USANA Health Sciences Inc (USNA) 2018 Q2 法說會逐字稿

Good day, and welcome to the USANA Health Sciences Second Quarter Conference Call. At this time, I would like to turn the conference over to Pat Richards. Please go ahead, sir.

Good morning. We appreciate you joining us this morning to review our second 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.

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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 the 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 second 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 Kevin.

Thanks, Patrick. Good morning, and thank you for joining us to review our second quarter results. As reported yesterday, this was an exceptional quarter for USANA, with record top and bottom line results. In addition to generating excellent operating results, we accomplished several initiatives during the quarter that are both exciting and important to our business. I will touch on some of these initiatives first, and then review several growth strategies that we are excited about for the second half of the year.

First, we expanded our European region during the quarter with the opening of 4 new markets: Germany, Spain, Italy and Romania. The launch of these markets went very well, and the initial operating results have been positive. Although the initial level of sales and customers we expect to gain from these markets is relatively small, this is helping to generate excitement within the region. As with our other European markets, we are leveraging the existing infrastructure of our regional headquarters in Paris, France, to operate in these markets.

Additionally, we completed the initial phase of our WeChat platform during the quarter, recently rolled it out to our China customers. In the coming weeks, we will also make this platform available to the rest of our markets around the world. Because many of our customers around the world outside of China are Chinese, we expect this new platform to benefit the customers in most of our markets. This new platform will make doing business with USANA much more convenient for our associates and customers, and improve their overall experience with us.

Now with respect to our strategies for the second half of the year, let's start with our 26th Annual International Convention that we will host in Salt Lake City in a few weeks. This event always helps to generate energy amongst our sales force, and provides an excellent venue for new product announcements. We believe this year will be very successful.

Following our International Convention, we plan to watch Celavive, our new skincare line in China during the late third and early fourth quarter. Celavive has been rolled out in all of our other markets, and has been a hit with customers, so we are expecting a very successful launch in China. In addition to this China launch, we will also be rolling out additional complementary products under the Celavive line later this year.

Finally, we will host our annual China National Meeting during the fourth quarter, and will be in Macau this year. This event is very similar to our International Convention in the U.S., and will help generate excitement and momentum in China. This year, however, we are doing something new and selling product at the event, which we believe will be very successful. In line of this, we are anticipating sales of this event to be between $8 million and $12 million, which we have not had in past years. In light of these strategies and our strong performance during the first 6 months of the year, we updated our 2018 outlook in our earnings release issued yesterday after market closed. Our outlook reflects our team's confidence in these strategies and the strength of our business around the world. We look forward to delivering on these initiatives and generating another record year for USANA in 2018.

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

(Operator Instructions) Our first question comes from Tim Ramey.

Congratulations on just a blowout. It's pretty impressive. I wanted to drill down on margins a little bit because I looked back, I think, these were the best quarterly EBIT margins that we've enjoyed in 5 years. I think it was second quarter 2013 when you were last at these levels. It seems like there was some good expense control, and associate incentive expense was lower than I thought it might be and decent leverage to the gross margin as well. I know you'll enjoy less benefited -- FX or you're projecting no benefit of FX in the second half. So how should we think about those margins rolling forward?

Tim, this is Doug. Yes, I mean, to your point, it was just -- is the perfect alignment of what we've seen. It was a great sales quarter. And just the timing of some of our expenses just didn't hit in Q2. We've wagged a little bit from our plan as far as our spending, and we expect to go back and spend some of that in the back half of the year. Celavive added a little bit of incremental margin that we -- a little bit above where we had anticipated originally. So those are the -- a couple of things that really provide the lift there. In the back half, we're about a 15.2% operating margin, which is still better than kind of what we kind of communicated for -- initially for the full year. But I think that lift that we see from the Celavive and just from a little bit higher top line has provided some leverage benefits. But currently, as you pointed out, it does provide a little bit of a headwind both on revenue and a little bit of compression on margins in the back half of the year..

And so should we think about that as -- I mean, I'm guessing that SG&A in dollar terms doesn't vary a lot, but maybe there's a 3Q peak in that. So this means maybe associate incentive expense does tick back up closer to historic levels in the second half. Is that the way to think about it, Doug?

Yes. I think the back half of the year is going to look much more like the first quarter than the second quarter. So I think that's probably the easiest way to capitalize this.

And I know your tax rate is always your best estimate of the future. But I have been, perhaps, optimistically modeling that there would be some reduction in tax rates going forward, as you address some of these initiatives, to figure out where you recognize expenses and revenues around the world. Is that just not going to be a 2018 kind of thing? It might be just too optimistic then on that?

Yes, I think you are. I mean, the 34% was really an anticipation of being able to go back and shift some of these costs. Going forward, I think there's some upside, but you really got to go back in fact to where we are paying taxes and what's the effective tax rates are in each of those regions generating the profits, and a good portion of our business and profits are generated in China. And when you look at the China tax rate along with the withholding tax when we repatriate funds, when you factor that in, it's not too different than the rate that we're reporting.

And just -- it's not the biggest thing, but relative to some of the balance sheet accounts, I noticed some compression in PPD and also in goodwill accounts. And everything moved a little bit down, except inventories. And should I think about that as the effective currency translation? Or is there something else going on there?

On goodwill, absolutely, it's currency. On PP&E, we didn't spend a level of plan in the first half on those type of activities, but currency is definitely playing a role of where those assets are. And when we built the plant and stocked the plant in China with some meaningful expenditures on equipment, we just changed that translation rate. It does affect with how you look at that on the balance sheet.

Okay. And my last one, just I always ask this question, but you're carrying a lot of cash, no debt. You have not been completely out of the market for the last year that the China investigation has been underway, but you haven't been aggressive. Is it a fair statement that the China investigation, until that's resolved, remains somewhat of an overhang on repurchasing shares?

So Tim, this is Josh. And with respect to that, we're not going to comment on how the investigation relates to the buyback program in any respect, and so we just can't speak to that today.

Our next question comes from Doug Lane with Lane Research.

I'd like to turn to the top line. The top line beat was pretty impressive, and in digging through it, at least, relative to my numbers, the currency was about as expected and that the leadership, the associate customer numbers are about as expected. So there was a big jump on productivity. And I know, in the first quarter, we were talking about Celavive, but that wasn't as much of an impact in the second quarter, and it's widespread. I mean, I'm looking at each of the major regions beating me on the top line through better productivity. So what's sort of the back story company-wide that's showing -- driving the improved rep productivity?

Yes. I would say that the primary factor in that lift on a constant currency basis was the Celavive, and you saw it. And we also had -- we ran several product promotions, and we have been doing that, and that's definitely added a little bit of incremental spend there. We always go back, and although very minor, we have a -- we review our prices every January. So year-on-year basis, that's reflected, and that's the very small part. But it's really Celavive and these product promotions that are really the driving force there.

Why don't we talk about China promotions being much more successful lately? But again, are these promotions being run in the other regions similar? Can you maybe give a little bit more color on what the promotions are outside of China and why they're being so successful?

Yes, I think it's a similar thing. So China ran another one, a Mother's Day special in the second quarter that helped lift revenue by about $6 million in the quarter. The other markets are using this template because it's been very successful, what we saw in China, and it really is a value offering. We're offering some of our top-selling products, and then throwing a free part on top of that, and it seems to have filled quite a bit. And so we're using that strategy in several of the markets and have seem to be relatively successful. It's not to the magnitude that you see in China, but it's still been, I think, well received.

Now that the numbers have cleared that out, that's for sure. On Celavive, where you've mentioned you did $7 million, I know you said that we had the pop in the first quarter from the launch, and that we wouldn't really see another kind of pop like that, until this launch in China, which is in the third quarter, fourth quarter. So for the research, should we look for another kind of number in the third quarter similar to the second quarter for Celavive, and then see the real growth in the fourth quarter?

Yes, I think from a percentage of sales standpoint, I think that's a fair comment. I mean, if you -- one of the comments we had is we had expected, as we launched this, to see a little bit of a spike. But then we expect that the run rate to build to about 10% of sales by the end of the year. And in markets where Celavive would launch, it's averaging about 9.5% of sales. And I think from that measure, we're maybe a little bit ahead of where we thought we would be at this stage.

Okay. Good, good. And then just lastly, the associate incentives have come back from last year. I guess they're more in line with where they were 2 years ago. Is that what we should see in the back half? Or are we going to pretty much even out at this 44% for the rest of the year?

Yes, yes. I think they'll be more in line with the first quarter. The second quarter didn't have some -- a little bit more the promotional expense. So I think you'd probably have a -- 20 basis points from the top year number, and you're right in that relevant range of what we would expect from the back half.

(Operator Instructions) Our next question comes from Frank Camma of Sidoti.

Just a follow-up on that last question, the associate incentive because it sounded like, Doug, you said, it's going to tick up, it sounds like, more in line with Q1. But it sounds like you have more promotional activity in Q2. Is that not accurate statement?

Not from an incentive standpoint. When you look at some of the product specials and stuff, yes, I think we've had a few more product specials than we've had, at least, on a year-on-year basis. But from a purely incentive-type offering, we really didn't have anything that was substantive. If you look at the second of last year, we had something pretty significant that was done in China, and that's why the year-over-year comp looks quite a bit different. We're going from 46.1, down to 44. So that's not the common comparable. And if we have one of those events, we'll make sure we spell it out, so you get visibility to it.

And is the payout, I think you mentioned this, the payout on Celavive is actually less. Is that because the gross margin is less on that product? Is that how you're doing it?

Yes, it is. And when we went through it, we did a host of studies. We looked at the kind of the -- all that market information out there, and so Celavive carries a lower gross margin with it, and it also carries a lower incentive burden too. So we're somewhat margin neutral in what we would expect that from our other categories.

Okay, okay. Is Celavive, you don't produce that in-house, correct?

Correct.

Okay. So that's all produced out. And when you do it in China, you'll source it in China as well?

Yes. No, no, we'll build it in China at our plants.

Right. That -- oh, you will be able to manufacture Chinese -- the Chinese portion in your Chinese plant?

Yes, that's accurate.

Okay, good. So will that mean that you get a better margin on the China stuff or is it too soon to tell because you won't be able to scale?

Yes, it's probably too soon to tell. But I would expect maybe it would be a little bit better. Their pricing structure is marginally different than the rest of the world, so...

Okay. And then staying on Celavive, I guess it's too -- is it too soon to make any comments about for your order rates, and what you're seeing there just as far as given that it's -- I mean, it's already a competitive category obviously. I'm just curious what customers are saying and how often they're reordering these products?

So anecdotally speaking and what we're hearing from our customer base, this is Kevin, it's being very, very well received. The reports coming back are extremely positive. It is too hard to quantify specifically. It's too early to quantify specifically. One thing is -- from our supplement side, it's based on a 28-day cycle in incremental purchase, and Celavive is a little bit different than that because consumption varies based upon the user. And so our -- it's just -- we're just a little too early to give you any kind of information. It will be concrete other than just anecdotal that we're hearing that it's being very, very well received.

I imagine it's also a little bit harder or different because it's kind of a suite of products, right? So do people pick and choose like what they want at the first order? You know what I'm saying, like, is there certain items in Celavive that they particularly like versus others? Or is that not the case? They kind of stay with their regimen?

So yes. So what we're seeing is that it looks like there are going to be a few flagship-type products with Celavive that will have a larger percentage of the Celavive sales. But again, we're watching how that mix plays itself out. One thing I want to also bring up is that Celavive includes our InCelligence technology, which is the delivery on our personalization strategy, which differentiate of this product from any other skincare product in the world. And that message is resonating very well with our custom base around the world, as they're out taking it to other people. So we can't lose that InCelligence message because that's a core part of what we're taking to the world right now in our flagship product, in our sales essentials. But it's also the same technology that's in our skincare product.

Okay. And are you seeing any -- it's probably also too soon to know, but any like changes or improvements in like the type of demographic that will be -- or helping you, I guess, recruit new customers is what I would say -- or associates in the sales force. I mean, I'm sure it's kind of rejuvenated your existing sales force. But have you seen any -- they obviously -- you had growth in the sales force. But people say, "No, I chose to join USANA because now I have the skincare line." Have you seen any of that? Just any of those?

Well, one of the areas where we've actually made a considerable investment is our technology side, which is our ability to use the social media, social sharing aspects. And Celavive wins itself beautifully to that strategy in the investments we've made in technology, which lends itself to your question of a younger demographic who participates in social media, and so again, no hard numbers to give you. But the activity we see from a social-sharing perspective through technology would lead me to believe that yes, we are seeing a younger demographic participate and be more excited from a product category perspective than we have seen traditionally.

Okay. And I guess the last question I have is what do you think it would take to -- I mean, you've done a lot of work on China turn. I'm just talking specifically now about U.S. numbers -- turn to U.S. numbers, and then, obviously, it doesn't -- it hasn't really taken, which I'm kind of a little surprised by. What do you think is going to take to turn those numbers easy? Is it just more of a reflection of direct sales kind of continuing to struggle in the U.S.? Or is it more the category of supplements? I was wondering if you could sneak some comments there.

So if you look at quarter-over-quarter, we did see a lift in the U.S. which we saw some very positive signs of our strategies actually gaining some traction, which for us...

Is that year-over-year or is that sequential, I'm sorry?

No. Sequential quarter-over-quarter, yes. And so I have great faith in our U.S. market, and I do believe that we've kind of seen a shift, well, not kind of -- we have seen a shift in the way people expect to do business with a company. They want it simple. They want it fast. They want it to show up on the front doorstep, and direct sales traditionally isn't that. So we are shifting from that perspective to interact with our customers in a way that they are saying they want to be interacted with. And I think as we continue to execute our strategies, that's something that's at the foremost of our mind, is that interaction. And so from a direct sales perspective, the key is figuring out how to crack that code and not compromise the distribution channel, which we're committed to. And we think we've made great strides and technology, again, plays a key role in that whole process. And as we continued to deliver on our technology, I think we'll see the United States move more and more in a positive direction.

At this time, we have no further questions in queue. And I would like to turn the conference back over to Patrique.

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, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.