USANA's (USNA) CEO Kevin Guest On Q1 2018 Results - Earnings Call Transcript

Apr. 25, 2018 4:55 PM ETUSANA Health Sciences, Inc. (USNA)
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USANA Health Sciences, Inc. (NYSE:USNA) Q1 2018 Results Earnings Conference Call April 25, 2018 11:00 AM ET

Executives

Patrique Richards - Investor Relations

Kevin Guest - Chief Executive Officer

Jim Brown - President and COO

Doug Hekking - Chief Financial Officer

Analysts

Frank Camma - Sidoti

Douglas M. Lane - Lane Research

Presentation

Operator

Please standby, we are about to begin. 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.

Patrique Richards

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 statements include those regarding our strategies and our 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 am 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 the company's website.

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

Kevin Guest

Thanks, Patrique. Good morning and thank you for joining us to review our first quarter results. We are very pleased to report another quarter of excellent results for USANA. This is exactly how we plan 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 suggests 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 have 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 of 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’s always difficult to quantify the positive impact in 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 continue 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 to 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 show 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 four 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.

We are 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 will now ask the Operator to please open the lines for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we go to our first question from Frank Camma with Sidoti.

Frank Camma

Hey. Good morning, guys. Thanks for taking the question.

Kevin Guest

Good morning.

Doug Hekking

Good morning, Frank.

Frank Camma

So, obviously, good results, I just have a couple questions here, something, I guess, I wasn’t modeling on. First, is there any way to get an idea of how much the China promotion may have helped you and what I mean by the China promotion is sell down of the Sensé product, I guess, may have helped you with accelerating associate growth to the extent -- customer growth to the extent that it did?

Kevin Guest

Yeah. 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 includes more top selling products along with some of the Sensé product.

Doug Hekking

Yeah. Actually it’s Doug.

Frank Camma

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?

Kevin Guest

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

Frank Camma

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 transitioned over and everything is going smooth?

Kevin Guest

Yeah. Definitely the -- that’s the point we made, as well as with the new factory and improvements in overall IT. In China we are able to manage our inventories and our system is 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.

Frank Camma

Okay. Is -- 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?

Kevin Guest

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 are always running different promotional activities, let’s engage the sales force or excite the consumer, but you’d just not seen anything of that magnitude that’s going to move the topline like you saw in Q4 of ‘17 and Q1 of ‘18.

Frank Camma

Okay. My last question is 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 say have for like a more -- a different market like the U.S., for example? Is there a similar Facebook type of app that you're working on?

Kevin Guest

Well, we are using several different platforms, also we are 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 become accustomed to just typically in a retail setting to bring that closer to bear in a direct sales setting and not changing the model in any way other than the ease of transaction.

Frank Camma

Okay. I got it. Thanks, guys. That's helpful.

Doug Hekking

Thanks, Frank.

Operator

[Operator Instructions] We’ll go next to Douglas M. Lane with Lane Research.

Douglas M. Lane

Hi. Good morning, everybody.

Kevin Guest

Good morning.

Doug Hekking

Good morning.

Douglas M. Lane

Staying on Celavive, you had a -- you’ve talked about our goals 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 launch in China?

Kevin Guest

No. It’s assume China, I think, what you have to unwind the -- you've got to pick that peek out like we had a little bit of a spike with initial launch of Celavive here and so that's not the runway we would expect in those other markets at this point.

Douglas M. Lane

Right.

Kevin Guest

We think it will ramp up there through the year and I think we have to go back and [just spec] China and so the run rate would be what we'd expect that kind of ongoing base to build and I think we have some opportunity there as well.

Douglas M. Lane

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

Kevin Guest

Yeah. 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 markets excluding China.

Douglas M. Lane

Right.

Kevin Guest

You'll see that settled down a bit -- a little bit and systematically build over the year and then we are expecting a spike in the fourth quarter for China.

Douglas M. Lane

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 a resumption of growth in Europe this year and as soon as the second quarter or how is that playing out in your mind?

Kevin Guest

Doug go ahead?

Doug Hekking

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

Kevin Guest

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 of it 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.

Douglas M. Lane

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

Kevin Guest

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

Douglas M. Lane

And have you given the CapEx….

Kevin Guest

But we are -- sorry, so ahead.

Douglas M. Lane

Go ahead.

Kevin Guest

I think we are about 2% to 2.5% of sales is what we are expecting in CapEx.

Douglas M. Lane

Okay. Got it. Okay. Thank you.

Doug Hekking

Thanks, Doug.

Operator

And 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.

Patrique Richards

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.

Operator

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

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