USANA Health Sciences (USNA)

Q3 2011 Earnings Call

October 26, 2011 11:00 am ET

Executives

Kevin G. Guest - President of North America

David A. Wentz - Chief Executive Officer

G. Douglas Hekking - Chief Financial Officer

Patrique Richards -

Analysts

Scott Van Winkle - Canaccord Genuity, Research Division

John P. San Marco - Janney Montgomery Scott LLC, Research Division

Timothy S. Ramey - D.A. Davidson & Co., Research Division

Rommel T. Dionisio - Wedbush Securities Inc., Research Division

Presentation

Operator

Ladies and gentlemen, welcome to the USANA Health Sciences Third Quarter Earnings Conference Call, on Wednesday, 26 of October 2011. [Operator Instructions] I will now hand the conference over to your host, Patrique Richards. Please go ahead, sir.

Patrique Richards

Thank you, and good morning, everyone. We appreciate you 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 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.

I'm joined this morning by Dave Wentz, our Chief Executive Officer; Doug Hekking, our Chief Financial Officer; Kevin Guest, our President for North America; and Roy Truett, our Chief Operating Officer. We'll hear first from Dave, who'll discuss our business activities during the quarter as well as our plans for the remainder of the year. We will then hear from Doug, who will discuss our financial results and updated guidance.

I will now turn the call over to Dave.

David A. Wentz

Thanks Pat. Good morning, everyone. We are pleased by USANA's solid financial performance during the third quarter and that we have continued to lay the foundations for consistent and long-term growth. The highlight during the quarter was our 19th annual International Convention in Salt Lake City. At this event we hosted thousands of our Associate leaders and made several important announcements including our plans to open France and Belgium in the first quarter of 2012. These new markets, together with Thailand, which we plan to open near the end of this year will bring USANA's country count to 18 markets worldwide.

In recent years, our new market openings have been concentrated in our Asia Pacific region. Our European markets of France and Belgium will provide our North American distributors further opportunity to expand their business internationally. This is particularly true for many of our Canadian Associates who have direct ties to France. France is considered the world's 10th largest direct-selling market with estimated sales of more $2.4 billion annually. Our regional office headquarters would be located in Paris, France and our distribution facilities will be located in the Netherlands. Having an office and distribution set in a location in Europe will not only allow us to service our customers in France and Belgium, but will also allow us to better service our customers in the U.K. and in the Netherlands.

The opening of these new markets is consistent with our plans to be more aggressive in our international expansion efforts. That said, however, we remain focused on our largest expansion opportunity, which is growing our business in mainland China. In China, we've generated continued growth in both sales and Associate counts during the quarter, sales increased $2.7 million year-over-year compared with partial third quarter 2010 operating results. As USANA acquired BabyCare in mid-August, 2010, we only have a partial quarter. Associate counts in China also increased 50% year-over-year to 15,000 Associates. To this point, growth in China has been almost entirely organic as we continue with our China integration strategy. This strategy focuses on first educating our Hong Kong Associates on BabyCare's compensation plan and introducing USANA products in mainland China. We have made excellent products in 2011 on product introductions in China and we'll introduce 4 more USANA products during the fourth quarter, which we believe will be very well received by our Associates. By the end of the year, we plan to have a total of 13 USANA products available in China as well as 11 existing BabyCare products. Although this integration process takes time and requires patience, we believe it is the right process to position USANA for long-term growth in China.

I'd now like to touch on our results in Asia Pacific during the quarter.

Sales in Asia Pacific grew by 12.6% to $84.5 million. For the first time, this growth was led entirely by emerging markets including the Philippines, South Korea and China. Sales grew 158% in the Philippines and 66% in Korea year-over-year. These markets also had very strong customer growth. We are pleased with the recent growth in these markets and look forward to further growth as well. Sales in Hong Kong during the quarter were, as we expected, essentially flat year-over-year and declined sequentially. Customer count also declined during the quarter.

Now let me explain Hong Kong's performance during that quarter. First as we explained, last quarter, many of our customers in Hong Kong increased their volume of purchases and enrollments during the second quarter ahead of policy changes they thought USANA would make in Hong Kong during the quarter. These policy changes were part of our initial China integration plan, which, based on Associate feedback was ultimately not implemented. Because of the run-up in the second quarter, many of our Hong Kong Associates did not purchase from us or enroll new customers during the third quarter. Because we only count as active those customers who purchase from us within the most recent 3-month period, these individuals did not appear in our quarter-end customer numbers. During the third quarter, we continued to see the lingering effects of the confusion that was created in Hong Kong when we changed our integration approach for China. As a result of this confusion, we have lost business from some Associates and there are other associates who have adopted a wait-and-see-you approach, and are not building their business as they did in the past. Our Asia Pacific management team led by Deborah Woo is working aggressively to put these concerns to rest and resolve any remaining confusion among the sales force.

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