USANA Health Sciences' (USNA) CEO Dave Wentz on Q4 2015 Results - Earnings Call Transcript

| About: USANA Health (USNA)

USANA Health Sciences, Inc. (NYSE:USNA)

Q4 2015 Earnings Conference Call

February 10, 2016 11:00 AM ET

Executives

Patrique Richards - IR

Dave Wentz - Co-CEO

Kevin Guest - Co-CEO

Paul Jones - CFO

Analysts

Tim Ramey - Pivotal Research Group

Frank Camma - Sidoti & Company

Eric Gottlieb - D.A. Davidson & Co.

Operator

Good day and welcome to the USANA Health Sciences Fourth 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.

Patrique Richards

Good morning, everyone. We appreciate you joining us this morning to review our fourth quarter and full year results. Today’s conference call is being broadcast live via webcast and can be accessed directly from our website at www.usanahealthsciences.com. Shortly following 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. These 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 fiscal year 2016. 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 am joined 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 announced our fourth quarter and full year results and posted our Management Commentary, Results and Outlook on the company’s website.

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

Dave Wentz

Thanks, Pat and good morning, everyone. We’re pleased to be with you this morning to review our performance in 2015 and to discuss our strategies and expectations for 2016. I'll keep my comments brief and then open up the call for questions.

2015 was an outstanding year for USANA. We generated topline growth of 16.2% and reported our 13th consecutive year of record sales. With EPS growth of 28.2%, we also reported the highest net earnings and earnings per share in the history of the company. We generated these results by executing our strategies throughout the year and taking care of our customers.

In fact, our total customer base grew by 80,000 in 2015 to an all-time high of 510,000 worldwide customers. This is certainly our most significant accomplishment as our primary goal remains to improve the health and nutrition of as many families as possible. In 2015, we also continued our international expansion strategy with the opening of Indonesia, which marks our 20th market worldwide. Indonesia is a perfect addition to our Asia-Pacific region and has great potential for USANA.

During the year, we also continued building our new world-class facility in Beijing to support our business in China and to prepare for continued growth. This new building is state-of-the-art and significantly increases our manufacturing capacity and office space in China. We will be transitioning to this new facility during the first half of the year.

Finally, we introduced our new MySmartFoods product line last August at our international convention. Now, these products were available to associates only at our convention to try. We are excited to officially launch the MySmartFoods around the world in the next few months. Then later in the year, we will have another exciting product launch that will take USANA’s products to the next level and keep USANA at the forefront of nutritional supplementation.

In addition to investing in these new product lines, we will make other strategic investments in 2016 to accomplish several initiatives. As discussed in the materials we issued yesterday, now is the time for USANA to make these investments, to keep delivering on our promises to customers and to prepare for continued growth.

With that, I'll wrap up by telling you that I’m confident of the strength of USANA’s business around the world and that I am as excited as I have ever been about what USANA will announce and deliver in 2016.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Tim Ramey. Please go ahead.

Tim Ramey

A couple of areas that I'm interested in. Can you comment - I mean, we've had four quarters of 40%-plus growth in China. I understand the extra week comp and so on, but was there anything that you would describe as deceleration in the business for the fourth quarter or is this just the variability of the business?

Dave Wentz

Well, I definitely think that we have a strategy that requires us to get a lot more infrastructure in place before we step on the gas any harder. We've had some amazing growth in China and we don't want to be one of those companies that grows too fast, outgrows their ability to take care of their customers, do things correctly and so we are just allowing things to go organically while we get the IT systems up to greater speed, while we get the manufacturing facility up and running, so that we can support further growth and we are working on building our management team.

We've grown so quickly from where we were five years ago that we have a lot to put in place to make sure that we are delivering that USANA quality levels. And so while we have not been putting our foot on the gas, we're still growing nicely just with that organic growth. Once we get everything in place, then we’re excited to once again put more initiatives, focus more initiatives to get that growth at higher levels, but doing it now for us seems premature and dangerous to push really hard now to grow when we have so much to put in place to support future growth.

So we are happy with the growth levels now. We think they are at the levels they should be for this year, but I don't believe that they will be the growth levels in future years, once the infrastructure is in place and we can push harder to get them growing faster.

Tim Ramey

David, it's interesting you mentioned five years ago. I went back and looked at the fourth quarter of '11, which was an earnings disappointment like this one, and one of the things you said was we've got to get China right. And I think the totality of the evidence over the last five years is you did, and that did make me feel a little bit better about what you just said and also about the earnings disappointment here. Just relative to P&L, you said that gross margin would be similar and you said associate incentive expense would be similar, so that leaves one line, SG&A, that looks like it will be under pressure next year. Can you describe some of the projects that you think that will flow through SG&A in terms of the reinvestment ideas?

Dave Wentz

Well, one of the biggest areas that we need to invest in this year is IT. We wish more of that investment had gone in last year, but it's just a very tough market, finding people in this market is extremely difficult, and so we weren't able to take on as many projects last year as we had hoped, but we are trying to put a lot more into 2016, because technology is just so important to our business that we need to keep up with it, have the best systems for our associates and have the best backup systems for us to run this billion-dollar 20 country worldwide organization.

It's getting more complex and that's going to be one of our largest, of course, as you can see with equity expense that is a change from what we had in the past that differentiates things. But R&D, we’re also taking to new levels. We need to put more into R&D and we’re excited to increase greatly our R&D investment as we change almost all of our product lines over 18-month period or two-year period. We've got a lot to do there and so we have a lot of things in store and planned, but they cost money and then we hope those investments will lead to that future growth.

Tim Ramey

Thanks so much.

Dave Wentz

You bet.

Operator

Your next question comes from Frank Camma. Please go ahead.

Frank Camma

Good morning. Can you talk a little bit about inventory seems to be trending up? Is that some of that buy-in for the MySmartFoods? Why is that increasing a little?

Dave Wentz

That's a little bit of it, but our big change is China. We are moving from one manufacturing facility to a new manufacturing facility and as you can imagine, during that transition time that we are not going to be running products each and every day and so we've been building up inventory to be prepared and be able to take care of that market while we make that transition. Of course, we’re being conservative and don't know what glitches or slowdowns there will be in the move over, and so we wanted to build plenty of inventory to take care of our customers during that move.

Frank Camma

Okay. And was the capital expenditures postponed there a little bit, a little bit of a timing increase on just finishing the plant? Could you talk about that?

Dave Wentz

Yes, not just with the plant, with some of our IT expenditures, last year at the beginning of 2015, we talked about anticipating around 40 million in CapEx. We ended up just under $24 million, about $23.7 million right in there and about $20 million of that was shifted into 2016. That also lends to the fact that we over the year of 2015 kept coming back out with some increased guidance on our earnings. So, we would anticipate that some of that, $20 million of that to shifted.

The other factor, Frank that I’d like to point out really has to do with - we consistently over the years have guided to and talked about trying to return about 15% earnings from operations. That will ebb and flow, last year was 15.5%, the year before that it was 14.6%, prior to that it was up in the [indiscernible]. So we’ll ebb and flow and we're just excited we have the opportunity to be able to invest at the same time providing a reasonable good return that over the long haul we believe will continue to be there at about 15% on the earnings from operations.

Frank Camma

Okay, great. And could you talk about your - typically, I think you do your price modifications in the beginning of the year. Am I correct about that? Or should we anticipate any of that this year due to the currency?

Dave Wentz

We did typically do those around the first of the year and most of those have been put in place. It was about 2.3% increase that’s build into our forecast, our guidance and in those markets where we have some real strong movement in currency where the dollar strengthening creates some problem. We will in those markets continue to monitor and evaluate and if we need to mid-adjustments we’ll do that. Although we want to make sure and continue to provide a great value and return to our active associates as well who are driving the business.

Kevin Guest

We also have to buffer some and we can’t change the prices immediately to - with the big things that we've seen in some markets. So, we have to observe some of that for a while and over time have a plan to get there, which is what we’ve done in the past and we’ll continue to do.

Patrique Richards

Melissa? Can we have the next question? Well, it seems that we've lost connectivity, we’re going to redial here, so if you'd all just stay on the phone we’ll be right back with you.

Operator

Ladies and gentlemen, thank you for standing by, it appears the speaker lines has disconnected, we’ll wait while the speaker rejoin the conference. Once again, please be connected while we wait for the speakers to rejoin. Okay, please proceed.

Patrique Richards

Okay, it looks like we’re ready for the next question.

Operator

Your next question comes from Eric Gottlieb, please go ahead.

Eric Gottlieb

I just have a few questions. So, let's go over associate growth in non-China. It was essentially sequentially flat. So first on the Americas and Europe, I am kind of curious. Canada and Mexico aside, where are you finding the most difficulties for growth?

Dave Wentz

So if you look at the Americas and Europe, we had a year-over-year customer growth of 3.5%. That was driven primarily by Mexico and Canada was strong as well. In the US on a customer year-over-year basis was down slightly.

Eric Gottlieb

And Europe?

Dave Wentz

Europe was fairly flat.

Eric Gottlieb

So my next question is, you said $54 million in FX expected for the coming year. I am wondering if that’s based on where currencies are now or expectations on where you think they will go throughout the year.

Paul Jones

We looked at four different bank forecasts, we looked at different models and we kind of combined that and made our best estimate of what we think will happen. Of course if we know exactly what that would be, we’d be in a different business. But we’ve looked at those factors to try and give us our best view of what we think will happen over the next 12 months.

Eric Gottlieb

Can you give a little more detail, maybe FX by region?

Paul Jones

I don’t really have that in front of me.

Eric Gottlieb

Okay. So, I have noticed guidance this year was $0.55 range, which was kind of wide. If I looked back the last couple of years and it has been like $0.25 to $0.30. What makes you believe there is more variability in the numbers this time?

Paul Jones

A big part of it is just the fact of as we reach some higher numbers on the top line, there is more variability in that bottom line. Also looking at the leverage piece, we're very much a leverage business. If we swing on the top line like that, the leverage in our business will create that impact on the bottom line.

Eric Gottlieb

Got it. Okay. And I know you said that this year is going to be slightly lower. You are modeling 14% to 14.5% and the long-term target is 15%. You said just before, there is some ebbs and flows. So given that this is going to be a down year, a slightly down year, what is ebbing and what is flowing?

Paul Jones

Well, if you look at the model, we anticipate we will be about the same as we have been on our associate incentive. Really, the other area would be in the investment spending in the SG&A as Dave alluded to. We have a lot of work to do in our IT infrastructure to make sure we would provide the personalized excellent experience we want our associates to have. Again, reiterating what Dave said, the R&D expected spends there are something that we're excited about and need to push forward as well the infrastructure in China.

So really all of these, I am very excited to be in a situation where we can continue to grow and we continue to create some healthy returns, at the same time we are preparing this business for our future and for the next 20 years. So I think you will see a step and we’ve done this over the years. There is a step increase on your SG&A, you get some leverage and then you invest into that future and then we will hopefully over the next several years get some leverage. We may see some of these overhead costs continue for the next year to two years. But it will be a step fashion, we will see it start to ratchet back as we get these things under control.

Eric Gottlieb

If we can go into that a little more, so you said some of these costs will stay for one to two years. This quarter you cited that some of those are due to higher comp expense. You are forecasting higher earnings next year and we will see what happens in 2017, but given that the earnings is expected to be higher, those comp expenses are going to maintain or are they going to increase? How do the comps work?

Paul Jones

I'm not sure I understood your question, Eric.

Eric Gottlieb

You cited higher compensation expense this quarter as part of your increased SG&A. I assume it’s led to higher earnings?

Paul Jones

Quite frankly in the fourth quarter due to the higher share price, there was a miss on that guidance and that was part of our issue dealing with the earnings for the fourth quarter. That of course will carry forward. The way that the accounting rules work on the equity space and they will carry forward through the life of the grants.

Eric Gottlieb

So, are those set to increase with even higher earnings for next year or are they maxed out? How did that compensation work?

Paul Jones

No, what we do is we have a step wise grants to make sure we don’t have a cliff for any of our management team to ensure long-term opportunity for our management team, so every couple of years we added grants that we call bolt-on that add on to the grants that they have in place that are about to expire within two years to extend their opportunity for four years and by every couple of years putting those on top, we are able to maintain that long-term retention of our management team. With the high stock price, those Black-Scholes calculations were higher than we've had in the past and had a bigger impact to that equity comp than we are normally used to.

Eric Gottlieb

Got it. And my last question, this isn't something that you guys calculate, but I do in my model. So sales per associate has declined for a while in numerous regions, and I know some of that is associate growth. Those new people start out at zero, so you are naturally going to get a decline on the average. And some of that might be FX as well. But is there reason to believe that associates are having trouble selling the product? I mean you did have an increase in inventories as well.

Dave Wentz

No, a lot of that decrease that you're seeing really has to do with FX, with the percentage of our businesses outside of the US that strengthening dollar has had a large impact on that piece. And there's no reason or evidence to believe that there's a problem selling the product. In fact if you look our unit volume, it’s meaningfully up and very strong. There are couple of issues that we need to keep in mind. If you look at the currency from year-over-year being part of that volatility and also remembering that we had an extra week in our fourth quarter of last year. And so that would impact depending on how you are calculating it as well.

Eric Gottlieb

Okay, fair enough. Thanks for the color and I will pass it on now.

Dave Wentz

Very good. Thank you.

Operator

We have a follow-up question from Tim Ramey. Please go ahead.

Dave Wentz

Tim? Well, looks like we’ve lost Tim. So we'll just conclude it this time. Thank you for your questions and for your participation on today’s conference call. If you have remaining questions please feel free to contact Investor Relations at 801-954-7961. Thank you and have a great day.

Operator

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your lines.

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