USANA Health Sciences, Inc. (USNA)

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USANA Health Sciences, Inc. (USNA)

Q3 2010 Earnings Call

October 27, 2010 11:00 am ET

Executives

Riley Timer - VP of Finance

Jeff Yates - CFO

Fred Cooper - President and COO

Analysts

Tim Ramey - D.A. Davidson

Mimi Noel - Sidoti & Company

Doug Lane - Jefferies & Company

Rommel Dionisio - Wedbush

Scott Van Winkle - Canaccord

Presentation

Operator

Good morning ladies and gentlemen, and thank you for standing by. Welcome to the USANA Health Sciences third quarter earnings conference call. At this time, all participants are in a listen-only mode. And following the presentation instructions will be given for the question-and-answer session. (Operator Instructions).

As a reminder this conference is being recorded October 27th, 2010. I would now like to turn the conference over to Riley Timer. Please go ahead.

Riley Timer

Thank you Craig, good morning everyone, we appreciate your 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, www.usanahealthsciences.com. Shortly following the call a replay will be available on our website.

Now, 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. 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.

Now, I'm joined this morning by Dr. Fred Cooper, our President and Chief Operating Officer, and Jeff Yates our Chief Financial Officer. We'll hear first from Jeff, who will discuss the details of the financial results this quarter. We'll then hear from Fred, who will discuss our business activities as well as our plans for the remainder of 2011 and a bit of a snippet in 2011.

I'll now turn the call over to Jeff.

Jeff Yates

Thank you, Riley. Good morning everyone and welcome to the conference call. We appreciate your joining us this morning. It's a pleasure for us to talk about our fourth quarter, fourth consecutive quarter of record results for USANA. I'm pleased to report that net sales for the third quarter were $135 million, which represents a 21.9% increase when compared with the $110.7 million, we reported for the third quarter of 2009.

Our growth in sales of this quarter was primarily due to an overall increase in the number of active associates, which for the third consecutive quarter resulted in a new high of 234,000. This represents an increase of 17.6% when compared to the third quarter of 2009 and is largely the result of our continued growth in Hong Kong. Also our acquisition of BabyCare in China added 10,000 associates.

Favorable changes in FX rates this quarter added $3.5 million to our top line when comparing our results to the same period last year. Looking at our results regionally, sales in North America were about the same as last year, coming in at $60 million for the third quarter.

Notably, sales in the U.S. increased modestly year-over-year and on a consecutive quarter basis. We were, however, disappointed to see associate counts decline in the third quarter. We believe that these decreases are due primarily to the following factors. An increasing number of our associate leaders based in North America building their businesses in Asia, a continued tough economic environment, particularly for the consumer segment, and typical summertime seasonality in North America when the associates take time off to vacation with their families.

Looking now at results in our Asia-Pacific region, net sales for the quarter increased by $24.6 million, or 48.7% compared to the third quarter of 2009. Net sales for this region totaled $75 million for the quarter, which represents 56% of our total sales.

Sales growth in this region was primarily due to the 47.4% increase in the number of active associates. The majority of this growth is due to our continued success in Hong Kong, where sales increased 134% over last year and were up 20% compared with Q2.

Notably active associates in Hong Kong increased 40,000, or 143%, over the last year. In addition to Hong Kong, we also experienced double-digit growth in the Philippines, Japan and South Korea, while small relative to our total we continue to gain market share in these countries and are building a strong base of leaders to influence further growth in sales.

BabyCare added $3.4 million in sales for the quarter, and both Fred and I will discuss this further in our remarks later. We are pleased this quarter to announce again, to once again see strong improvements to our operating margins. The great thing about our business is the earnings leverage we gain at the top line growth.

In the third quarter, our operating margins improved nearly 56% over last year, and nearly 9% compared with Q2. I'll now take a few minutes to walk you through each of the major expense items on our P&L.

First, gross profit margin for the third quarter increased as a percentage of net sales to 81.4% compared with 79.6% for the third quarter of 2009. This 180 basis point increase was primarily due to lower overall costs on our raw materials, benefits from changes in currency exchange rates, reduced freight costs, production and shipping efficiency due to capital investments, and leverage gained on higher sales.

Read the rest of this transcript for free on seekingalpha.com