USANA's (USNA) CEO Kevin Guest on Q3 2018 Results - Earnings Call Transcript

Oct. 24, 2018 3:15 PM ETUSANA Health Sciences, Inc. (USNA)5 Comments1 Like
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USANA Health Sciences, Inc. (NYSE:USNA) Q3 2018 Results Earnings Conference Call October 24, 2018 11:00 AM ET

Executives

Patrique Richards - Investor Relations and Business Development

Kevin Guest - Chief Executive Officer

Jim Brown - President and COO

Doug Hekking - Chief Financial Officer

Analysts

Tim Ramey - Pivotal Research Group

Frank Camma - Sidoti

Doug Lane - Lane Research

Ivan Feinseth - Tigress Financial Partners LLC

Operator

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 Mr. Patrique Richards. Please go ahead, sir.

Patrique Richards

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 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 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; our Chief Financial Officer, Doug Hekking; as well as 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 will first hear brief remarks from Kevin.

Kevin Guest

Thanks, Patrique. Good morning. And thank you for joining us to review our third quarter results. As we disclosed yesterday, USANA generated very strong results for the third quarter, notwithstanding the notable strengthening of the U.S. dollar both year-over-year and sequentially.

Our growth is due to the momentum we continue to see across most of our markets, and in many cases, we are seeing strong momentum. For instance, local currency net sales in five of our markets grew by more than 20% during the quarter. Five additional markets grew by more than 10% as we had several additional markets grow.

On top of that, active customers around the world increased 9.2% year-over-year. Customer growth continues to be our most significant non-financial metric. Notably, we did not offer any meaningful short-term market specific incentives during the quarter to accelerate growth.

Beyond our excellent operating results, there are several third quarter accomplishments I want to address. First, with the launch of Celavive in China just before the end of the year, we completed the worldwide rollout of our new skin care line.

Celavive has been a hit with customers around the world and was received in China with similar enthusiasm. Of the $28.5 million in quarterly year-over-year growth in China, $4.1 million can be attributed to incremental sales from the launch of Celavive. While we have not yet seen a full quarter of Celavive sales in China, we continue to expect skin and personal care to hit a run rate of 10% of net sales by the end of the year, up from 6% in 2017.

Second, we continue to improve our customer experience with the rollout of our new WeChat platform in China. This platform is also being made available to the rest of our markets around the world to meet the demand of Chinese customers in all of our markets. Additionally, we will continue to add functionality to this platform to ensure that we stay at the forefront of technology and continually improve the customer experience at USANA.

Finally, we held our 26th Annual International Convention here in Salt Lake City and completed our first full quarter of operations in Germany, Spain, Italy and Romania, although, these markets and Europe overall represent a small portion of sales, the initial operating results maybe a positive contribution to the region. We are encouraged by the excitement we have seen and most importantly, by the opportunity to reach more customers around the globe.

Looking forward, we will host our annual China National Meeting in November. This event will be in Macau this year and is very similar to our International Convention in the U.S. As always, we expect this event to generate a lot of excitement and momentum in China.

As we have told you, we will offer product for sale at this event for the first time. In light of this, we are anticipating sales at this event of between $8 million and $12 million, which we have not had in past years.

Following this event, we look forward to finishing the year strong and have updated our 2018 outlook to reflect our projections for the year and confidence in the business. The Board also approved $150 million in share repurchases.

With that, I will now ask the operator to please open the line for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] The first question comes from Tim Ramey.

Tim Ramey

Thanks and congrats on another amazing performance. I know you are not going to talk about specifics of the China National Meeting. But just in broad strokes, do you think this is going to be focused on training and product, training on WeChat, new product introductions. What are the broad strokes of the focus of the meeting?

Kevin Guest

It’s all of the above. We will do a considerable amount of training, training our associates there. There will be introduction and we will focus on training on our new skin care line that was just released in China and we will continue to do similar to what we do here at the international event in Salt Lake City, which is to allow our local distributors and leaders also to be recognized for their accomplishments because these events recognition is a key part of the objective as we go into these events. So everything you mentioned will be covered in great detail at the event and we will have a real specific product training that will happen as well.

Tim Ramey

Okay. And I did think it was interesting and important that you had as stronger sales performance and customer account performance as you did without meaningful promotion. I am guessing you will have meaningful promotion in the 4Q and kind of trying to think through how that impacts associate incentive expense, 3Q last year there was like a 170-basis-point improvement year-over-year in the third quarter. I assume that’s not going to be the case in the fourth quarter. Can you help us out a little bit on that?

Doug Hekking

Yeah. Tim, this is Doug. I would still expect us right in that -- for the year we are probably in that 44, 44.2 range. So we are not anticipating a great lift in expense during Q4. We always have something small going on in the markets doing this other stuff, like many of the times in the past where you have seen a meaningful promotion. You see something that would be disruptive on a short-term basis to the operating margins that’s just not what we are -- is not the type of activities we are doing right now.

Tim Ramey

Okay. Did you say how many people are going to the China National Meeting, if you did, I forgot what you might have said last quarter.

Kevin Guest

We didn’t say. We are expecting over 13,000.

Tim Ramey

Okay. So that will be a big group. Thanks.

Kevin Guest

Yeah.

Tim Ramey

I will turn it over from there.

Kevin Guest

Thanks, Tim.

Operator

Our next question comes from Frank Camma.

Frank Camma

Hey. Can you hear me?

Kevin Guest

Yeah.

Frank Camma

Okay. I was wondering…

Kevin Guest

Good morning, Frank.

Frank Camma

… if you can give us any color on what your people are hearing in China. One of your competitors was talking about potential weakness there. Not the sort of weakness but a little bit slowdown, obviously, doesn’t show in any of your numbers, but just wondering what you are hearing about just general consumer spending and how that might flow through to your customers there?

Kevin Guest

When we look at the China market, we really haven’t seen any effect on our own business. Again, we are somewhat in control with our self manufacturing in China when it comes to tariffs and how we get our products into the country, because we are really not made in the country for China and we are talking about the sales side in and seeing the effects, we really haven’t seen any downturn from our associates.

Doug Hekking

And I would say, Frank, that we read the papers, when we see the reports come out of China as well. We are definitely not immune to those things, but we haven’t seen that to-date really reflected in the business thus far.

Kevin Guest

And I said on the Board of Directors for the Direct Selling Association and so we have the opportunity to talk to several of the competitors and this is anecdotal for sure. But everyone feels cautiously optimistic with regards to direct sales and the movement forward in the marketplace in China and just how the model is being accepted in China seems to be -- the discussion amongst ourselves is very positive and very upbeat for the future of our industry in the marketplace.

Frank Camma

Okay. Good. And can you talk a little bit about what you have seen so far with Celavive for your order rates?

Kevin Guest

Yeah. We are still sorting that out and it’s a little bit longer use cycle than other products, and what we are finding is that maybe a few people here give it a few more pumps when they are applying the products and those other stuffs. So we are still kind of sorting that out.

We see the reorder rate roughly in line with how we are seeing the other product, but it’s not happening in the same time frame. So the use cycle is a little bit longer on this product. Most of our other products are designed for monthly consumption and these products, I think, anywhere from two months to three months, three and a half months.

So it’s a little bit different to what we are seeing, but we are definitely paying attention to it. But it’s just we haven’t had enough time to really go back and get a great feel for it, and trying to go back and look at a little bit different than how our other products perform.

Frank Camma

Okay. And then, my last question just on U.S. numbers, U.S. alone, obviously, it looks like it was down pretty sharply when you add in the new markets. Can you talk about that and what’s going on there?

Kevin Guest

So, two main factors that is the majority of what you are seeing there. One, the comparable year-over-year -- last year was our 25th anniversary and we had, I don’t know, $4 million more. Is that right, Doug? Is that number right?

Doug Hekking

Yeah. About $4 million more in products.

Kevin Guest

$4 million in sales that’s attributed to the U.S. that came through our 25th anniversary of International Convention that we don’t have this year, we stripped that out. And then if you look at currency and the effect we have had in currency in the market, it’s -- that -- those two things really attribute for almost all of that.

Doug Hekking

For the region as a whole …

Kevin Guest

Yeah. Yeah.

Doug Hekking

… Frank on that.

Frank Camma

Okay. I see. I see what you are saying. But has just general attitudes toward, I guess, this is where I am going with that. I mean, it seems like every article you read these days about vitamins or supplements is almost negatively slanted in the U.S. I don’t know about other markets. But versus like if you step back five years ago you wouldn’t see that. Does that affect -- has that affected your business at all?

Kevin Guest

I think it’s -- I think health and health as a category is growing and growing in a very positive way. I think the interaction with people from kind of consumption base and how they interact and purchase is what has changed most dramatically in the United States.

And that’s a key area of focus for us, when we talk about customer experience for us here at USANA and especially in the U.S., we refer to it as the Amazonification of the marketplace and direct sales is catching up with that the way people receive order and have product delivered and that’s a major focus for us. I think it’s more that than it is vitamin per se and vitamin consumption, because health and the health category is still a very strong category.

Frank Camma

Okay. Thanks.

Kevin Guest

Thank you, Frank.

Operator

The next question comes from Doug Lane.

Doug Lane

Yeah. Hi. Good morning, everybody.

Kevin Guest

Good morning, Doug.

Doug Lane

To follow up on Frank’s questioning, there was an article in the Journal yesterday, implying a pending crackdown by the FDA on dietary supplements and I just wondered if you’d seen that or if your scientists had taken a look at the JAMA article that they were citing in there, obviously, they don’t name names as far as the company is concerned, but it just sort of implies this increased scrutiny in dietary supplements?

Kevin Guest

So for us, it might sound odd, but for us, it’s good news, because we manufacture our own products. The great lengths we go through to make sure that what’s on the label is in the product. We guarantee the products, GMP manufacturing standards.

And we believe that it will help weed out some of those actors that are creating products that have substances in them that they are not aware of, and I think, from the article perspective, that is where the reference is headed. And so from a regulatory perspective, we feel like we are in a very, very strong position based upon the standards we have in place from a product perspective.

Doug Lane

Yeah. Okay. That makes sense. Looking at the numbers here, the biggest upside for me certainly was China and just going right to the associates and the preferred customers up 16% year-over-year twice what it was in the second quarter and the best growth in 18 months. What is driving that growth? Is it the anticipation of the Celavive launch here at the end of the third quarter or was it promotional activity? What is really generating that excitement at the street level for just people that are interested in buying and participating in USANA?

Kevin Guest

Yeah. Doug, we started Celavive on September 20th in China and we definitely saw a little bit of a lift in the customer count as they went on a tour across China and promoting the Celavive product and so that definitely was a catalyst there. But it does create momentum and doesn’t fuse there, and I think, the original -- the initial feedback we are getting from the market is very positive on the product.

Doug Hekking

And I think we can’t underestimate the boots on the ground that are there and we have never had a stronger management team and team in place in China in our operations in my opinion than we have right now. And I think those people we have leading the business over there we have great confidence in their ability and it’s showing in the numbers and that’s really what results in the customer count and people having the trust and confidence to do business with us.

Doug Lane

Now looking at it as it impacts the fourth quarter, did -- is there any way to look at this as pulling forward from the fourth quarter or is it building into additional momentum in the fourth quarter from a customer standpoint?

Kevin Guest

Yeah. I think it can be pulling just modestly from the fourth quarter just because there was such kind of a promotional tool there to go back and get the word out. I don’t think it’s dramatic. But we saw a little bit more of a lift in that short period of time than I was expecting.

Doug Lane

Okay. That’s fair. And then sort of along the same lines, I noticed your inventories were up 28%, twice or more of your sales growth and I am assuming that’s in anticipation of Celavive launch because it is such a big deal, but is anything else going on there?

Doug Hekking

No. You are right, Doug. It’s the Celavive launch especially in China where we had to build from going at the end of the second quarter into the third quarter so you will see some of that come down in the fourth quarter. We also have some planned product introductions next year that works being done on that but the majority is Celavive.

Doug Lane

Okay. Thank you.

Kevin Guest

Thanks, Doug.

Doug Hekking

Thanks, Doug.

Operator

The next question comes from Ivan Feinseth.

Ivan Feinseth

Hi. Thank you for taking my question. Congratulations on another great quarter. Can you give some insight into some -- into your China product line and where you see your strengths are and maybe what holds you have and what other products you are going to be introducing? Thank you.

Jim Brown

Yeah. I mean, when you look at China itself, we have some few products that are doing really well. We have probiotics. We have a powdered formula that’s doing well. But it’s the USANA products that are really going forward and we are seeing momentum on.

When we talk about new products, we have plans for new products, but we really don’t share those on the call. We step back and do those at either convention or large meetings to promote excitement in the field.

The reality is we know the line itself is about 24 products strong and we are looking at opportunities to bring more products in. It’s a very lengthy process in China from a regulatory standpoint. Some of the products take two years to four years to get in or get through the regulatory process.

So we have kind of a pantry of products that will be coming out over the next few years, and again, we will try and find those at large events so that we can do the proper training to do the release. But it’s a lot of the products that we have brought over from USANA and those USANA products are the leaders.

Kevin Guest

Yeah. I want to go back and say when we have looked at the competitors over there, I think, the breadth of our product offering is pretty strong and we definitely want to do more and there’s definitely more opportunity. To Jim’s point that process to go back and get products approved is a pretty lengthy process specifically on supplements.

Ivan Feinseth

And do you see more interest in the Chinese market from, let’s say, nutritional supplements or skin care, do you think, where do you see the bigger growth opportunity? And do you see any specific trends like healthcare concern trends in China versus, let’s say, in the U.S., obesity, diabetes, things like that are a problem. What kind of specific health trends do you think exists or are emerging in China that you think you could address and create new opportunities?

Kevin Guest

So the Chinese Government has an initiative in place and they are calling it Healthy China. I think it’s by 2030. And so the government as a whole is pushing as a government initiative nation-wide in Mainland China the notion of health and Healthy China.

Our message is resonating very well, especially with several of their Olympic athletes that are involved in taking our products there and so the supplement side is very, very strong and the message and the nutritional side and support.

Also, the issue that they have going on over there, when you go over to Beijing for instance and you walk out of your hotel room and can’t see across the street because of the air pollution, they know that they are faced with some very, very health -- strong health concerns and nutritional supplementation, especially the USANA message fits right within what they have been talking about for centuries in utilizing essential elements and the essential minerals, and those things to help support a healthy lifestyle.

Ivan Feinseth

Thank you.

Kevin Guest

Thanks, Ivan.

Operator

At this time, I would like to turn the call back over to Mr. Patrique Richards.

Patrique Richards

Well, thank you. That concludes our call for today. Thank you for your questions and for your participation. If you have any remaining questions, please feel free to contact Investor Relations at 801-954-7961.

Operator

Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may now disconnect.

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