USANA Health Sciences Inc (USNA) 2017 Q4 法說會逐字稿

Good day, and welcome to the USANA Health Sciences fourth quarter conference call.

At this time, I would like to turn the conference over to Patrique Richards. Please go ahead.

Good morning. We appreciate you joining us this morning to review our fourth quarter results. Today's conference call is being broadcast live via webcast and can be accessed directly from our website at ir.usana.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. Examples of these statements include those regarding our strategies and outlook for fiscal year 2018. 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.

Kevin Guest, our CEO, is currently traveling. I'm joined this morning by our President and Chief Operating Officer, Jim Brown; our Chief Financial Officer, Doug Hekking; our Executive Vice President of Legal and Investor Relations, Josh Foukas; as well as other executives. Yesterday, after the market close, we announced our fourth quarter results and posted our management commentary results and outlook document on the company's website.

Before opening the call for questions, we'll first hear brief remarks from Jim.

Thanks, Pat. Good morning, and thank you for joining us to review our fourth quarter and full year results. This quarter was certainly a strong finish to 2017. We're pleased to report our highest quarterly sales in company history, which topped off the 15th consecutive year of record revenue for USANA. Importantly, we executed several key initiatives during the year and completed strategic investments that have positioned the company for the next phase of growth.

The announcement and prelaunch of our new skin care line Celavive was arguably our most significant initiative introduced in 2017. Celavive is our completely new, personalized skin care offering that features USANA's proprietary InCelligence technology. We began launching Celavive in select markets in January, and we'll continue systematically rolling it out around the world during the remainder of 2018. We believe that Celavive is an opportunity to acquire a new custom demographic and believe that Celavive will grow our skin care line from 6% of net sales to a run rate of approximately 10% by the end of 2018.

During 2017, we also announced our plans for a mid-2018 entry into 4 new European markets: Germany, Spain, Italy and Romania. In preparation for this expansion, we have already made products available to Preferred Customers on a not-for-resale basis in these markets.

Finally, we strengthened our management team with the addition of new chief officer talent and made key investments in the business to help facilitate future growth. These changes and investments yielded an immediate benefit to our results in 2017. For example, we made meaningful progress in improving our global IT infrastructure during the year. These improvements ensure that our systems meet the needs of our current business, but also position USANA for future growth. They are providing us with the speed, efficiency and flexibility to run a business that operates in 20 markets around the world. I expect USANA to begin leveraging these investments in 2018.

Additionally, during 2018, we enhanced our process to discover, develop and commercialize new products while enhancing our MySmart Foods offering. We plan to introduce new Foods products in 2018.

Looking forward, we are optimistic about our 2018 growth initiatives. In addition to the worldwide launch of Celavive and European expansion, initiatives include: growing our Preferred Customer business around the world; introducing a robust social sharing platform; pursuing additional product and technology innovation; and continue our investment in our IT infrastructure to create a better overall customer experience.

I will end by saying that I believe we are well positioned for accelerated growth. As indicated by our outlook, we are expecting record sales results in 2018. We're also expecting improved earnings from operations and strong bottom line results. I am confident that our 2018 growth initiatives will continue to drive momentum.

I will now ask the operator to please open the line for questions.

(Operator Instructions) And we will take our first question from Frank Camma with Sidoti.

Couple questions here. Can we first talk about the growth of your network, particularly sort of in the composition, active members versus Preferred Customers?

And it seems like to me, there's some language in the commentary kind of focusing a little bit more on the Preferred Customers than you traditionally have, or maybe that's not the case. That will be sort of the first question.

Yes, Frank, the main change that we made during this release is we've had a class of customers in China that we call China Preferred Customers, and we've had those for quite some time now.

Historically, we classified those customers as Associates because they're not exactly like our Preferred Customers in other markets, meaning, they have an opportunity to get referral benefits through product. And so historically, we would classify them as Associates.

But since they're not earning money doing this other stuff, we think with how we're approaching those customers' stuff, it's best to go back and give that transparency and visibility with what that number is for those China Preferred Customers. So you see that reclassification during the quarter.

Okay, that makes sense. I guess, the second part of the question is more going forward. When you look into '18, are you emphasizing more the growth of the active Associates or the Preferred Customers? Like, has that approach changed? I guess, that -- to clarify my question.

Yes, Frank, it actually has. We're emphasizing more growth on Preferred Customers, and that's pretty much our ongoing strategy. We just feel as a company, building that base will help stabilize USANA from growth as well. And then our Associates will come from that base.

Sure. And so they -- I guess, the question to that is, since you're using more social marketing, does that help you attract more Preferred Customers who might just say, they look at the Celavive product or the supplements and they just want to buy the product, that's part of my question.

And who gets credit for that sale, I guess? Like, so let's say you were using targeting marketing -- I am not saying you're using this, but like on a Facebook, the company itself, how would that work?

Right, so -- you're right. I mean, when we're looking at social sharing, we're looking at different social platforms, it could be Facebook, WeChat, Instagram, the list goes on. And our plan, like we just introduced last week, we made a lot of IT upgrades, and the IT department has worked hard as well as creative and marketing a lot to get these out.

When you talk about that specific link, it would be -- I mean product-focused. And the hope is that it would attract customers. And assuming they used the link to get into our shopping cart, that order would then go back to the person who had posted that link. It would be an automatic process. USANA in general is never going to compete against our Associates.

Right, okay. So you do have obviously a mechanism to track all that and give credit, okay, that's good.

Yes.

In -- staying on that for about a second, because I think that's pretty important. Where are you in the IT investment cycle, both on a -- sort of CapEx? And how we should think about it as it flows through the P&L versus the CapEx?

Yes, I think you probably have seen this hit our kind of sweet spot as far as a percent of sales, Frank. It's probably when we're continuing to invest in sales growth as well just so we can stay ahead of the game. But you're not going to see the same level of increase that we've seen in absolute dollars over the past years. You'll see that more in line with what the growth of sales is.

Okay. And on the Philippines, specifically -- not to jump around to a specific country, but I noticed that wasn't called out anywhere here. I was just wondering, can you talk about the environment there since that, historically, was a really good market. Looks like you had some success in another market -- obviously, in a lot of markets this quarter, but could you talk about the Philippines, specifically?

Yes, I mean, Philippines has had years and years of success of growth. And we've been off a little bit and they've been down a little bit. They have some initiatives and plans they have to go back and kind of flatten out that trend and get them turning in the right direction again. But they were off a little bit this year from where they were in 2016.

Is that more of a macro factor? Or do you think it's an issue just like with your network, just kind of high level?

Yes, I think it has to do more with the successes in the leaders there, that maybe they're not as hungry as they had been historically. I think they're comfortable, and so it's really trying to go back. In addition, supporting those leaders get a new kind of a group of leaders emerging and hungry for the growth in that market.

Okay, last question, and I'll hop off is the environment for direct selling in China, just -- if you can give any general commentary about that given how sizable it is. Can you just talk about -- has anything changed since the last conference calls, either in governmental side or just how the consumer looks at direct selling there? I know it's not technically the same as other markets.

Frank, this is Josh. And so, you're right, China is a different market. But in terms of changes within the last quarter, we haven't been made aware of any, and we're regularly in touch with the China management team, including our legal and external affairs groups over there.

External affairs is government relations. So we follow that very closely, and quarter-over-quarter, there just hasn't been any noteworthy change that we would report.

(Operator Instructions) And we will take our next question from Timothy Ramey with Pivotal Research Group.

Congratulations on just an amazing quarter and year. Couple of things. One, I noted that the rate of spending in the China investigation kind of doubled from the run rate from the previous couple of quarters.

I know your bullet point language in the release that says we're not going to really comment on that. But can that be thought of as being closer to the end than the beginning? Or is there any way to kind of quantify where we're at on that?

So Tim, this is Josh again. We dropped in the same disclosure we've had historically, and that disclosure is included intentionally. And so beyond that, we can't comment on the investigation, other than I would just remind you that the investigation is still voluntary, it's an internal inquiry.

And we included the disclosure again that it's not quantitatively material, and don't believe it'll materially affect our results of operations. Beyond that, we really can't comment on it.

Yes, I appreciate that. And then relative to the commentary on the tax rate for next year, I think I kind of get what the problem is, you have too many expenses in the U.S. and not enough earnings in the U.S. to have the U.S. tax rate really matter.

Obviously, there's lot of strategies that other countries have used to shift costs, maybe your foreign subs have to pay a royalty for the use of the trademark or something like that. How bullish are you that you'll be able to kind of mitigate some of those issues, number one.

And number two, what external tax rate is really driving you to assume 34%? Since I would think many of those countries are much below that.

Yes, so Tim, you essentially, with the path of the U.S. tax reform, you saw a key market in the U.S. go from one of the highest tax rates in the world to one of the lower ones, and so that definitely changes how you approach the tax strategies.

So to your point, and you're correct on that, you see a game plan to go back and shift costs that have been supporting China from the U.S. over to China over a several year period. It's not going to be a light switch, we're going to do things that make sense that really support the China market, but that's definitely part of the game plan that we're addressing.

I would also comment is if you look -- let's take '16 and '17. With the type of instruments that have been issued from an internal equity perspective and the spread of the price and what was outstanding, we've generated excess tax benefits that have been pretty substantive in both 2016 and '17. And when you strip those out, the adjusted rate is like 34.4% in 2016 and 34.6% in 2017. So the 34% is not too much different than what that illustrates.

Got it. And then just one more on China, a very impressive growth in the fourth quarter, and wouldn't lead one to believe that there was any kind of turmoil in that market or lack of leadership or issues that would emanate from the internal investigation. Can you comment on how you're sort of firewalling the -- running the business versus conducting this investigation?

Tim, I'll try and then I'll let Josh comment on some of the specifics there. But I think what we're seeing -- we're very comfortable with the management team in China. We're comfortable with the direction.

We did -- and you saw from the commentary about a product promotion that was supportive of what you saw in the fourth quarter. In China, it was probably a good 70%, 75% of what the lift was from that product promotion. It was different than what you've seen in the past, where we've had things that have been more incentive-based, and you see a drag on margins.

This did not have that effect. And you didn't see any kind of dip in perspective sales after that. So we're pretty excited about what we saw there and we really haven't seen that type of response historically. So it was a good product promotion.

As far as the firewalling and the terms you're using there, I think we'll just keep running the business. And I think the investigation that we've had here, I wouldn't say has been impactful on the performance in that market.

Yes, Tim, this is Josh. It's helpful if you just take a step back and take a look at the investigation for what it is, right? It's a U.S. voluntary inquiry under U.S. law and to certain particularized activity in the China market.

And that, like Doug said, has not affected the sales arm of the business or the product arm of the business or our leaders who are out in the field selling to consumers, or consumers who are purchasing our products. And that's what you continue to see in China, is very strong consumer demand coupled with growth in leaders and success by leaders. And so, it is, for use of your term, firewall, that's separate. They're separate focuses that don't really relate to one another.

And we have no further questions at this time. I would like to turn the call back over to Mr. Richards for any additional or closing remarks.

Well, thank you for your questions and for your participation on today's conference call. If you have any remaining questions, please feel free to contact Investor Relations at (801) 954-7961. Thank you.

And this concludes today's conference. Thank you for your participation, and you may now disconnect.