USANA Health Sciences Inc (USNA) 2018 Q1 法說會逐字稿

Good day, and welcome to the USANA Health Sciences' First Quarter Conference Call. Today's call is being recorded.

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

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 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 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.

I'm joined this morning by our CEO, Kevin Guest; President and Chief Operating Officer, Jim Brown; and our Chief Financial Officer, Doug Hekking; as well as other executives here in the room with us.

Yesterday, after the market closed, we announced our first quarter results and posted our management commentary results and outlook document on our company's website.

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

Thanks, Patrique. Good morning, and thank you for joining us to review our first quarter results. We're very pleased to report another quarter of excellent results for USANA. This is exactly how we planned to start the year. The launch of Celavive was certainly the highlight of the quarter for us. We systematically launched this product line around the world beginning with Australia, New Zealand, Malaysia and Singapore in January, followed by the United States, Canada and other markets throughout the remainder of the quarter. Our data, which includes unit volume, customer feedback and sequential quarter preferred customer growth, suggest that Celavive has been well received by our customer base.

The sequential quarter preferred customer growth is particularly important to us as one of our 2018 initiatives in growing our preferred customer base around the world.

Keep in mind that we've not launched Celavive in China but plan to do so in the fourth quarter. We expect this launch to be just as exciting and successful as the launch that occurred in the first quarter. Our strategy for Celavive also includes rolling out additional complementary products to this line in 2018, and we will update you on that aspect to the strategy on future calls.

On a regional basis, our overall results continue to be driven by our Asia Pacific region and China, in particular. Our results in China reflect the strong customer response generated by the product promotion we offered in that market, as that promotion contributed approximately $11 million to sales for the quarter.

Additionally, we are very close to rolling out our new WeChat platform in China. As you know, WeChat is China's most widely used do-it-all app because of its wide range of functionality. This platform will make it easy for our China sales force to connect with potential and existing customers, introduce USANA products to them and complete sales.

While it is always difficult to quantify the positive impact an app such as this might have on the business, we believe that it will significantly improve the overall experience of doing business with us in China. With the rollout of WeChat and the launch of Celavive in China, we are confident about our continued growth in this important market.

In the Americas and Europe region, our results continued to be flat to down on a year-over-year basis, although we saw some improvement on a sequential quarter basis. These results are not acceptable to us as we have initiatives in 2018 that target key markets in this region, including the U.S. These initiatives include our social sharing strategy, which we began rolling out late in the first quarter and is beginning to share results, and continuing to educate, train and promote our new Celavive line, which represents an opportunity for us to acquire a new customer demographic in this region around the world.

Additionally, in June, we plan on opening 4 new European markets: Germany, Spain, Italy and Romania. In preparation for this expansion, we've already made products available to Preferred Customers on a not-for-resale basis in these markets. We're also utilizing our European regional headquarters in Paris, France, to efficiently and effectively expand throughout Europe. We are already seeing excitement around these new markets, which we expect to add incremental sales and help generate momentum in the region.

In closing, I'd like to express my confidence in the strength of our underlying business and our growth potential for 2018. As reflected in the updated outlook that we issued yesterday after market close, we believe that our 2018 initiatives will position USANA to again deliver another year of record results.

With that, I'll now ask the operator to please open the lines for questions.

(Operator Instructions) And we'll go to our first question from Frank Camma with Sidoti.

So obviously, good results. I just have a couple questions here, some things, I guess, I wasn't modeling. First, is there any way to get an idea of how much the China promotion may have helped you? What I mean by the China promotion is the sell-down of the Sensé products, I guess, may have helped you with accelerating associated growth -- or customer growth, to the extent that it did?

Yes, I think the China product promotion, Frank, was not a catalyst to customer growth. It was a catalyst to a value buyer who was looking for a good deal on product, which included some more top-selling products along with some of the Sensé product.

So from an inventory standpoint, will you be out of Sensé by a certain quarter? Is that your target like before the build of the Celavive?

No, we plan to have a little bit of overlap. There will probably be a little bit of spillover -- we're making appropriate provisions for the inventory. We just want to have a good customer experience, and we're not going to be stocking out and having them go without for a period of time.

Okay. So your overall inventory seems to be well contained. Is that just sort of ongoing play-out, with the China factory now fully up and you're transitioned over and everything is going smooth?

Yes, definitely that's the point that we made as well as with the new factory and improvements in overall IT. In China, we're able to manage our inventory using our systems much better than we did a few years ago. So we should see improvements and controlled inventory given that China does represent a large amount of our product produced.

Okay. Are there any near-term promotions? You mentioned Q4 Celavive launch for China. Are there any near-term promotions we should look out for that might affect quarterly results between now and then?

Nothing to the magnitude, Frank. I think what you saw in the fourth quarter and then again in the first quarter here, nothing to that magnitude. We're always running different promotional activities and some of the stuff to engage the sales force or excite the consumer, but you've just not seen anything to that magnitude that's going to move the top line like you saw in Q4 of '17 and Q1 of '18.

Okay. My last question is just going back to China for a second since you seem to be much further along as far as engaging the social online concept with the WeChat. What type of initiative do you have for like a more -- for a different market like the U.S., for example? Is there a similar Facebook type of app that you're working on?

Well, we're using several different platforms. Also, we're going to be utilizing WeChat in the United States and other markets, especially for our Chinese communities around the globe. But yes, Facebook will be a key component, Instagram, other platforms, and the notion is ease and customer experience as to what they've become accustomed to just typically in a retail setting to bring that closer to bear in a direct sales setting. I'm not changing the model in any way other than the ease of transaction.

(Operator Instructions) We'll go next to Doug Lane with Lane Research.

Staying on Celavive, you've had a -- you talked about our goal of exiting the year with Celavive around 10% of sales. Has that always assumed a launch in China in the fourth quarter? Or is that before you launched in China?

No, it's assumed China. I think what you have to unwind is you've got to take that peak out. Like we had that little bit of a spike with the initial launch of Celavive here, and so that's not the run rate we would expect in those other markets at this point. We think it will ramp up there through the year. And I think we'd have to go back and just factor China in. So the run rate would be what we'd expect that kind of ongoing basis to build, and I think we have some opportunity there as well.

So is it going to be a gradual build from first to second to third to fourth quarter? Or we're just going to sort of see a spike up in the fourth quarter given how important China is as a market for you?

Yes, I think because it wasn't launched in a market that represents roughly half of our sales, you saw a spike in the first quarter in markets excluding China. You'll see that settle down a little bit and then systematically build over the year, and then we are expecting a spike in the fourth quarter for China.

Got it. That makes sense. And then given the opening of the European markets and comparisons and what have you, I mean, how soon should we -- or do we expect the resumption of growth in Europe this year and as soon as the second quarter? Or how is that playing out in your mind?

Doug?

Yes. Kind of our expectations for Europe, we will see some growth in Europe, but it will be minimal. It will be a ramp-up throughout the year, but in our model, we're taking a very conservative approach with it. There is excitement in Europe, but it's more of a wait-and-see where we're going to go, but again, the model doesn't have a large amount in it for sales in Europe.

And I would kind of add on there, Doug, too, is the summer is not the most opportune time to go back and see robust growth, so there will be more of a launch event a few months after the launch. And I think so really, you'll start maybe seeing a little bit of activity, a little bit more activity in Q4.

Right, okay. That makes sense there. And then the obligatory cash question, where you've got so much cash in your balance sheet and a free cash flow generation here. As you build momentum, I mean, what are we going to do there?

I think it's the same commentary that we've had in the past. We've had -- we've just had board meetings this week. There were very active discussions on kind of that capital allocation question. We're always going to favor opportunities to go back and invest back in the business and things that are going to be a catalyst to top line growth. When we have funds exceeding that, we're going to find a productive way to go back and return capital to the shareholders.

And have you given the CapEx?

I think we're about 2% to 2.5% of sales is what we're expecting for the CapEx.

It appears there are no further questions at this time. I'd like to turn the conference back to Mr. Patrique Richards for any additional or closing remarks.

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.

This concludes today's conference. We appreciate your participation. You may now disconnect.