USANA Health Sciences, Inc. (USNA) CEO Kevin Guest on Q4 2018 Results - Earnings Call Transcript

Feb. 06, 2019 5:27 PM ETUSANA Health Sciences, Inc. (USNA)
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USANA Health Sciences, Inc (NYSE:USNA) Q4 2018 Earnings Conference Call February 5, 2019 11:00 AM ET

Company Participants

Patrique Richards - Investor Relations

Kevin Guest - Chief Executive Officer

Doug Hekking - Chief Financial Officer

Jim Brown - President and Chief Operating Officer

Conference Call Participants

Timothy Ramey - Pivotal Research Group.

Douglas Lane - Lane Research

Frank Camma - Sidoti

Ivan Feinseth - Tigress Financial Partners

Operator

Good day and welcome to the USANA Health Sciences’ Fourth 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 fourth 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 2019. 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’m 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 here in the room.

Yesterday, after the market close, we announced our fourth quarter results and posted our management commentary results and outlook document on the Company’s website.

We will first hear brief remarks from Kevin, before opening the call for questions.

Kevin Guest

Thank you Patrique. Good morning. And thank you for joining us to review our fourth quarter and full-year results. USANA generated strong fourth quarter results, notwithstanding the continued strengthening of the U.S. dollar both year-over-year and sequentially.

Nearly all of our markets worldwide generated local currency sales growth during the growth and net sales in four of our markets grew by more than 20%, five additional markets grew by more than 10%.

Our operating margin also continue to be very strong and came in above 16% for the quarter. As noted previously, our target operating margin is between 14.5% and 15%. Which we believe is equitable for all of our stakeholders.

Accordingly, our results for the fourth quarter and for the year as a whole, were exceptional. For the full-year of 2018, net sales grew 13.6% resulting in our 16th consecutive year of record sales.

Our bottom line results were equally impressive as we delivered the highest net earnings and earnings per share in the history of the Company. Importantly, our active customer base grew 9% from a year ago.

Beyond our financial performance, we accomplished several key initiatives throughout the year, including the launch of our new Celavive skincare line, the opening of our four new European markets, and the completion of meaningful improvements in our global IT infrastructure. As a result, our business is stronger and better positioned for continued growth in the future.

In 2019, we will continue enhancing our overall customer experience around the world. Our efforts in this regard will include enhancing the value proposition we offer to USANA customers through our best-in-class products and income opportunity.

Our aim is to ensure that USANA products not only continue to deliver superior nutrition, but also provide an excellent experience for our customers. In that regard, we will introduce our new healthy living category in 2019, which will include new products as well as an updated existing product line that fit into that category.

These products will be customer focused, demonstratable, and easily shareable through social media. To improve our overall customer experience we will also continue to improve our customers ability to shop, prospect and share USANA through enhanced technology.

Our efforts in this regard, are to ensure our technology is simple, mobile and shareable. I believe we are positioned to continue delivering on these enhancements as a result of the strides we have made over the last several years.

Finally, after opening our four new European markets in 2018, we are focused our efforts in 2019 on growing our existing markets. This strategy includes targeting and addressing the needs of different customer demographics within a single market, something we call the developing sub markets.

We also plan to offer trial initiatives and incentives in select markets, particularly in the U.S., which will broaden our compensation and loyalty offerings for our salesforce and customers. With these initiatives and the overall strength we are experiencing in our business, we expect 2019 to be another record year of revenue, earnings and active customers.

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

Question-and-Answer Session

Operator

[Operator instructions] And we will be taking our first question today from Tim at Ramey. [Pivotal Research Group]. Please go ahead sir.

Timothy Ramey

So I wanted to follow-up on the EBIT guidance. I know what you just said about target EBIT being, I think you said 14.5% to 15% and you did over earn on that this time. So what does that mean for 2019, does that mean more associates spending , does it means more promotions? I don't really see that similarly reflected in like a higher than expected sales growth rate, although I'm sure currency will play a role.

Doug Hekking

Yes, Tim this is Doug. I think many of the area you see outlined in the MCRO document. Kevin talked about these initiatives that in particular in the U.S. we will be investing millions of dollars in those initiatives and those would be kind of trickled out throughout the year and the return is probably not going to be an immediate thing.

You go back and things correlated, so we think these things are very important to do for the growth of that market and that region as a whole. Also the customer experience technology enhancements that are noted back in MCRO, the product innovation and Kevin and Jim chime in here, but we probably have a fuller pipeline of what we are looking at for product introductions and we have had for quite some time and very excited about that.

And it's really focusing on existing market growth and putting resources towards focusing on each of our existing markets, but particularly ones that have been lagging a little bit. Those are the areas that we are really…

Kevin Guest

Yes. The good news for us as a 16 years of record growth and as we want to continue to build upon that growth, but we do see a change in the overall environment as it relates to direct sales. How people are doing business, how they expect to interact with companies.

This year is really as it relates to our outlook the timing issue and how we expect and expect it to take time for these initiatives to have an effect on our overall business model. So that is why we are extremely positive are where we are at and strategy is in place, as we look forward, but we expect that this will not be an immediate return.

Jim Brown

I would also say it's just more of a philosophical approach from our standpoint. We have evaluated over the years is what is the right amounts to go back and return back in the earnings from operations and we have invested consistently to go back and keep that top-line growing at double-digit constant currency rate and so it's just been kind of our approach internally.

Timothy Ramey

Right. That sounds good. Kevin you touched on the idea of this healthy product line and I don’t know if you said exactly what that is. You probably won't say exactly what it is, but can you give us an idea of what the sort of categories are that you will be approaching?

Kevin Guest

Well the strategy behind it is, if you think our independent business owners, if you were to think of them as owning a store, how can we broaden the inventory and product offering that they would have in their store outside of our traditional nutritional supplements, but they would still be aligned with the fact that we are a health nutritional supplement provider.

And so the strategy is a customer strategy for products and allowing our current independent business owners a broader offering to their customer base and the opportunity to attract new customers through products that are easily shareable from a social media perspective.

It's really difficult for instance with social media to talk about vitamins, because you take the pill, there is not an immediate reaction, there is not an immediate cause and effect so to speak, and so we really want to move into an area where we can leverage technology to help grow our business.

Timothy Ramey

Okay and I wonder if you could clarify, you mentioned that you were expecting a softer 1Q. Should we be thinking that that is a down quarter, or is that just mid single-digit kind of quarter?

Doug Hekking

Yes, I think we'll see modest growth Tim, but it's not going to be the clip that you have been seeing. I think really it's more of a matter of timing of our global calendar. We have a variety of promotional activity, incentive of offerings and different products we will be coming out with throughout the year, but the first quarter is really like that. And so you really start seeing that pick up in Q2, and we'll see that accelerates throughout the years is our anticipation.

Timothy Ramey

Thanks Doug.

Operator

And we will take our next question from Doug Lane, Lane Research. Please go ahead.

Douglas Lane

Hi, good morning, everybody. I'm just picking up on the seasonality here, or how the quarters are going to play out. What does the calendar look like for the timing of the launch of the new healthy living products? Will that be in conjunction with your convention in the second half or will it be more of any launches ahead of that?

Doug Hekking

So we have a Asia Pacific convention coming up in April and we are going to do a launch of a couple of products that fit into that category based on a limited time offer, and let our distributor base have the opportunity to become familiar and aware with a few of the products, but the actual launch will take place in the third quarter at our international convention.

Douglas Lane

Okay. Got it. And just to clarify on the margin structure. It sounds like the investments you are talking about are more SG&A investments than anything to do with tweaking associated incentives. Is that a good way to look at it?

Kevin Guest

Yes in great part that is an accurate statement.

Douglas Lane

Okay. And along the same front, Doug you have a CapEx number for 2018 and an initial outlook for 2019?

Doug Hekking

Yes, let me give you those. So for 2019 our model shows about $32 million. We did about $11.5 in 2018. And what I would like to do is you asked that question, maybe I will go back and let Jim maybe talk about some more of our key strategic initiatives that we kind of launching here in 2019 and trying to get our arms around.

Jim Brown

In 2019, we will continue some of the same strategy we had in 2018 within IT investments with capital, we also had investments around the world, looking at our facilities and upgrading those. We have some equipment investments in China itself to stay ahead of the game with our growth.

And then when we talk about vertical integration, one of our investments this year is in as well into 2020 as we are looking at bringing some of our food products internal, our powder beverage line as well as our bars.

We are going to start a facility here, over the years historically we have had issues from a supply chain and we always feel that we have more control when we bring that and internalize it here at USANA.

Douglas Lane

Okay. That is helpful that is a big jump in your CapEx here. But even with the jump in CapEx you generate a lot of free cash flow and I think if my math is right, you are over 11 bucks a share in cash on the balance sheet as it is. So can you just go over what your strategy is for the use of free cash flow and how to maximize the return there?

Doug Hekking

So kind of just looking for the historical context is as you saw the dollars taking a great deal of price kind of manufacturing on price in-house and Jim just kind of walked you through kind of what we are looking at in the food side and bringing up production in-house and I think we are excited about it. I think our salesforce and our customers are excited about it. That is one area.

Ongoing investments in technology and product development are other areas that are key, really the infrastructure that we continue to go back and develop and sit out in China. One of the areas that we are looking at Doug is, do we start trading off in these lead facilities, these branch locations or even key strategic locations around the world. Do we start buying some of this real estate? Is that a good long-term investment?

So those are some things we are evaluating and then as we go back and focus on kind of that organic site, we are being much more active in evaluating different opportunities on the business development side. There is nothing that is imminent or close to that point, but it's something we are much more actively going through at this point.

And then obviously if we see kind of that piece there that we are going to be sitting with excess cash. I think the primary tool that we have used in the past and probably will for the foreseeable future would be the share buyback program, that been about 65% of our free cash flow over kind of the last historical tranche, we look at three, five, 10 year period, somewhere in that range.

Douglas Lane

Okay. Thanks Doug, and that is helpful.

Operator

We will take our next question from Frank Camma, from Sidoti. Please go ahead sir.

Frank Camma

Good morning guys. Thanks for taking the questions. My first question is just on China. Obviously some companies seen some slow down there, you are obviously not. Can you just say whether the consumers, do they view USANA as an American brand? I'm just trying to get a feel for whether that is seen that way or maybe not, because since you manufacture over there and it's really not a truly well known brand. I was just wondering about that.

Doug Hekking

The answer is yes. They see the American company and the American brand as one of the strength. Like you said, even though we do manufacture our product in country, it is an asset for us to be perceived as an American brand in China.

Frank Camma

Okay. Well, initially I thought that would be the case, but some companies have said that that might be a disadvantage short-term, given the trade wars if you will, but obviously not having any impact on your company. The other question is on personal care. Can you talk about the reorder rates now that you have some history on the new product line?

Doug Hekking

Yes, you know Frank, it’s kind of going that is similar - that we have from the other products. I think we are hoping for a little bit more stickiness.

I think what we are finding is the commodities provided in the packaging that we are giving them. The usage is not a month cycle, it could be three, it could be four months, it could be two months and so it’s a little bit more sporadic problem, than what we are anticipating.

I think we definitely have some ambassadors out there who are really excited about it and I think we have learned a lot. We have had some follow on product offerings in the form of a math that we have seen a great deal of excitement with.

But I think as a whole, we are pretty close. You know, we talked about hitting a run rate of about 10% of sales by year-end and we came in just below that right around 9% of sales at the end of the year.

Frank Camma

Okay, and did some of that lead to the - I mean, you talked about the inventory though, but did some of that lead to the inventory build, because you specifically called out personal care. I mean I don't see it has much of a problem since these. I'm assuming these products don't really have a short exploration, am I right about that?

Doug Hekking

Yes, we have a longer exploration of the products. And you are exactly right. The reason that you are seeing in lift in inventory is directly relatable to our sale of the product offering. We are using a third-party right now in markets outside of China to produce that and we acquired enough inventory to allow us to go back and have a little bit of a buffer as we kind of get used to what the demand cycle was.

So we would expect to go back and see that inventory kind of being brought down as we sell through that in 2019 and going forward.

Frank Camma

Okay. Last questions is a strategy question because, when it historically from covering you, you have had a very tight portfolio of products in the last couple years, you have definitely been more willing to expand beyond that. And it seems like obviously this year, given what you said on the healthy living products, you are going to go even further, which I think is positive. But, are you getting that directional input from your salesforce or is that really management like? Can you just sort of like talk about how that - to me it seems a little bit of a strategy change, right. So could you just talk about what led you down that path?

Kevin Guest

Yes, it is definitely a strategy change. If you look historically at any companies that are over $1 billion, this is a guess on my part, but as I have looked at other companies, none of them have had a limit product offering who sustained long-term growth like USANA has. But given what is happening in the marketplace, we call it around here, the Amazon application of what is happening in the world, right now and how customers expect to interact with a company.

And we believe that by broadening our strategy from a product perspective, we could still stay within the lanes of health and health related products. But the strategy is providing healthier alternatives for our current customer base and products that they are already consuming. But as we are providing those healthier alternatives, a broader appeal to people.

And then the second part of it is the whole vitamin industry and nutritional supplement industry. When we first launched USANA almost 27 years ago, if you would walk into a store, all you see is [Flintstones and one a day] (Ph) about and now there are entire departments that are devoted to vitamins as a product offering.

And so the differentiation and the ability to have an edge is becoming more and more cloudy as the years move on. And so for us, we are thinking forward many years in advance to see where we would be as a company provided if we just stuck with our current product offering.

So the answer to your initial part of your question is, yes, we are listening to our customer base, and they have really been lobbying for us to expand the base. Secondly, we are doing outside research with outside companies.

And then lastly, we are very active in the direct selling space and being aware of what is happening in the marketplace as an industry. And so we believe this is a future where we are headed or paving the path by changing that strategy.

Frank Camma

That is great. I agree. Thanks.

Operator

[Operator Instructions] At this time we'll take our next question from Ivan Feinseth from Tigress Financial Partners. Please go ahead sir.

Ivan Feinseth

Thank you. Thank you for taking my questions and congratulations on another record year. My first question in China, where you are seeing the most initial interest either in feedback from your agents or from customers on let’s say skincare or nutritional products?

Kevin Guest

I’m very confident to our nutritional products. The skincare is a new launch for us there and it's only been a week and just maybe a month or two versus years and the foundation is the nutritional products and supplements, which is consistent with everywhere around the world and so for sure - correct me if I'm wrong. I don’t have the number in front of me, but certainly the nutritional products in China.

Doug Hekking

It’s ahead nutrition in China. Now we just, try to keep in mind, we just launched our net sales e-product line in the fourth quarter as well.

Kevin Guest

Yes.

Ivan Feinseth

But I think overall there seems to be a big interest amongst Chinese consumers about skin care products and that has been at least feedback from other similar companies. So congratulation. I think this could be a successful product line. In your healthy living new product launch. Can you give us some idea of what type of products are going to be included in that or what kind of initiatives you are taking there?

Kevin Guest

Without going into specifics the name implies really what it is from a healthy living perspective. One of the greatest issues that we believe and our science team believes is the notion of toxins that we are applying to ourselves or that we have as part of our daily routine within our homes.

And so if we can help eliminate and provide healthy alternatives from a toxicity perspective and improving and offering products that have - some will have significant differentiators and very key stories to be told, others will simply be a healthy alternative. But as we think about healthy living, the name really implies what that category - what we are going to offer as far as products.

Ivan Feinseth

You are going to be focusing on, let's say prebiotics and probiotics.

Kevin Guest

Certainly the whole micro biome strategy is a major area of focus and R&D for us and that will be part of the product offering. As we think about micro biome, which is all the prebiotic probiotic side of things. So the answer to that is yes.

Ivan Feinseth

Okay. Then on your upcoming CapEx in your marketing spend. Can you give us some idea of what the focus is are going to be.

Doug Hekking

Yes, a lot of it Ivan is Jim talked a little bit earlier in the call about spend on facility and equipment for fitting out of foods plants so we can go back and currently make our own bars and greens. So that is a big part of it and a lot of the other stuff is more of a maintenance CapEx. Go ahead Jim.

Jim Brown

No, but you have mentioned the marketing CapEx. Yes, I mean - again a lot of them - go ahead Ivan.

Ivan Feinseth

Yes, I mean like what type of marketing. When you say technology for example, is this like technology to support your agents or and what type of marketing spend let’s say to that is supporting the agents or more direct to consumer like brand awareness, things like that.

Jim Brown

So, yes on both of those. So when we look at it from a technology spend and marketing or CapEx or capital investments to make our technology more customer focus. Again, what Kevin said earlier is the Amazon notification.

And we want to make sure that we are going down that path so that our customers can easily, like we would say a one quick sale as well as from our social sharing aspect be able to share our products and again go down a path with our technology that makes that purchase very easy.

And again with the healthy living concept all that will roll into more CapEx and more technology through this year and next year. And then when you look at a marketing spend, we are really looking at the same type of strategy we have had in the past a lot of our marketing spend are with our athletes and we will continue down that path as well as some of our other social people who can help us with our social sharing.

Kevin Guest

Yes. The athlete side of things really continues to be a significant area of success for us as a company where we have Olympic athletes, world class athletes that utilize our products. We are going to continue down that path and look at opportunities where we even can expand our athlete base as it relates to utilizing our products.

Ivan Feinseth

Okay, then looking at the Celavive product line, it looks pretty much focused on women. Are you considering any type of men's skincare products?

Kevin Guest

So the current approaches is, yes, even not in with new products that these products are very relevant to men as it relates to shaving and when you are using the products and skincare. And we are broadening our marketing reach from a social sharing perspective as well as a user experience to include men. Certainly our marketing has come out of this appealing to women.

Our target market demographic is a female base and they are generally the decision makers in the family from a money spending and disposable income perspective. And so that is our out of the chute, but we are right now working with and continuing to market to men with skincare.

Ivan Feinseth

And then on your WeChat enrollment system. This is for agents or customers and users to directly enroll on behalf of agents or how does that work?

Kevin Guest

Eventually all of the above. In China, for instance, WeChat platform, they pretty much live their lives. They order products, they interact with companies. And so we are stepping into that, the functionality isn't exactly where it's going to be when we have WeChat fully developed. But yes, our vision is that they will be able to run their entire business through the WeChat platform.

Doug Hekking

Again, that is our customer focused as well as the other countries around the world not being WeChat, but our intent would be for them to easily be able to sign up themselves instead of it being a very associate based enrollment as well as just the purchasing.

So WeChat like we have talked about it on enrollment base initially, but we have multiple phases throughout 2019 and reflect into 2020 to make this the platform in China to be used pretty much for everything.

Ivan Feinseth

Okay, very good. I have a lot of other questions, but I look forward to speaking offline. Congratulations and thanks again.

Operator

And we will now take a follow-up question from Tim Ramey of Pivotal Research Group. Please go ahead, sir.

Timothy Ramey

Thanks so much. Just a clarification, but I think I know the answer. You are sure guidance does not imply any future share repurchase beyond what is already been fluctuated. Is that correct?

Doug Hekking

It implies enough to offset kind of the equity being issued by the company through its equity comp programs.

Timothy Ramey

Right, okay. But not necessarily discretionary repurchases.

Doug Hekking

Correct.

Timothy Ramey

That is it. Thank you.

Doug Hekking

Thanks.

Kevin Guest

Thanks Tim.

Operator

And there are no further questions in the queue at this time. I would like to turn the conference back over to Mr. Richards for any additional or closing remarks.

Patrique Richards

Thank you for your questions and for your participation in today's conference call. If you have any remaining questions, please feel free to contact Investor Relations at 801-954-7961.

Operator

And this concludes today's call. Thank you for your participation. You may now disconnect.

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