast and trying to put the instruction of people and place to manage this new side business. So, we want to make sure that we were able to continue great customer service, great supply, non-back [ph] orders, or occur anything that would get in the way of our line when we distract to run again. So we are watching to grow it organically, adding more families, adding thousands of new families in China every week, and it's just a very organic growth with a no push or influence from us which is very nice to see that, that is a baseline type growth, not a once we get the manufacturing and developed more this year where we can hopefully, then turn up the volume a little bit there and get it going a little fast and knowing that we can sustain that growth.

[Tim Ramey:]

So not particularly related to the number of products authorized, how many products do you?

[Dave Wentz:]

Oh no, I don't think I have anything to do with the number of products that we have. I mean, we do have - we do offer I think more packages about any company over their registered nutritional products and so we're very proud of our science focus in China and our ability to have a wide variety of products over there which I think attracts customers to us. But it's not product launches or new products that's driving this growth; it's their taking the existing business, the existing products and taking it to more people.

[Tim Ramey:]

Finally, on the change in accounting that impacted the tax rate, is that a one of, impacted the tax rate or should we expect tax rate be maybe quite lower than the previous tax?

[Dave Wentz:]

So on the new accounting standard, seriously what happened there is that we would do an estimate on what those expenses would be using a Black-Scholes Model and those would be expenses through the income statement, but any variance from that would be written off through the equity statement on the balance sheet. And so you would never really see the volatility and the expense to that because it would go directly to the balance sheet. This change that will become mandatory that all companies adopted at the end - for 2017, now requires that, that variance and expense, its adjusted to the income statement in the form of tax adjustment to the tax wide [ph]. And so by nature of that pronouncement, that standard, we will volatility in the range per share based on the fluctuation in the actual expense versus the projected expense using the Block-Scholes Model.

[Tim Ramey:]

So higher stock price equals higher tax rate, in a given quarter?

[Dave Wentz:]

Actually, it's the opposite. A higher - so if the stock price is higher than what was anticipated with the Black-Scholes projection, and it get exercised to that point, there would be a tax benefit to the company, whereas it's just the opposite, it gets exercise below that Black Scholes estimated for the cost, you wouldn't see a tax yet, and so that we will see some volatility. We chose to adapt that early for couple of reasons, one is to keep a simple, it really had a neutral effect on our EPS in the first quarter and everybody's going - mandatorily will be putting an place in 2017 and would then be required to relook at those numbers for 2016 to have an equal comparison. So rather than do that we just adapted early.

[Tim Ramey:]

Got it. Thank you so much.

[Operator:]

We'll go next to Eric Gottlieb with D.A. Davidson.

[Eric Gottlieb:]

Good morning everyone! Thank you for taking my question. My Smart Food, I guess we'll start there; do you have any internal sales projection?

[Dave Wentz:]

I do not have any in front of me. We are looking for this to be an enhancement to the formulations we had. We'll hope to continue to drive the food lines harder going forward, but no I don't have any projections, I apologize.

[Eric Gottlieb:]

Are there going to be in addition to or instead of certain existing -- are you adding to it or taking somehow?

[Dave Wentz:]

We're placing our shaking bars with new formulas, we'll shake some bars.

[Eric Gottlieb:]

Got it. Okay. The much awaited this year, that you will - was that going to be a food item as well? Or you're not conveying that?

[Dave Wentz:]

We are looking forward to in bringing that exciting and surprise news to all of our distributors and public at our convention.

[Eric Gottlieb:]

Okay, fair enough. And in scope, as much as you can tell me, is this going to be larger or smaller than the My Food - My Smart Food initiative?

[Dave Wentz:]

Much larger initiative for us.

[Eric Gottlieb:]

Okay. In China as well or just in the U.S? Or just - worldwide?

[Dave Wentz:]

We're going to take it worldwide as fast as possible. China, of course is the most difficult with a 3 to 5 year lead time on all new products, and that's the time required to go through the registration process of a new - registration of a new product. And so, China is a different animal for us and we will be bringing new products to China that we have in a works for years, and take this operation and new products as soon as we can, but that takes long time, so it's a huge away.

[Eric Gottlieb:]

Okay.

[Dave Wentz:]

Maybe when U.S. will launch, then China will launch.

[Eric Gottlieb:]

Fair enough. And you said that you have up new promotions in China due to a -- is there any timetable for those picking up?

[Dave Wentz:]

We just want to make sure that the manufacturing are transferred over. We believe we know the timeframes it will take to get permits and products registered, and all that. There could be delays and so we hope to get those permits started towards the end of this quarter but does it take the 1-2 months we think or 6-9 months, you do not know what the Chinese government and so we are going to wait, soon as we get everything switched over we'll begin pushing but we are not going to guess exactly when it will happen.

[Eric Gottlieb:]

Got it, and as far as the percentage of associates, I didn't see any material difference and we didn't have China promos there, is there anything going on? Can you give more color? And the $66 million on credit of credit, how much interest are you paying and how long do you think it will stay there?

[Dave Wentz:]

The interests rate are $0.5 million and other income is about 1.4% that we are paying on that and as far as how long we had estimated that we would be between 44% to 44.5% on our associates incentive line and as you see we are a little bit higher than that so we would anticipate that we'll continue to be around 44.3% to 44% through the year. Of course it flows a little bit. We are watching that very closely, we have had some increases to some of our incentive trips and some of those things, simply due to productivity and success of our associates around the world so we are watching closely and anticipating being.

[Eric Gottlieb:]

On that is a timing issue, as you look at our cash flow obviously cash from China is a little bit delayed as we look at the way we bring that back is a timing issue and we would see or anticipate being able to move off of that line as we were able to bring some of that cash back. So the rationale was moving cash back from China to the rest of the business to take some time you need to basically get in front of that, is that right are is it to... I think that's it for me, I appreciate the call one other thing, sorry, and then I'll leave you, so, the guidance range ah 55cents is the spend between the top and the bottom and…. You have done near 20-35 rough estimates not that there were one quarter in we are still at the 55cent range and I'm wondering why is there variability, what is different about this year that leaves you with even with one quarter in.

[Dave Wentz:]

Well, we still look at the fact that we have a wide, some speculation in our FX, we are looking at the impact that the change, the top line on that so as we tighten and see what we are doing on a top line we'll see that bottom line tighten up as well but a lot of that has to do with just the leverage and sales and understanding what will happen there.

[Eric Gottlieb:]

The big question with FX is also as it comes to China, how soon can we begin pushing again there is a big question for us, the manufacturing facility is going to be done in the next couple weeks but it is just the permitting process of when we can actually start utilizing that is the big question?

[Dave Wentz:]

We want to make sure we can tighten that top range to make sure we know where the leverage would be on the earnings for sure

[Eric Gottlieb:]

And the inventory being high again that is because of the new plant in China?

[Dave Wentz:]

Absolutely, as a fact we are making sure we are in place for the transition, Got it, I'll pass it on, thanks for the call

[Operator:]

We'll go next to Frank Camma from Sidoti & Company.

[Frank Camma:]

Good Morning, guys. Congratulations on a the quarter here. So can you, you spoke last time about the various initiatives that you were doing for this year I was just wondering if you can drill down a little bit more, what the additional cost, you called out some specific cost for FX but I'm talking about the actual R&D span and the things you might have spent on that you were not able to spend like on your IT spending, is there any way you can give us more color on how much you spent on the quarter on those types of things for future revenue growth?

[Dave Wentz:]

Frank so most of the lift that you saw there were related to most of the events under the IP I think we give bodies in place as soon as we can, it's just tough to find good resources out there so we are actively looking at that. We've been more active in our R&D recently here with these product promotions coming out of our marketing spins so we are right in line with those bullets you had on the MCRO we are following that path, but that lift you saw on your year spin was primarily equivocal to those activities as we outline.

[Frank Camma:]

Okay. So what do you think now that the China factory is basically over there, what do you think your total is still the same number of total spent for the year?

[Dave Wentz:]

Yea, I think we said 30-35 million at year end in that range

[Frank Camma:]

All right. What I wanted to ask, are they any, know obviously, big revenue growth here but how much of that was for pricing cause you typically do pricing at the beginning of the year right?

[Dave Wentz:]

Yes, we typically do very little we had a modest increase of around 2% which is not a huge impact to the overall sales, no prices increase in China, correct.

[Frank Camma:]

Okay, that's good. So the Chinese economy obviously not really having any slow down on your company, was wondering

[Dave Wentz:]

Which I am more optimistic and excited as every is that we brought in a new president from the future who was kinging operations with the VP and it was so fantastically promoted them to president the beginning of April and we are just the communication, the understanding of the business, the understanding the individual of the industry has us very excited and he is assembling, a professional team that can handle a business of this size and we are excited about the people that he is bringing in and we are excited with his relationship with the field, his understanding with the business plus operations and stuff where we brought him. He's got a full understanding of the business and we are getting more and more excited about what we will be able to accomplish as we transition more from the old culture to our culture over there and we expect to see great things. China always worries us cause its unknown because it's now known to us more than ever before and we have a better understanding of where to work and more confident now with understanding and we are talking more to other players on our industry and comparing notes and understanding where we stand better than we have in the last 6 years about China and knowing how to manage it and how to work within that culture and that system so I'm extremely excited seeing that it is doing a fantastic job for us and I have a lot less concerns about China than I did say a year ago.

[Frank Camma:]

Great, final question. On the inventory level, you have been pretty clear about that but assuming the factory comes online by the end of this quarter, the end of June or so, how long does it take to normalize inventory level?

[Dave Wentz:]

There is going to be a transition that goes over months between the two factories, we would see some odds and gains by year end but it would go into the first quarter going into 2017 before we get into a normalize state and we feel comfortable with that.

[Frank Camma:]

Great, thanks guys.

[Operator:]

And we will take a follow-up from Tim Ramey with Pivotal Research Group.

[Tim Ramey:]

Just a couple more points on the new guy from china, did he come from another MOM or where did he come from?

[Dave Wentz:]

It was from a non-MOM when we got him but he had worked in the industry prior has a lot of contacts and completely understands the industry and wanted to give back into it especially with USANA, when he saw that opportunity he knew it was the company he wanted to give back into the industry with so he understands the business inside and out and has fantastic relationships with people he worked with in the past, other companies so he'll bring a lot of experience there along with the great communication between Salt Lake and Beijing that we are now seeing.

[Tim Ramey:]

Can you say where he came from?

[Dave Wentz:]

He was with -- and now Miranda [ph].

[Tim Ramey:]

And you eluded cash being tied up in China what % of cash, I think it was 150 million on the balance sheet right now would be-- in the US what percentage perhaps stranded are not stranded offshore that isn't yet repatriated?

[Dave Wentz:]

We had about two-third of what's shown there in China and it's not stranded in anyway, it is just a matter of timing on it. In most countries we can repatriate much quicker there would be a 12 to 18 months lag on getting that back but currently what you are looking at about two thirds of that would be in China.

[Tim Ramey:]

There were some new roles that were propagated in China, supplements, and just wondering what color you can give us in terms of how you're impacting the types of products or the ability to register products in China.

[Dave Wentz:]

Well we continue to work very closely with the CFDA and all the regulators over there and it's a moving target a little bit and we continue to stay close and comply with it as it is interpreted and forced and we are continually looking at the product formulations to make sure that they are in compliance and in line with what is expected and what those new changes have been and some respect there are not even news, there are just now saying we are going to enforce them different than we did in the past as so again that is how things move over there and we are constantly working on that and have a full team fully engaged in that. And China has had more new product launches than any other market for the last couple years and so they are good for a while I believe so throwing more and more at them just confuses them, makes it more complicated when the main goal is to get them in our central and add a few extra supplemental products on top of that is great but essentials are the base and that's where we are at, we are adding new families and getting on those products so they have had a lot of great product launches and excitement created there that we don't need to launch new products there for a while.

[Tim Ramey:]

If you had to say what do the Chinese folk have to say in terms of the formulations, is there anything specific you can point to?

[Dave Wentz:]

Besides that they have a very good reputation for quality products manufactured to the highest standards, the facility which we are building over in China is good if not better than here in Salt Lake and we have the best in the world here in Salt Lake so they know that the quality of the products is something that they can trust and it would be the most beneficial to the cells in their bodies that they can possibly be and just add reputation and confidence that allows them to share it with people around them allows them to keep spreading the words of these products to everyone they meet and a lot of people over there to meet.

[Tim Ramey:]

No doubt, you are very well known to have very high manufacturing standards, I guess what I was just focusing on is what are the bad actors doing at looking that would be kind of a bright line?

[Dave Wentz:]

Sorry, I don't understand the question exactly.

[Tim Ramey:]

Well, obviously there is greater focus on formulations and they are looking for something, they are not looking for, I would acknowledge but not guess that your formulations are very clean but there must be something thematically that they are looking at that says ‘hey we don't want a -- or hey we don't want this or that or is there anything you can point to or is there strict regulations'.

[Dave Wentz:]

I think in general they are trying to clean up an image of the country and try to make sure that the products and things that are manufactured in country are of quality standards and so I believe that the safety issue is a huge issue for them over there and we actually blends very well for us and our desire to have top quality. I think this in the end helps us because they would be consistent in applying those standards across the board we believe we would do very well in that and it would continue to differentiate with safety and quality.

[Tim Ramey:]

And the basing facility I assume will have a similar I mean in the US you talk about pulling yourself to pharmaceutical grade manufacturing standards where there is different kind of---

[Dave Wentz:]

We are getting the latest equipment and newest technology, this thing is built perfectly for our business designed around what we have learned over the last twenty-three years here in Salt Lake and so as I said the products in China will be manufactured as well like Salt Lake if not even better due to the equipment and technology that we were able to start with over there so you won't be able to tell the difference between the quality at all between a product that came out the plant here and the plant there, you would have no idea or geography based on the protocols we are following and the rigorous testing over and over throughout the process that we do in both places we are very confident and our million dollar guarantee for athletes is something that we don't think twice about because we have no concerns whatsoever about the quality for the cleanliness of our products and we know exactly what is in them. Thanks so much

[Operator:]

At this time I would like to turn the call back over to Patrique Richards for any additional or closing remarks.

[Patrique Richards:]

Well we thank you all for your questions and for your participation on today's conference call. Do you have any remaining questions, please feel free to contact professor relations at 801-9547961. Have a great day.

[Operator:]

That does conclude today's conference. Thank you for your participation.