USANA Health Sciences CEO Discusses Q4 2010 Results - Earnings Call Transcript

| About: USANA Health (USNA)

USANA Health Sciences, Inc. (NYSE:USNA)

Q4 2010 Earnings Call

February 9, 2011 11:00 am ET


Riley Timmer - Vice President of Finance

David Wentz - Chief Executive Officer

Jeff Yates - Vice President and Chief Financial Officer


Timothy Ramey - D. A. Davidson & Company

Douglas Lane - Jefferies & Co

Scott Van Winkle - Canaccord Genuity


Ladies and gentlemen, thank you for standing by and welcome to the USANA Health Sciences Fourth Quarter Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today, Wednesday, February 09, 2011.

I would now like to turn the conference over to Riley Timmer. Please go ahead, sir.

Riley Timmer

Good morning everyone. We appreciate you being on the call this morning to discuss our fourth quarter and full-year results. Today’s conference call is being broadcast live via webcast and can be accessed directly from our website at Shortly following the call, a replay will be available on our website.

Now, 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 that 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.

Now, I’m joined this morning by Dave Wentz, our Chief Executive Officer; and Jeff Yates, our Chief Financial Officer. First, we’ll hear from Dave who will discuss our business activities during the quarter, as well as our plans for 2011, and then you’ll hear from Jeff who will discuss the financial details of the quarter.

I will now turn the call over to Dave.

David Wentz

Thanks, Riley, and hello to everyone on the call. I appreciate you joining us to talk about yet another record year for USANA. I want to begin by thanking our management team, our employees, and of course, our independent associates worldwide for their tireless efforts to positively impact more lives in 2010 than ever before.

As we look forward to 2011, I’ll begin by updating you on our activity in China and then discuss what we anticipate for China during 2011. Then, I’ll turn to North America and discuss our strategies for the New Year, which we believe will help us rejuvenate that region.

Now, with regard to China, obviously we’re excited about our acquisition of BabyCare. As you know, China is the second largest direct-selling market in the world. We believe that in light of our rapid growth in Asia Pacific and the strength of our Asian associate base, China represents the most imminent and significant growth opportunity for USANA. Although, we will need to make meaningful investments in both capital and human resources in the short-term, we believe that our acquisition of BabyCare is the most efficient way for USANA to capitalize on this opportunity.

I’d like to stress, however, that our acquisition of BabyCare and our plans for China represent a long-term growth strategy for USANA. While we understand the importance of reporting our progress in China quarterly, we are positioning ourselves in laying the foundation for a successful future in China. It’s absolutely critical that we did it right.

We spent the first eight months of 2010 negotiating and finalizing the acquisition of BabyCare and the best possible returns for USANA.

As Jeff will discuss in a moment, the small amount of debt that we used to fund this acquisition was repaid within three months of closing. And we now own BabyCare free and clear. I am very proud of our disciplined business model and the amount of cash we generate through operations.

Over the last four months, we have been working diligently to successfully integrate and align USANA and BabyCare. This integration applies not just to typical factors like operations, but to all aspects of the business.

Most importantly, it requires that we learn as much as possible about the direct-selling market in China from our experienced BabyCare management team and then work to develop an aligned vision for growth in that market. Although this integration process will take time, we are well on our way and pleased with our progress.

For example, over the past several months, we have been working very hard to have USANA products registered and approved to sell in China. Our BabyCare staff is among the most experienced and qualified in China, particularly with regard to government and regulatory matters.

With their assistance and our in-house expertise, we continue to believe that we will be able to introduce USANA labeled product through BabyCare over the next three to nine months. Although, we are excited to offer USANA products through BabyCare, we will not sacrifice quality for expediency.

In addition to product registrations, USANA will begin to shift much of its international attention in 2011 to assisting BabyCare with customer growth in China. As a result, we believe many of our associates in our current Asia Pacific markets, particularly Hong Kong, will shift their attention to facilitating growth in China. As a result, we will likely experience a slowdown in the growth of our Hong Kong market.

It’s very important to note that our growth opportunity in China will be a much different experience for existing associates because of the direct-selling regulations in China. As you know, these regulations require that we utilize a business model that has been specifically designed for China and approved by Chinese regulators, namely, BabyCare’s business model. It will take time for our associates to understand and become comfortable with the requirements of BabyCare’s model.

Likewise, it will take time for us to educate and train our associates on how to appropriately facilitate growth under BabyCare’s model. As a result of these factors, as well as the time requirements to gain product registration in China, we anticipate that sales in BabyCare will begin to meaningfully increase midway through 2011. Again, we are positioning ourselves for long-term sustainable growth in China.

Now, turning to North America. As you know, tough economic conditions have had a major impact on our sales in North America over the last few years. Many of our competitors have felt the impact of these economic conditions on their business in this region as well.

Notwithstanding these conditions, we believe that growth in North America is not only possible, but important to the long-term success of USANA. In that regard, I am pleased that our projections for 2011, while modest, include growth in sales for North America. In fact, our primary corporate performance objectives will be tied to sales and associate growth in North America. We have already begun to implement a number of different solutions to attract both customers and potential business owners to USANA.

We recently launched a new training system in the U.S. called eApprentice. This system is designed to make training and network marketing both simple to use and easy understanding for new associates. The success rate of associates who use eApprentice is much higher than those who don't. For this reason, we’re going to continue to do more promotions to encourage its adoption. As more associates continue to utilize this training program, USANA will introduce it worldwide.

Also on the technology front, we introduced a new interactive presentation tool called Health & Freedom Solution. We worked closely with our top associates in North America to develop this tool, which is designed to help our associates explain and share the USANA opportunity while requiring little public speaking by new associates.

We expect this tool to help new associates share the USANA message sooner and more effectively, which in turn should help them to be successful sooner. We know that the earlier associates earn a check with USANA, the more confidence they have to build a long-term successful home-based business with us.

In addition to these new tools, we have magnified our efforts to enhance our global brands. This includes providing products to amateur professional athletes as well as advertising and partnering with credible organizations.

A great example of this is our recent announcement of the extended partnership as the official health supplement supplier to the Women’s Tennis Association. The WTA is an organization with over 2,200 players from 96 nations.

We’re excited that eight of the current top ten ranked players in the world are using USANA’s products. This partnership will now increase USANA branding and participation at WTA events over the next three years. We believe that strong partnerships with greater organizations such as the WTA will help us to achieve our goal of enhancing our global brand, ultimately making USANA a much more common name.

Along the line of increasing brand awareness, Dr. Wentz and I recently co-authored a book titled, The Healthy Home. As you know, USANA’s most important object have always been to improve the health of individuals and entire families. The Healthy Home addresses surprising health risks posed by the everyday products and behaviors of a modern family and offers simple solutions to help minimize exposure without foregoing convenience.

In effort to reach more people, Dr. Wentz and I have committed to complete a book tour, which begins in late March. On this tour, we will visit 17 cities in the U.S., Canada, and Mexico, where we will share our vision for better health in the home. We believe this book will also serve as a great marketing tool for our associates.

Although 2011 will be a transitional year for USANA and will acquire significant work in investment, I am pleased with the underlying strength of our business, particularly in light of the current economy. We’re excited about the growth opportunity for USANA in China and the initiatives we have planned for North America.

With that, I’ll turn over to Jeff to take you through the numbers.

Jeff Yates

Thank you, Dave. And it's good to be riding shotgun with you today. Good morning, everyone. Thank you for joining us today. And along with Dave, I’m delighted this morning to report on a good quarter and another strong year for the company.

As you have seen in our release, net sales for the fourth quarter were $137.5 million, which represents a 17.8% increase when compared with the $116.8 million we reported for the fourth quarter of 2009. This quarter’s sales included $4.1 million in sales from BabyCare, our newly acquired business in China.

Additionally, favorable changes in Fx rates this quarter added nearly $3.6 million to our top line when comparing our results to the same period last year. For the full year of 2010, net sales increased 18.5% to $517.6 million, which marks the eighth consecutive year of record sales for USANA. Excluding BabyCare, sales increased by 16.8%. Additionally, favorable changes in currency rates accounted for $21 million of the $80.7 million increase year-over-year.

Our growth in sales this quarter was primarily due to an overall increase in the number of active associates to 228,000. This represents an increase of 14.6% when compared to the fourth quarter of 2009 and is largely a result of continued growth in Hong Kong. Also, our acquisition of BabyCare in China added 12,000 associates.

Excluding the addition of these BabyCare associates, active associates increased by 8.5%.

Looking into our results regionally, sales in North America decreased 2%, coming in at $59.6 million for the fourth quarter, driven by a disappointing decrease in the number of active associates to 86,000. We believe that these decreases are due primarily to continued tough economic environment, particularly for the consumer segment, and an increasing number of our associate leaders based in North America building their businesses throughout Asia.

Looking now results in our Asia Pacific region, net sales for the quarter increased by $22 million or 39.3% compared to the fourth quarter of 2009. Net sales for this region totaled $78 million for the quarter, which represents 57% of our total sales. Sales growth in this region was driven by the 39.2% increase in the number of active associates. The majority of this growth is due to our continued success in Hong Kong where sales increased 94.4% over last year. Notably, active associates in Hong Kong increased 35,000, or 100% over that market’s prior year.

In addition to Hong Kong, we also experienced sales growth in the Philippines, Japan, and South Korea. While small relative to our total, we continue to gain market share in these countries and are building a strong base of leaders to influence further growth in sales.

Looking to our bottom line results, net earnings for the fourth quarter were $12.4 million or $0.75 per share compared with $10.2 million or $0.66 per share in the fourth quarter of the prior year. Net earnings for the full year were $45.7 million or $2.86 per share, compared with $33.6 million or $2.17 per share in 2009.

The increase in net earnings and earnings per share this quarter resulted from improved gross profit margins, decreased associate incentive expense and a lower effective tax rate. These improvements were partially offset by higher relative SG&A costs and earnings per share were negatively impacted by a higher average number of shares outstanding.

Notwithstanding some post-acquisition integration costs that began flowing through the P&L in the fourth quarter, I am pleased with the fundamentals in our results as we finished this year.

Now let's talk in more detail about the major components of our P&L. First, gross profit margin for the fourth quarter improved as a percentage of net sales to 82.1%, compared with 79.8% for the fourth quarter of ‘09. This 230 basis point increase was primarily due to lower overall cost for our raw materials, benefits from changes in currency exchange rates, reduced freight costs, production and shipping efficiencies gained from capital investments and leverage gained on higher sales.

On a consecutive quarter basis, gross margins improved 70 basis points, which was primarily due to changes in currency and the increased leverage. For the full-year of 2011 we are expecting to maintain these margins and may even see a slight improvement in these gross margins.

Associate incentive expense for the quarter improved 100 basis points to 44.7% of sales, compared to the fourth quarter of the prior year. This decrease was primarily due to the strategic changes implemented in 2010 to better align compensation with actual sales growth. As anticipated, this expense has trended downward over the last several quarters and improved another 20 basis points on a consecutive quarter basis. We expect that associative incentives expense will continue to decline relative to sales during 2011. That said, it remains very important to us that we are among the highest paying compensation plans in the industry.

SG&A in the fourth quarter increased to 24.3% of net sales compared to 21% last year and also increased 150 basis points compared with the third quarter. Much of the higher than normal SG&A expense was largely a result of costs associated with the integration of BabyCare, which were higher than originally anticipated. These expenses related primarily to employee compensation paid out due to higher than expected sales results and to an associate event held during the quarter. Excluding BabyCare’s operations, SG&A would have been 21.8% of sales in the fourth quarter.

Now turning to our guidance for 2011, as noted in our release yesterday, our initial guidance is conservative. As I just mentioned, we experienced higher than anticipated costs associated with BabyCare during the fourth quarter. In addition to these costs, we believe that the investments that we will need to make in 2011 will successfully integrate BabyCare and will be higher than we originally estimated. Although, these investments may result in lower than desired top and bottom line projections in the short-term, we firmly believe that these are the right investments now to position USANA for a long-term sustainable growth.

In light of these factors, we are still projecting a ninth consecutive year of growth with net sales for 2011 to be between $530 million and $550 million. And we estimate that earnings per share will be between $2.85 and $2.95.

I’d like end by pointing out the strength of our balance sheet where in our cash balance at the end of the fourth quarter was $24.2 million compared to $13.7 million at the end of 2009. As Dave mentioned, this is remarkable given the fact that we have no debt and we used our line of credit to help fund our acquisition. This was completely paid off in the fourth quarter. I point this out because I believe the strength of our balance sheet positions us well to fuel the future growth we have planned for each of our markets.

With that, I will now ask the operator to facilitate the question-and-answer session.

Question-and-Answer Session


Thank you, sir. (Operator Instructions) And our first question is from the line of Tim Ramey with D.A. Davidson. Please go ahead.

Timothy Ramey - D. A. Davidson & Company

Good morning. Jeff, I’m going bait you a little bit here, but this date a year ago, you gave sales guidance of 6.4% to 8.7% sales growth and of course, the year came in at 18.5%, and you just referred to your own guidance as conservative. I guess the two inescapable conclusions are you guys are either really bad at doing forecasts or really conservative. How would you characterize the 2010 performance versus your initial guidance? Was it you were conservative or things just really broke your way?

Jeff Yates

I think that there are a number of factors. Both are probably true. We wanted to be careful and as we’ve always been, present a cautious guidance, particularly early on for the year. We outperformed our expectations. We saw some nice momentum in anticipation of the China opening and we were pleased with that.

Frankly, Tim, I hope to be able to beat the guidance for 2011 obviously. I wanted to be cautious coming out of the chute here with the impact that we have in those markets. And especially with the focus and objectives that we have to grow our North American markets, we’re going spend a lot of time there as well and are anticipating turnarounds in the markets we’ve been lagging and obviously have an opportunity to upgrade those projections as we get a little bit better view into our first and second quarter, but do apologize for guidance that we’ve given. But, as you know, we want to make sure that we’re being cautious as we come out of the gates.

Timothy Ramey - D. A. Davidson & Company

And just a follow up, if I could, Jeff, the SG&A, you talked about the quarter and you said what your thoughts were on 2011, I missed it, but I note that one point change in SG&A on the 2011 forecast is about $0.22 a share on my model. I assume that’s where you’re tied, since gross margins are going to be up and since the associate incentive expense is going to be okay, I assume that's where we're talking about a little bit of pressure.

Jeff Yates

That's where we're talking about pressure. And as I had mentioned, the investment in growing the markets where we've been economically challenged and some of the distraction that we've experienced, we want to focus on that. Dave's tour is a good example of that focus.

The investment and relationships with branding efforts from the athletes, as well as our attention to building the infrastructure and the model and the communications and the training and so forth for the China market, we’re going put some pressure on that SG&A line and believe that that will establish some foundations for future growth and anticipate fully a return to the more efficient model that you've experienced from us and we're known for since our inception.

Timothy Ramey - D. A. Davidson & Company

And just a quick one for Dave, if I could. Dave, getting kind of feet on the ground in China proved to be disruptive in the near-term for both New Skin and Herbalife, but obviously extremely lucrative in the longer-term. Your stated strategy was you wanted to be a fast follower in China. You didn't want to be the first ones in. What do you think you’ve learned about the China opportunity having observed your larger brethren?

David Wentz

Well, that's a big question, but it's definitely been nice to learn from their mistakes and try to let them break ground. It's not like we're going to run out of people in China and the market will be saturated any time in my lifetime. So it's been nice to have them break ground and I think the government is also starting to become more comfortable with our business model of direct-selling in general over the years where they went from banning it to now starting to understand it better.

And I think that makes the playing field a little easier for us coming in now, because they've learned more about it. They're not as fearful of it and they can see that companies can do a lot of good for their people. And so it's a better environment for us to go into now, where we don't have to waste hundreds of millions of dollars breaking new ground and fighting through those fears and trying to overcome them. We can get off and running.

Once we get our products in there and registered, I think we can get off and running quickly. But our people want our products and so getting those products into the country is the transition period that we've been working through and waiting on that kept it from happening sooner, but it's a critical step before we can do it so we can do it right.

Our people love our products and they want to see them in China. Jeff?

Jeff Yates

Yeah. One thing, Tim, that I would add to that and Dave emphasized it well in his remarks is that the relationships, as is evidenced by the people who have been over there for the last 18, 19 years and forged that ground, we’ve learned that relationships are essential to success in China and we're grateful that BabyCare has had longstanding very credible relationships with key regulatory officials, hence have helped us weather some of that challenge and navigate that landscape and we're pleased to see that they have been acknowledged in country with the license and the updating of their business, their operating license and so forth. And so we're anticipating the introduction of our products to be approved quickly and as quickly as it could be expected. And feel like we have learned from years of experience from others that that's key to the success for us in the country.

Timothy Ramey - D. A. Davidson & Company

Thanks, Jeff. And I don't really believe you're bad forecaster, why should I?

Jeff Yates

Well, I appreciate your restating the strategy that you have noted and observed that we've declared over the last several years. We feel like we're executing a long-term plan. We're pleased with our progress. We understand that there are factors economically and in the marketplace that we need to address, but I think you've reiterated the points that we've been making for some time and we appreciate that acknowledgment and feel good about our progress. We're looking forward to an exciting yet challenging year, but really an extraordinary future.

Timothy Ramey - D. A. Davidson & Company



Thank you. Our next question is from the line of Doug Lane, Jefferies & Company. Go ahead.

Douglas Lane - Jefferies & Co

Hi, good morning everybody.

Jeff Yates

Good morning, Doug.

Douglas Lane - Jefferies & Co

Jeff, can you help us understand, it's hard from the outside to get a feel for where the swing factors are in going into China. You mentioned that, expenses are a little higher and you've built more expenses into 2011 because of the BabyCare deal. Can you tell us maybe where specifically those expenses are higher than maybe what you’re looking at six months ago and what's your level of comfort that we won't come back in three or six months with even higher expenses?

And then from a timing standpoint, do you think you can get done what you need to get done in six months before you start selling USANA products in the market or is there a risk that maybe actually 12 months. Just try to give us some understanding about what you're dealing with this in building up BabyCare here?

Jeff Yates

Sure. It's an excellent question. We've availed ourselves the opportunity over the last five months since the acquisition to evaluate their model, their messaging, their compensation plan, the product offering and so forth. Dave has done a nice job of describing what our plans are to integrate our products and sales philosophy and the opportunity that we present to the people of Greater China.

I think we've laid some meaningful and effective plans. We've already begun executing those to give you some flavor of what plans that we've been considering. Obviously we need to train lots of people. Thousands of the consumers, thousands of associates throughout the other markets that we serve and to get our branding and messaging within that country established early on, get a strong presence, a strong awareness.

We're going to be traveling quite a bit amongst the various provinces, holding several meetings in each of those areas to train as many people as possible on the opportunity. There are 12,000 associates over there right now and about that many consumers in the BabyCare model already who are beginning to understand what USANA has to offer them and the product offerings that we'll be modifying in their line. We have to help them understand.

We need to help those who would be candidates for enrollment and participation in the BabyCare model, but with the USANA message want to recruit for them. We've got a lot of marketing websites, messaging, planning to communicate in that regard. We've got design and IT infrastructure to put into place.

The brick and mortar infrastructure that we acquired at the acquisition is a positive and favorable position for us. We want to expand that. We're going to do that carefully only in those provinces and cities that would be most appropriate. We've got some communications and marketing efforts amongst our associates throughout the world who have an opportunity to influence people within the BabyCare model and/or have an opportunity themselves to, because of their dual citizenship, to operate a business there.

We're planning to create infrastructure foundations capability early on knowing that the revenue curve will follow it soon enough, but we recognize that we got to get out in front of that in order to establish a strong presence in that country and a basis upon which we can build for the long-term.

Douglas Lane - Jefferies & Co

And the timing aspect of the question, I mean, is this something that you're really comfortable can get done in six months or I mean, how confident are you that everything you need to get done, which sounds ambitious, can get done in the timeframe you've outlined?

David Wentz

Based on the intelligence we have, the experts we have working in the area, we believe that we'll have a phased in approach to products and that we will be phasing them over the next three to nine months. We will get our product line in there. Of course, you never know if there's some huge change in government sentiment in the next fit, but based on what we're seeing we're feeling very confident.

Douglas Lane - Jefferies & Co

So the timing really here, Dave, is the approval process the biggest sort of unknown or out of your control part of the equation?

David Wentz

Yes, it's absolutely out of our control, but based on histories and expectations, we're feeling quite comfortable.

Douglas Lane - Jefferies & Co

Okay. And then lastly, how does this – maybe I'm getting ahead of myself here, but you have your global convention every August and it's in Salt Lake City. Is that whole structure going to change? Is it going to be moving around, are you going to split the convention into U.S. and Asia? What's your plan with the convention going forward?

David Wentz

Well, currently we've had two conventions, one in Asia Pacific and one in Salt Lake for the last, I don't know how many years, because of the difficulty in traveling between the two areas, the expense, so we're having our Hong Kong convention in five weeks or so here, expecting over 8,000 people to be at that convention, which will be big or bigger than our Salt Lake convention.

Then we'll have our Salt Lake convention back here in August and then we’ll go back to Asia Pacific. We're trying to do every six months, have a convention in one of the two regions. And it will move around Asia Pacific and it will always be in Salt Lake due to our headquarters here, but it will, for North America, it will always move around Asia and well, not always, but our plans are to have an AP convention March timeframe and a Salt Lake convention August timeframe going forward.

Douglas Lane - Jefferies & Co

Okay. That makes sense. Thanks.

David Wentz

Thanks Doug.


(Operator Instructions) And our next question is from the line of Scott Van Winkle, Canaccord Genuity. Please go ahead.

Scott Van Winkle - Canaccord Genuity

In China. First, Jeff, you talked about forecasting timing and costs associated with the investments in Mainland China with BabyCare, but you’re also talking about kind of a revenue disruption. How do you forecast that? Is there experience or are you kind of taking a shot at it or have you talked to distributors? How does that plan come together as to what the impact might be on revenue as the transition occurs?

Jeff Yates

You broke out of the first part of that question there, Scott, but I'm gathering what do we base our forecasts and our projections on with respect to the transition in that market? Is that.

Scott Van Winkle - Canaccord Genuity

Yeah, more revenue than expenses.

Jeff Yates

Sure, sure. We anticipate, as is always the case with new market openings, there's always a period of time where we've got transition and people are trying to figure out what to do. We look to that experience from new markets that we've opened and we anticipate that those who have dual citizenship or qualified to operate in that country will move or change their focus and shift from Hong Kong business into BabyCare as well as from other markets.

There are associates many of whom are simply product consumers that we know of, who are buying in Hong Kong for consumption only. We expect a shift to BabyCare for many of these people who we also anticipate will become entrepreneurs and build a BabyCare business. We anticipate that the average initial purchase per associate in BabyCare, which is about 40% lower than our other markets, as a result of that there will be a natural sales decrease at least early on or until our volumes increase.

And given those factors as we evaluate the demographics of the market of the associates, the distributors, the consumers that are in play here, we model our best projections and taking the experience of market openings that we've had and in concert with our communication and marketing plans and our training plans, have come up with what we believe is a strong educated guess at what that transition will look like and how that market will evolve. And so with the visibility that we have from that experience and the plans laid, we feel pretty good about our early projections and hope that obviously we can beat those and lay up in store some nice growth that we hadn't planned for.

Scott Van Winkle - Canaccord Genuity

Great. And that 40% lower average purchase, is that driven by price point or a different model on personal sales volume?

Jeff Yates

Well, yes, they absolutely have a different compensation plan, a different model. So their initial price point is lower, but what we've seen is the longevity is better at BabyCare than Hong Kong, which means initially we'll get less dollars from each new person that comes in, but long-term that will catch up and cumulatively grow nicely, which is what we're excited about, because the potential in Hong Kong compared to the potential in China, there's no comparison there. So we'll have some initial disruption as we transition our focus, but the potential of China is just huge and gives us the ability to do so much more long-term.

Scott Van Winkle - Canaccord Genuity

And can you remind us when BabyCare received its license for direct selling, was there any negative impact or if I recall, didn't the business kind of take off once this transition began to direct selling?

David Wentz

Yes, the current associates they have were very excited, of course, to receive one of only 25 licenses and that will allow us for a lot more talking, a lot more confidence and credibility. And so they picked up their activity, but they're such a small company, such a small base that we're hoping that when we bring our expertise to it, we'll be able to completely dominate that growth curve. I don't know what the right terminology, but we believe, we think we can get it really going.

Scott Van Winkle - Canaccord Genuity

And over the next three to nine months as you register USANA products in China, are there specific products that you expect to or not expect to get in the market? What would the tool bag be for a USANA distributor in Mainland China in nine months from now?

Jeff Yates

Well, I can't let you know that until I let all of our distributors know, because they are waiting with anticipation to see what their product line is, but we've had that Tianjin facility in China for a number of years and we've been registering products, but we do need to get those transferred over to the BabyCare model and so that's what we've been working on.

As in with all our markets, our products will follow the regulatory guidelines of that country. We've had to modify our products for almost every country we've gone into and so we'll be following the rules and regulations of China in launching those as quickly as we can to build up a good-sized product line that will support the business model. And we hope they will be very happy with what they see coming in the next three to nine months.

Scott Van Winkle - Canaccord Genuity

And beyond the focus obviously on the China transition this year and your efforts in the U.S., the book tour et cetera, are there specific incremental efforts in other markets? You had some comments about promotions. I wasn't sure if that was North America specific or more broadly. Is there anything incremental that's happening in other markets?

Jeff Yates

Not incremental from a cost standpoint, if that's what you're asking, or --

Scott Van Winkle - Canaccord Genuity

Well, I was thinking more kind of business development catalyst.

David Wentz

We're really hopeful that the eApprentice and Health & Freedom Solution tools that have recently come out, it takes a little while for adoption. The leaders have to get comfortable with them before they start training their people in a new way, but we've measured the results of people who take the training versus those that don't and we've seen an improvement. And so now that we can share those results with the leaders, more and more leaders will adopt, will almost likely adopt and help their teams perform to that higher productivity level.

We need to get those completely translated and moved into all markets and that's going to take some time, all those video productions. It just takes awhile. Health & Freedom Solution is an easier way to do presentations. Number one fear is public speaking and so the idea of a new person getting up in front of the group and speaking is a fear that keeps them from doing anything. And so this tool will hopefully do the speaking for them in a way that makes them confident and comfortable and that more of them will start presenting than normally would and start presenting much sooner because their confidence level will be much sooner. So we're hoping those tools will have an impact and get that confidence building and that growth building.

Scott Van Winkle - Canaccord Genuity

That's a global effort. And then lastly, Jeff, I think you said and pardon me if I'm wrong, but you gave a SG&A as a percentage of sales figure for the fourth quarter. I think it was up year-over-year. Is that the case? Even if you had taken out Baby – I'm sorry, if you exclude BabyCare, I think you gave us an SG&A number that would have been up year-over-year as a percentage of revenue. Is that that accurate and if so why?

Jeff Yates

The 21.8 versus 21.0, so we were up slightly. We had a few costs that we advanced on this year, contributions and some miscellaneous marketing activities, none of which by themselves are significant in any way, but nothing really notable, but that in and of itself is not necessarily a trend. But we believe that we're managing that like we always have and outside of these investments in brand awareness and marketing and communications and promotions, WTA and so forth, which are largely incremental. The fundamental model still remains as we've managed it in the past.

Scott Van Winkle - Canaccord Genuity

Okay. Thank you very much.

David Wentz

Thanks, Scott.


Thank you. And I show there are no further questions at this time. I would like to turn the call back over to Riley Timmer for closing remarks.

Riley Timmer

Okay. Thank you everyone. We appreciate your participation on our call this morning. If you have any remaining questions, please feel free to call us. You can contact our Investor Relations department, you call Patrick at 801-954-7961. Thanks again.


Ladies and gentlemen, this concludes the USANA Health Sciences fourth quarter earnings conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3030 or 1800-406-7325, followed by the access code of 4403365 and the pound sign. Thank you for your participation. You may now disconnect.

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