USANA Health Sciences Inc (USNA) 2016 Q4 法說會逐字稿

Good day and welcome to the USANA Health Sciences fourth quarter conference call. As a reminder today's conference is being recorded. At this time I would like to turn the call over to Mr. Josh Foukas, Vice President of Legal and Investor Relations. Please, go ahead, sir.

Good morning, everyone. Thank you for joining us this morning to review our fourth quarter and full-year-results. As always our call today is being broadcast by web cast 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 these conference calls our Management Team will make forward-looking statements regarding future events or the future performance of the Company.

Those statements obviously involve risks and uncertainties that could cause our actual results to differ sometimes materially from the results projected in the forward-looking statements. Examples of these statements include those regarding our strategies, and financial outlook for the 2017 fiscal year. We caution you that these statements should be considered in conjunction with all of our disclosures including the risk factors and financial data that's contained in our most recent filings with the SEC.

This morning I'm joined by our Chief Executive Officer, Kevin Guest, our President, Jim Brown, our Chief Financial Officer, Paul Jones, and our Executive Vice President of Finance, Doug Hekking. Now, yesterday after market closed we announced our fourth quarter and full-year-results. And we posted our management commentary results and outlook document on the Company's website.

In these documents we provided information about a voluntary investigation that the Company and specifically the audit committee of the Board of Directors is conducting into our China business. Because this is an early stage pending investigation we are not able to provide additional information about the investigation or answer any additional questions about the investigation at this time. Before opening the call for questions and answers we'll first hear from Kevin Guest who will briefly review both the quarters highlights and the highlights for the year. And so with that I'll turn the call over to Kevin.

Thanks, Josh, and good morning. We're pleased to be with you this morning to review our 2016 performance and to discuss our strategies and expectations for 2017. I'll keep my comments brief and then open the call for questions. 2016 was another excellent year for USANA. We surpassed the $1 billion mark in net sales, generating our 14th consecutive year of record sales and we reported the highest EPS in the history of the Company. We also ended the year with solid associate and preferred customer growth.

Customer growth remains our highest priority as we strive to improve the health and nutrition of individuals and families around the world. We generated these results by executing our various strategies throughout the year. During the year we introduced two new personalized product platforms with the launch of InCelligence and MySmartFoods.

InCelligence as you saw is proprietary patent pending technology that is designed to support the body's natural ability to nourish, protect and renew it's cells. The InCelligence platform represents the future of USANA products and is intended to keep USANA at the forefront of nutritional supplementation. MySmartFoods are science-based healthy nutrition shakes, bars, boosters and flavor optimizers that provide our customers with customized healthy food options.

We also improved our infrastructure in China during the year specifically with the successful completion of and our transition to our new China production facility in the fourth quarter. This 350,000 square foot facility is now fully operational and will provide the production capacity we need in China for the foreseeable future.

During the fourth quarter we also offered a short-term incentive to our associates around the world. For most of 2016 we focused on product launches and completing our China facility and did not offer additional incentives to our sales force. The incentive we offered during the quarter was well received by our sales force and should help us get off to a good start in 2017.

Finally, we made meaningful progress during the year with improvements to our IT systems and infrastructure around the world and will continue to invest in these systems during 2017. 2017 also marks USANA's 25th anniversary and will certainly be another significant year for the Company as we continue investing in our business to drive long-term growth. During the year one of our goals is to further advance our personalization strategy by leverage our InCelligence technology.

In particular we will launch the InCelligence platform in additional market around the world and incorporate this proprietary technology into additional product launches and offerings that will occur during the year. We will also execute customer growth incentives in 2017.

In this regard we plan to enhance and emphasize our preferred customer program through a number of strategies that will begin to roll out during the year. These strategies include a new customer invitation program as well as a rewards and loyalty program. We believe an enhanced preferred program offers a growth opportunity that we have not fully realized in the past.

We will also continue to invest in our IT systems and infrastructure during 2017 and continue to enhance our customers experience with USANA. Finally, we will also continue our brand recognition campaign in 2017 through trusted partnerships like our partnership with the Dr. Oz show, the Women's Tennis Association and additional elite athletes around the world that we plan to sponsor during the year.

With that, I'll finish up by telling you that I'm confident in the strength of our business around the world and that I'm excited for 2017. Now, I'll ask the Operator to please open the lines for questions.

Yes. Thank you. (Operator Instructions). And we'll take our first question from Tim Ramey, with Pivotal Research Group.

Your outlook was somewhat muted at the top line and one wouldn't have guessed that looking at the -- I mean the fourth quarter performance was pretty good at the top line. We're aware you probably won't have the same amount of new product activity next year, but you also probably will have more promotional activity. Can you talk a little bit about your conservatism and guidance and why you think other than the currency impact why you think you might be tracing a little bit slower?

Yes, Tim. This is Doug. I think what you saw in the fourth quarter was that side of the promotion we probably wouldn't run every quarter and obviously the local currency boost in Q4 was a strong quarter for us. But going forward I think what we put in the model is our best estimate of what we think is going to happen. Obviously we hope there's more up side as we go back and design these incentives and promotions to the best our ability but right now it's just kind of what we see and kind of the outlook.

Okay. And you also were conservative in not buying back stock for the past three quarters and, you know, you might argue you're going to get an opportunity now at a lower price, but you certainly have plenty of fire power. Can you discuss your attitude toward repurchase at this time and would there be any exogenous reasons such as the inquiry into the Chinese activities that would prevent you from buying back stock?

Yes. As far as the last three-quarters, this is Paul, if you recall we talked about the investment spending that we had in place. We looked at also the location of our cash with roughly 60% of our cash in China and the process of getting that out can be a little bit delayed, and then looking at our new product development and launches over the last 12 months. All of those things put us in a position where we wanted to make sure we kept our fire power available and used it as wisely as we could to create the best return to our shareholders with that.

Moving forward we'll continue to do what we have done in the past. We'll analyze it based on the factors given and see what will make the best sense for, again, for providing a return to our shareholder. And so we'll certainly analyze it, we'll look at it. We'll talk it out with our Board of Directors on a regular basis and we'll analyze it as we have always done in the past.

Terrific. Thanks.

Thanks, Tim.

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

Yes. Hi. Thanks for taking my questions. I have a bunch of them. I know we're not allowed to talk about the reimbursement issue in China but maybe we can talk around it just to gain a couple of insights. This is a new issue. You've never had something like this before; is that correct?

Eric, this is Josh. That is correct.

Okay.

And so what I would do is just qualify the rest of our discussion by really the disclosure that's in the release and the management commentary document. I think beyond that we can't comment at this point, but I take your question and that is accurate.

Okay. Well, then we'll leave the issue alone. I'm wondering if you foresee that there could be any backlash or difficulties in conducting business due to the publicity?

Yes. So that's one that we're not going to comment on right now, Eric. And, again, I would just refer you back to the disclosure that the investigation is a voluntary internal investigation in its early stage at this point.

Okay. Then switching gears to the IT investment. I think you said another bucket was coming in March and April. I'm wondering is that still the case and then what are some of the projects coming online soon and how quickly do you think we'll see the benefits of those?

Eric, this is Jim Brown. So looking at the IT spend it's actually going to go as we talked about through the year. A lot of infrastructure is just getting prepared for the future. There's servers, there's all types of ways to make sure we support the markets. We're looking at International areas for support as well to make our systems quicker, but we're looking at that through 2017 and it will go into 2018 but from a capital investment side it will be much smaller through the remaining years and will be more maintenance capital.

I think (Multiple Speakers).

Eric, real quick. One of the challenges specifically in the IT side is finding the qualified personnel as you're trying to go back and build up that infrastructure and we had pretty aggressive plans to onboard some of that talent and it doesn't come onboard as quick as you want and so I think part of what you're seeing on that investment is kind of that delayed effort there to go back and get the right talent onboard.

What are you expecting for CapEx for the year and, well, you said throughout the year so it should be fairly constant, but what's your plans there?

Yes, I think we should model going forward, Eric, somewhere between 2% and 2.5% of sales for maintenance CapEx. If there's something outside of there that is an elevated level we'll talk to that specifically but between the production and having these two full operating production facilities and the recent set-out at China, in addition to ongoing investments in IT that's a ballpark of where we would estimate it to be for next year and the foreseeable future.

Got it. And here's a line of questions that I've been asking a lot of my people in my coverage universe and that's the changeover in the administration. I'm wondering what helps, what hurts, obviously corporate taxes come in that would help, less regulation expected at the FDA, issues possibly with exports, especially trade situation with Mexico, things of that sort. Could we just run through positive and negatives and what you're expecting or are you just kind of wait and see and see how it goes?

I think part of it if we're to go back and quantify anything, we need to go back and see what the final rules would be. If we were to go back and have some of these proposals push forward as we have seen in the paper we would probably see a small benefit but given the profit distribution of our organization and so much of that growth happening in China, we'd have to go back and obviously go back and pay the taxes on any business in China first and then bring it back here. So we wouldn't get that full GAAP and so we're not expecting a meaningful change in our base effective tax rate. We can probably see a little benefit but nothing so far we would expect in 2017, that would be perspective after 2017.

Eric, this is Paul. In addition to the tax rates as far as relations it's really a wait and see. We don't anticipate at this point that we're going to have any more challenges getting product from the US to the countries where we are doing business. We believe that at this point it will be business as usual and we have hope going forward that less regulations can help us not only in the US but around the world. So it's really a wait and see.

Got it. Okay. And then associate incentives of 46.5. Was that blanket throughout the world or was it higher in China or other locations or things of that sort?

You know, most of the markets have a little bit modestly different payout but the elevation you're seeing in Q4 was really related to the promotion. We also had an award trip for some of our leaders that was a little bit higher than we expected but that elevated payout was really attributed to those two items in great part.

Okay. And then as far as the new plant, what was the utilization in the quarter thus far and what's the pace that you expect for filling that out?

This is Jim. You know, when we look at the new facility just to clarify it was built to support mainland China only and it was built expansion in mind. So it's kind of a modular design, if you think about it. We have the opportunity to add equipment into the clean rooms or up-size our equipment. So our utilization right now is very small and for the foreseeable future we're set up when it comes to capacity.

Got it. And then that would explain the decline in inventory, right? How we moved over to the new familiarity or was there something else in inventory that I'm not seeing?

No. We -- again, we planned for November and we hit that time frame, but we did a build-up in case things happened and you have seen the drop through that transition from the two facilities.

Okay. And then lastly sales in the US region have been week once again. I'm wondering if there's any plans the Company has for reversing that trend or if there's any new events that happened in the market that's causing the trajectory to decline further?

This is Kevin. As we look at the US, the US continues to be on our radar here and we are working on new strategies to see the market be re-energized and just specifically some things that are already in place in motion. We've made some executive leadership changes that we believe will have a positive impact and we are already seeing through our sales force leadership the positive effects of some of our structural changes from an executive leadership perspective.

Secondly, we're going to this year and into the future we have a strategic plan where we're going to look at the US market almost as three separate markets individually. The Chinese market, Hispanic market and the Caucasian markets and begin to market to them effectively in segments from a tools perspective, from an on the ground field perspective and how we communicate with them. One of the areas I'm most excited about is our enhancement of our customer program.

We already have a robust customer program globally and I'm excited about that, but making some enhancements to that I think and I'm confident will make a positive impact on the United States overall. And then lastly, our business is largely driven by events and when we bring people together. And we are changing that strategy this year as well to going to a more regional approach and a localized approach versus a single national approach which we think will also bring excitement, momentum and life into the marketplace.

So we are very actively pursuing the US market and I feel confident in the direction we're heading for 2017 into 2018. It's a large ship to turn so to speak, but it is an area of focus for us.

Okay. Two more. Since you brought it up do you know the split between the Chinese, Hispanic and Caucasian market segments right now? Rough percentages?

We don't report on those at a granular level at this point in time so I can't comment to you and I don't have those numbers in front of me.

Okay. That's fine. And then just lastly I was kind of encouraged by the growth in China. I expected that to come sometime in early 2017 but it looks like we're a quarter early. I assume that's because you put the foot on the gas of the incentive programs there. Is there anything else going on that's driving the growth?

I think you're exactly right in your assumption from the promotions that we ran. Again, we're going to be cautious in how we move in that direction from a long-term sustainability perspective, but we love where, I shouldn't say love, that's not a common word in this kind of dialogue. We're encouraged by the direction we see in China and the growth that we see there. And just overall, just from an organic perspective when you look at the size of the market, it becomes just inherently more and more difficult to move the of the numbers at a growth percentage that we have seen traditionally just as the market grows in numbers. So we are encouraged by what we see there.

Got it. Okay. I appreciate the comments. With that I'll pass it on. Thank you.

(Operator Instructions). It appears there are no further questions at this time. I would like to turn the call back to management for any additional or closing remarks.

Thanks, everyone, for the participation today and joining the call. As always if you have additional questions, you are welcome to contact USANA Investor Relations at 801-954-7961. Thank you.

And, ladies and gentlemen, that does conclude today's conference call. Thank you for your participation.