USANA Health Sciences' (USNA) CEO Dave Wentz on Q2 2016 Results - Earnings Call Transcript

| About: USANA Health (USNA)

USANA Health Sciences Inc. (NYSE:USNA)

Q2 2016 Earnings Conference Call

July 27, 2016 11:00 AM ET

Executives

Josh Foukas - Vice President of Legal and Investor Relations

Dave Wentz - Co-Chief Executive Officer

Paul Jones - Chief Financial Officer

Doug Hekking - Executive Vice President of Finance

Analysts

Frank Camma - Sidoti

Eric Gottlieb - D.A. Davidson

Tim Ramey - Pivotal Research

Operator

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.

Josh Foukas

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 after 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. Example of these statements includes 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 highlight. Dave?

Dave Wentz

Thanks Josh and good morning everyone. It’s great to be with you this morning. I will 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% not withstanding a strong U.S. 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 have 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 to 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 is continuing 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 complete in the next three to five 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 going forward until the facility is operating at full production.

That said we’re 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 AsiaPacific 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’re following our MySmart launch with an even more significant product launch to a record breaking number of attendees next month at our recently 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’re 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’ll finish by telling you that I’m very excited about our international convention next month and the product launches we will make there.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we’ll take our first question from Frank Camma with Sidoti.

Frank Camma

Good morning guys, how are you?

Dave Wentz

Good morning, fine.

Frank Camma

Alright, good. Hey, you spoke about the permits, obviously you disappointed by that. 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?

Dave Wentz

We continue to build inventory from the old factory and agree to make sure that we don’t have any problems of a supply, but we’re certainly not taking or putting any brake sign and we see a good momentum in the growth over there.

Frank Camma

Yeah, because you’re still - 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 sales force even faster than you wanted to.

Dave Wentz

Yeah, absolutely, we don’t want to do anything that would create bad customer service or bad customer experience and create a thing to say we don’t want to be too successful, if we were to it’s put out there and have a backward of situation. So we’ve putting the infrastructure, we’re building the management team over there. We really have everything in place I believe this year to really start pushing again in 2017.

Frank Camma

Okay, you mentioned you’ve obviously launched the MySmart Foods in several markets and 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 learnt so far?

Dave Wentz

We’ve been fairly consistent across the markets that we’ve 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’re running that inventory down we’re not in torrent in a way, 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. And so we feel good about it, the numbers are looking good, but until we have a 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.

Frank Camma

Sure, okay. My last question is that can you talk about the U.S. market in particular. I mean 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 it difficult in U.S.?

Dave Wentz

Yeah, that continues to be our challenge. We’ve continued 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 continue 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’re constantly playing defense against the players in greatest. So there is even a possibility with the changes and the FTC starting to become more involved and they’ll see few of those and allow more of the established companies to prosper more than we’ve seen in the past. Don’t for sure.

Frank Camma

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

Dave Wentz

Yeah, we hope so. So we need to get the energy, we need to find the next level of hungry leaders who’re going to push our old leaders by just increasing the competition and excitement and energy and we’re continuing to search through the database and talk to people to find those who will be the next way. You see the momentum is a lot in this business where you’ll see a wave of leaders just come up and challenge the top ones and that creates a lot of excitement. Also, of course the new products that will get the U.S. talking again. Going back to those people they talked to you before, who weren’t interested, but now with an even more exciting story that hopefully they’ll be able to get reenergized and - very product focused market, so they’ll be very excited about the science in the new products.

Frank Camma

Great, thanks very much.

Operator

And we’ll now go to Eric Gottlieb with D.A. Davidson.

Eric Gottlieb

Hi, yes, good morning. I’m looking at the net cash balance; it seems to climb a lot like $2 to $3 per share, what’s wrong with that. It looks like you paid off your short-term debts and I’m wondering what was CapEx and some of the other drivers there?

Paul Jones

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

Eric Gottlieb

I was looking at net, okay. So the three to five months in China, what would make that on the lower high end, what kind of things are we exactly waiting for?

Dave Wentz

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 those products in that facility. And so it’s just a long line of items that go into this one after another and how fast will the government move along and approve them. We feel we’re doing things as fast as we can, but we don’t have control over that side of it, so it could be three, it could be five months. It just depends on how quickly they respond to our request.

Eric Gottlieb

Okay and is that your estimate or theirs?

Dave Wentz

Just experts in the industry and what we’ve heard from others and just talking to our consultants and getting the 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.

Eric Gottlieb

Got it and then the internal program, we’ll assume that those are going to be in place and those are going to accelerate the second you get those rules right?

Dave Wentz

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

Eric Gottlieb

Got it and the growth in China, seems like they’ve stabilized a bit. I’m wondering if there’s anything that the new management is doing differently.

Dave Wentz

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

Eric Gottlieb

Got it, okay and then the inventory, I assume they’re going to come back in line once the facility comes on line, is that right?

Dave Wentz

Yeah, I mean we’ve a combination of new product launches and building up at China, all of those combine together after we’ve - with the Smart Foods being launched and transitioning of the old product line with the new product launch at convention, with the China build up, so that we can handle one or two months transition in production. All of those are putting a little pressure on the inventory that we’ll bring back in line in 2017.

Eric Gottlieb

Okay and then you said that CapEx is 13.7 for the first six months, were you expecting it to be 35 to 45?

Paul Jones

Correct.

Eric Gottlieb

Right, what kind of ramp are we going to see in the second half and what are the projects with a significant uptick?

Paul Jones

Yeah, you still have a host of payments to do with 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’re pursuing as well.

Eric Gottlieb

Got it, okay. With that I’ll pass it on. Thanks for the commentary.

Paul Jones

Thank you.

Operator

[Operator Instructions] We will now go to Tim Ramey - Pivotal Research.

Tim Ramey

Hi, good morning.

Dave Wentz

Good morning, Tim.

Tim Ramey

Good morning, another decent quarter of preferred customer growth and I’m guessing with the Herbalife order stressing preferred customers here, putting renewed energy into that. Can you give us a color on that? Were your approach to preferred changed on a perspective basis? Will you - we try to take a harder look at who qualifies for active associates versus preferred customer, how should we think about preferred customer outlook?

Dave Wentz

Yeah, absolutely, we’ve been talking about those things for three, four years or even before. Any of the Herbalife and [indiscernible] and things, we’ve been talking about how we want to move the business overtime. We’re curious to see what the focus will be of the FTC. We’ve strategies, certain plan based on what the emphasis is and we’re 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. The barrier to go distributor versus preferred customer is so small that it’s an easy up sell 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’re working on, programming getting prepared for, but also curios to see what the focus of the generalities the FTC will talk about for the industry and feel we’re very well compared for whatever direction they decide to put their focus on.

Tim Ramey

Got it and is there any preliminary view on CapEx for ‘17, should we assume that it normalizes back to maybe a 20ish kind of number, once we get the China plant behind us?

Paul Jones

Yeah, I think that’s the expectation Tim. I think we’d expect somewhere between 1.5%, 2% of sales. Prospectively you’re 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 level of IT and stuff, you’ll still that maintained CapEx really flow with the side of the business. And everyone’s rather some pop up and when they write those things specifically as those events unfold.

Tim Ramey

Okay and then just finally on share repurchase, I know you didn’t do any in the 2Q or aggressive in the 1Q at lower prices, so that’s smart. But was there any particular reason where you precluded from share repurchase in the 2Q or it was just the way the timing worked on?

Dave Wentz

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

Tim Ramey

Okay, perfect. Thanks for your help.

Dave Wentz

Thank you.

Operator

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

Josh Foukas

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.

Operator

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

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