USANA Health Sciences, Inc. (USNA)

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USANA Health Sciences (USNA)

Q1 2011 Earnings Call

April 27, 2011 11:00 am ET

Executives

Jeffrey Yates - Chief Financial Officer, Principal Accounting Officer and Vice President

David Wentz - Chief Executive Officer

Fred Cooper - President and Chief Operating Officer

Riley Timmer - Vice President of Finance

Analysts

Scott Van Winkle - Canaccord Genuity

Rommel Dionisio - Wedbush Securities Inc.

Per Ostlund - Jefferies & Company, Inc.

Timothy Ramey - D.A. Davidson & Co.

John San Marco - Janney Montgomery Scott LLC

Presentation

Operator

Welcome to the USANA Health Sciences First Quarter Earnings Conference Call on the 27th of April 2011. [Operator Instructions] I will now hand the conference over to Riley Timmer, Vice President of Finance. Please go ahead, sir.

Riley Timmer

Thank you. 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 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. 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 Fred Cooper, our President and Chief Operating Officer; and Jeff Yates, our Chief Financial Officer. We'll first hear from Jeff, who will discuss the financial results for this quarter. Then, you will feel from Fred, who will discuss our business activities.

I'll now turn the call over to Jeff.

Jeffrey Yates

.

Thank you, Riley, and good morning, everyone. Once again, I am pleased to report that we completed another solid quarter of sales, coming in at $143.6 million. This represents a 20.6% increase when compared to $119.1 million we reported for the first quarter of 2010.

This quarter's sales included $5.7 million from our Chinese subsidiary, BabyCare. Also, favorable changes in FX rates this quarter added nearly $4.2 million to our top line when comparing our results to the same period last year. We also realized approximately $3 million in incremental sales via Hong Kong Associates in anticipation of a price increase in that market. Additionally, sales from our Asia Pacific convention, which was held in March this year, added $3.1 million to sales during the first quarter. Remember that we held this event during the second quarter last year, so there is a timing difference on the year-over-year comparison.

Although sales were impressive during the quarter, we were disappointed with our Associate counts in many of our markets. Excluding the addition of BabyCare Associates, the overall number of active Associates decreased 1%. We believe that this is the result of many of our Associates being distracted by the acquisition of BabyCare in China, as many of our Associates are evaluating how to incorporate this new market into their businesses.

Looking at our results regionally. Sales in North America were essentially flat, coming in at $60 million, which is due to softer-than-anticipated Associate counts. Along with many other companies in our industry, we continue to see a soft consumer segment, which we believe is the result of a lingering tough economic environment.

Furthermore, our business model allows an Associate to build a business in any market where we have operations, with the exception of China. Currently, many of our North American leaders are focusing their efforts on growth opportunities throughout Asia. As a result of this, we continue to see disproportionate growth, especially in Greater China.

Consequently, in our Asia Pacific region, net sales for the quarter increased by $25 million, or 42.6%, compared to the first quarter of 2010. Net sales for this region totaled $84 million for the quarter, which represents 58.2% of our total sales. Sales growth in this region was primarily due to the 18.2% increase in the number of active Associates. The majority of this growth is in Hong Kong, where sales increased 82.7% over last year, and the number of active Associates increased 35.6%.

Notably, on a sequential-quarter basis, the number of active Associates decreased, which we believe is the result of unusually high enrollments during the fourth quarter of 2010 and softer-than-anticipated results in the first quarter, most likely from Chinese New Year. In addition to Hong Kong, we also experienced double-digit growth in the Philippines and South Korea, 2 relatively small but emerging markets.

Now shifting to the other major proponents of our P&L. Gross margin -- gross profit margin for the first quarter improved as a percentage of net sales to 82.1%, compared with 80.7% for the first quarter of 2010. This 140 basis point increase was primarily due to benefits from changes in currency exchange rates, reduced freight costs, leverage gained on higher sales and lower overall cost of our raw materials. For the full year of 2011, we expect gross margins to be about 82% of sales.

Associate incentives expense for the quarter improved 30 basis points to 45.1% of sales, compared to the first quarter of the prior year. This decrease is primarily due to the strategic changes implemented in 2010 to better align compensation with actual sales growth and the impact of a slightly lower payout rate through BabyCare.

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