USANA Health Sciences, Inc. (NYSE:USNA) Q3 2017 Results Earnings Conference Call October 25, 2017 11:00 AM ET
Patrique Richards - IR
Kevin Guest - CEO
Doug Hekking - CFO
Tim Ramey - Pivotal Research Group
Frank Camma - Sidoti and Company
Doug Lane - Lane Research
Good day and welcome to the USANA Health Sciences Third Quarter Conference Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to Patrique Richards. Please go ahead, sir.
Thank you and good morning. We appreciate you joining us this morning to review our third quarter results. Today’s conference call is being broadcast live via webcast; 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 our outlook for fiscal year 2017. 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 Chief Executive Officer, Kevin Guest; our Chief Financial Officer, Doug Hekking; our Executive Vice President of Legal and Investor Relations, Josh Foukas, and other executives. Yesterday, after the market closed, we announced our third 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 from -- some brief remarks from Kevin.
Thanks, Patrique. Good morning and thank you for joining us to review our third quarter results. The third quarter was an exciting quarter for USANA. In addition to achieving record quarterly sales, we celebrated our 25th anniversary, made some exciting announcements at our International Convention and made meaningful progress on several key initiatives. I’ll comment briefly on these topics before turning the call over for questions.
First, we held a very successful International Convention here in Salt Lake City. At this event, we made two significant announcements that have generated a lot of excitement amongst our associates and customers. The most exciting announcement was likely the introduction of our new skincare line Celavive.
In comparison to USANA’s existing skincare offering Sensé which was introduced in 2002, Celavive is a completely new, personalized experience. Celavive offers a more comprehensive skin care regimen. It’s designed to benefit multiple skin types and ethnicities, and more effectively meets the needs of USANA’s current demographics. Importantly, Celavive features our new InCelligence technology which provides cellular nutrition to the body’s largest organ.
Celavive was made available for purchase exclusively to Convention attendees, which allowed us to give this new product line into the hands of many of our brand advocates prior to the official launch in 2018. This prelaunch availability created an opportunity for an important pre-market user experience. This certainly allows USANA to receive useful feedback ahead of the official launch but it also gives each associate time to create their Celavive business plan, leading into 2018. We will officially launch the Celavive line in select markets in January of 2018 and then systematically roll it out to other markets around the world during the remainder of 2018.
Skincare has presented a growth opportunity for USANA for some time now. In recent years, we’ve seen skincare drop as a percent of net sales. Considering the meaningful enhancements of this new -- all new product line, we believe that Celavive will generate incremental sales. While we do expect to gain some wallet share from existing customers, we believe that Celavive will help attract a new customer demographic. Given the systematic rollout of Celavive throughout the year, we expect skincare sales to grow from the current 6% of net sales to an estimated 10% of net sales by the end of 2018.
The second key announcement made at our Convention pertains to our continued expansion through Europe by opening four new markets next year. Beginning mid-year 2018, we will open Germany, Spain, Italy and Romania. Each of these markets provides an opportunity for us to get our high-quality products into the hands of more individuals and families in Europe. Over time, I’m optimistic that these markets will contribute to Europe’s overall growth as a percent of sales.
Finally, I’d like to speak to the meaningful progress we’ve made on several key initiatives. Throughout the year, we’ve invested in several major technology initiatives to ensure that our systems meet the needs of our current business but also position USANA for future growth. The enhancements we’ve made and continue to make to our IT systems are intended to make it easier and more enjoyable for our customers to do business with USANA in each of our markets. They’re also intended to create speed, efficiency and flexibility for us to run a business that operates in over 20 countries around the world. I’m pleased with our progress on this front and expect it to begin leveraging these investments in 2018.
As we celebrate our 25 years of business, it’s amazing to reflect not only on the success USANA has achieved over the years but also on the meaningful evolution of our business and industry. In many ways, we’re at the beginning of a new chapter for USANA, one which entails the introduction of bold new growth strategies and an expanded definition of direct selling and customer service. In fact, our initiatives and investments over the last few years are intended to prepare USANA for this new chapter. With that in mind, I’m excited for USANA’s future and particularly 2018.
I’ll now ask the operator to please open the line for questions.
Thank you. [Operator Instructions] And we’ll take our first question from Tim Ramey with Pivotal Research Group. Please go ahead.
Good morning. Thanks. Just wondering about the kind of the cadence of the -- is it a total phase out of Sensé, will Sensé still exist in the future, or did you write down that product and perhaps there won’t be any fourth quarter sales of that? Can you give us some sense of how the phasing of Sensé into Celavive might work?
Yes. So, we’re going to completely phase out Sensé, we’re going to do it on a run out basis. We expect the run out to tail into next year and overlap with our launch of Celavive. But, from a strategic perspective, we will no longer have Sensé as part of our skincare line and skincare offering.
And do you have any thoughts or guidance about what the margin structure of Celavive looks like, is it similar to Sensé, similar to the corporate average, higher, lower?
It’s roughly in line with what you’re going to see for the company as a whole, Tim and it’s right in line with where Sensé is now. The distribution between incentives and cost of sales is a little bit different, in investments we’ve made on kind of the packaging and the formula side here. But as a whole, the margin profile is roughly the same.
Okay. And should we expect any further impairment or inventory write downs on this or is it…
Based on the plans that we’ve right now, I would say no, that’s -- if we thought it was going to happen, we’d have gone back and done that. But as time passes and we see the reactions, that may be necessary but we don’t think it’s going to be large on that either if that happens.
And just one more, if I can, maybe I’ll jump back in the queue after that. But, just happy to see you resume participation in share repurchase. I was concerned that you might not do that until you would result the China investigation but apparently that was not a factor for you. Can you elaborate at all on your -- the why of -- why resume versus not buying shares in the first half?
Yes. I think Tim I’m just -- I’m not going to couple the discussion on the share buyback with investigation going on. I think going forward, we’ll just see us be opportunistic if the opportunity arise, that we see a good opportunity and that we don’t have anything precluding us from doing it, you’ll see us be active there.
Our next question will come from Frank Camma with Sidoti and Company. Please go ahead.
It’s funny because South Korea and Philippines have kind of been like a tale two of countries here. And just wondering if you could sort of give us some color around that since you are really doing obviously well in South Korea, which some of your competitors actually aren’t; and then, Philippines was hot for really long. So I was wondering if you could just kind of give us color around that and also maybe speak to how those demographics might be different or similar.
Yes. So, we are very pleased with what’s happening in Korea. And it’s not atypical from what we’ve seen over the 25 years of USANA where leadership really drives the business and momentum and customer excitement around products and so forth. And so in Korea, we are seeing a younger demographic become more and more excited about USANA, our products and what we offer, and the excitement level just continues to grow and grow. Our management in Korea is outstanding and it’s connected really well. And it’s a momentum business and we’re in momentum in Korea, in South Korea.
In the Philippines, we had momentum going there. And again, I’ll point back to our business leaders that are doing businesses there. And we’re at a point in a maturing market where we are focused on new leadership development and rising leaders up the ranks as other leaders have become very successful in their business. And so, our focus for the Philippines is to really look at new leadership development and how we can bring others up the ranks. We also expect that Celavive and this new skincare and others will help in those marketplaces and bring some new excitement and energy, especially in the Philippines as we grow there. There are certain areas of the Philippines where there’s considerable unrest from a governmental perspective and what’s happening in the region, which has had an effect, and there’re other issues beyond our control from USANA perspective as it relates to the Philippines that have also had an impact on our business.
Larger macro issues. One of the things that always struck me about South Korea, if I’m right about is, it is a pretty professional workforce, right, like it didn’t attract sort of like a lot of accountants and that type of white collar work. I think I’ve heard that comment in the past. Is that technically correct or am I -- from a leadership perspective?
We saw that in the Philippines where we saw a lot of...
Yes. Philippines, yes. I’m sorry. That’s right.
Yes. We saw a lot of nurses and doctors and very, very high professional level people coming into USANA. And we haven’t seen a change in that trend, we still see it. But, to your point in South Korea, we also see a very highly educated, high level of people who are involved in USANA as we see that market grow.
A quick question on China, just to clarify. There was no promotions in the quarter. Is that correct?
That’s accurate. Nothing…
And another final question just in particular to China. What technology are you using there as far as -- given that they use a lot of WeChat and stuff like that? Can your associates use that over there? Do they do even that or is there something built into your platform? I always kind of confuse that with some of the other sellers. What do you have today?
So, we’ve had at best, a limited WeChat activity happening with our customers in China. And a major part of our strategy, as we talk technology, WeChat is at the top of the list in making it easy for people to enroll, easy for people to become involved in USANA, and to simply do their business through WeChat platforms and order products which will -- which we believe will have a very positive impact in our China business.
Our next question will come from Doug Lane with Lane Research. Please go ahead.
Start with a small one, just you mentioned about an impairment on a note receivable from a supplier. Can you just give us some color on what the supplier was and have you replaced that supplier, and how does that look going forward?
Yes. So, the nature of the note is we had some supply chain issues on the food side. And so, we decided with kind of the consolidation we saw in the space and rollup, trying to get some stability there, we entered into a relationship with a third-party, and we assisted them with getting some equipment that would go back and specifically benefit the Company. We’ve made a decision recently to go back and move away from that supplier, given some of the concerns we have with what -- how the relationship is developing, and they’re in the process right now of identifying different suppliers to look at.
So, it was on the food side?
Turning to Europe, the new markets do have a couple of large direct selling markets, as you mentioned, Germany and Italy in particular. Can you -- how does this affect your addressable population in Europe, does this make it substantially bigger?
Well, to begin with, the answer is no. But potentially, absolutely, we have allowed preferred customers and a customer base to grow in those markets, and we have several thousand customers that already exist in the existing marketplace. So, we’re not starting from ground zero in those countries. But, we believe from a European strategy perspective that -- certainly to add Germany and Spain, we also see Eastern Europe as a very bright potential for us in European market, but we’re hoping to leverage economies of scale, leverage distribution networks that we already have in place in those markets and have this be truly in additive as it relates to a leveraging what we have in Europe. And it just made sense for us to expand because there’s great opportunity, like I said especially Germany. Well, all four of the markets we see great potential. We’re seeing excitement from our Spanish speaking associates as we talk about Spain. Romania has been really a surprise. We had several key leaders from Canada, really large leaders show interest in Romania. And so, we opened Romania for preferred customer base and we saw great activity there, and that’s what drove us there. We always look at where do we have an existing base and/or leaders that can help us in those markets hit the ground running. And that’s strategically why we chose those markets.
And just lastly, you cite the investment and IT spending as one of the factors driving some margin compression. And you’re not the only one, there’s a lot of money going in the IT, it seems in the space. And I just wanted to know if you could put a little bit more color on what kind of things you’re spending on, how long do you think you’d be calling out IT spending as being heightened year-over-year, is that another quarter or two, maybe throughout 2018 and then when do we start to see kind of the returns on all the spending that’s going on in the IT area?
Doug, at a really high level, was really trying to go back and make the infrastructure as robust and forward thinking as possible coupled with making it as easy as possible to do business with USANA. Kevin spoke about the WeChat a little bit but it’s that same concept really pushed out to each of the markets and every interaction point we have with our consumers is making it easy and simple as possible. As far as calling it out, we definitely had a higher lift on year-over-year basis over last several years in that spending. But, I think as a whole, we’d expect kind of this level of spending to level out, but I don’t think we’re going to go back and see a reduction there. I think this is just part of our future, kind of this heavy investment cycle on IT on ongoing basis. But we should be able to go back and our plan is to go back and leverage that prospectively as sales grow.
And there are no further questions in the queue at this time. I’d like to turn the conference back over to you Patrique for any additional or closing remarks.
End of Q&A
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.
This concludes today’s conference. Thank you for your participation. You may now disconnect.