USANA Health Sciences’ (USNA) CEO David Wentz On Q4 2016 Results – Earnings Call Transcript

USANA Health Sciences Inc. (NYSE:USNA)

Q4 2016 Earnings Conference Call

February 8, 2017, 11:00 A.M. ET

Executives

Josh Foukas – Vice President of Legal and Investor Relations

Kevin Guest – Chief Executive Officer

Jim Brown – President

Paul Jones – Chief Financial Officer

Doug Hekking – Executive Vice President of Finance

Analysts

Tim Ramey – Pivotal Research Group

Eric Gottlieb – D.A. Davidson

Operator

Good day and welcome to the USANA Health Sciences Fourth Quarter Conference Call. As a reminder, today’s conference is being recorded. At this time, I’d like to turn the call over to Mr. Josh Foukas, Vice President of Legal and Investor Relations. Please go ahead, sir.

Josh Foukas

Good morning, everyone. Thank you for joining us this morning to review our fourth quarter and full year results. As always, our call today is being broadcast by webcast and can be accessed directly from our website at www.usanahealthsciences.com. Shortly following the call, a replay will be available on our website.

As a reminder, during these conference calls, our management team will make forward-looking statements regarding future events or the future financial performance of the company. Those statements obviously involve risks and uncertainties that could cause our actual results to differ, sometimes materially from the results projected in the forward-looking statements.

Examples of these statements include those regarding our strategies and financial outlook for the 2017 fiscal year. We caution you that these statements should be considered in conjunction with all of our disclosures, including the risk factors and financial data that’s contained in our most recent filings with the SEC.

This morning, I’m joined by our Chief Executive Officer, Kevin Guest; our President Jim Brown; our Chief Financial Officer, Paul Jones; and our Executive Vice President of Finance, Doug Hekking. Yesterday, after market close, we announced our fourth quarter and full year results and we posted our management commentary, results, and outlook document on the company’s website.

In these documents, we have provided information about a voluntary investigation that the company and specifically the audit committee of the Board of Directors is conducting into our China business. Because this is an early stage pending investigation, we are not able to provide additional information about the investigation or answer any additional questions about the investigation at this time.

Before opening the call for questions and answers, we’ll first hear from Kevin Guest, who will briefly review both the quarter’s highlights and the highlights for the year. And so with that, I’ll turn the call over to Kevin.

Kevin Guest

Thanks Josh and good morning. We are pleased to be with you this morning to review our 2016 performance and to discuss our strategies and expectations for 2017. I’ll keep my comments brief and then open the call up for questions.

2016 was another excellent year for USANA. We surpassed the $1 billion mark in net sales generating our 14th consecutive year of record sales and we reported the highest EPS in the history of the company. We also ended the year with solid associate and preferred customer growth. Customer growth remains our higher priority as we strive to improve the health and nutrition of individuals and families around the world.

We generated these results by executing our various strategies throughout the year. During the year, we introduced two new personalized product platforms with the launch of Incelligence and MySmartFoods. Incelligence as you saw is proprietary patent pending technology that is designed to support the body’s natural ability to nourish, protect, and renew itself. The Incelligence platform represents the future of USANA products and is intended to keep USANA at the forefront of nutritional supplementation.

MySmartFoods are science-based healthy nutrition shakes, bars, boosters, and flavor optimizers that provide our customers with customized healthy food options. We also improved our infrastructure in China during the year, specifically with the successful completion of and our transition to our new China production facility in the fourth quarter. This 350,000 square foot facility is now fully operational and will provide the production capacity we need in China for the foreseeable future.

During the fourth quarter, we also offered a short-term incentive to our associates around the world. For most of 2016, we focused on product launches and completing our China facility and did not offer additional incentives to our sales force. The incentive we offered during the quarter was well received by our sales force and should help us get off to a good start in 2017.

Finally, we made meaningful progress during the year with improvements to our IT systems and infrastructure around the world and will continue to invest in these systems during 2017. 2017 also marked USANA’s 25th anniversary and will certainly be another significant year for the company as we continue investing in our business to drive long-term growth. During the year, one of our goals is to further advance our personalization strategy by leveraging our Incelligence technology.

In particular, we will launch the Incelligence platform in additional markets around the world and incorporate this proprietary technology into additional product launches and offerings that will occur during the year. We will also execute customer growth incentives in 2017. In this regard, we plan to enhance and emphasize our preferred customer program through a number of strategies that will begin to roll out during the year.

These strategies include a new customer invitation program, as well as a rewards and loyalty program. We believe an enhanced preferred customer program offers a growth opportunity that we have not fully realized in the past. We will also continue to invest in our IT systems and infrastructure during 2017 and continue to enhance our customer’s experience with USANA.

Finally, we will also continue our brand recognition campaign in 2017 through trusted partnerships like our partnership with the Dr. Oz show the Women’s Tennis Association and additional elite athletes around the world that we plan to sponsor during the year. With that, I’ll finish up by telling you that I’m confident in the strength of our business around the world and now I’m excited for 2017.

Now, I’ll ask the operator to please open the lines for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we will take our first question from Tim Ramey with Pivotal Research Group.

Tim Ramey

Good morning, thanks so much.

Kevin Guest

Good morning.

Tim Ramey

Your outlook was somewhat muted at the top line and one wouldn’t have guessed that looking at the – I mean the fourth quarter performance was pretty good at the top line, where you probably won’t have the same amount of new product activity next year, but she also probably will have more promotional activity, can you talk a little bit about your conservatism guidance and why you think, other than the currency impact why you think you might be tracing that a little bit slower?

Doug Hekking

Yes, Tim this is Doug. I think what you saw in the fourth quarter was that size of promotion we probably wouldn’t run every quarter and obviously the local currency boost in Q4 was the strong quarter for us, but going forward, I think what we put in the models are best estimate of what we think is going to happen, obviously we hope there is more upside as we go back and design these incentives and promotions to the best of our ability, but right now it’s just kind of what we see in kind of the outlook.

Tim Ramey

Okay. And you also were conservative in not buying back stock for the past three quarters and you might argue you are going to get an opportunity now at a lower price, you certainly have plenty of firepower, can you discuss your attitude towards share repurchase at this time and would there be any exogenous reasons such as the enquiry and to the Chinese activities that will prevent you from buying back stock?

Paul Jones

Yes, as far as the last three quarters, this is Paul, if you recall we’ve talked about the investment spending that we’d had in place. We looked at also the location of our cash with roughly 60% of our cash in China and in the process of getting that out can be a little bit delayed. And then looking at a new product development and launches over last 12 months, all of those things put us in a position where we wanted to make sure we kept our firepower available and used it as wisely as we could to create the best return to our shareholders with that.

Moving forward, we will continue to do what we have done in the past, we will analyze it based on the factors given and see what we will make the best ends for again providing a return to our shareholder, and so we will certainly analyze it, we will look at it, we will talk with our board of directors on a regular basis and we will analyze it as we have always done in the past.

Tim Ramey

Perfect, thanks.

Doug Hekking

Thanks Tim.

Operator

And we will now go to Eric Gottlieb with D.A. Davidson.

Eric Gottlieb

Yes, hi. Thanks for taking my questions. I have a bunch of them. I know we’re not allowed to talk about the reimbursement issue in China, but maybe we can talk around it just to gain a couple of insights. This is a new issue, you’ve never had something like this before, is that correct?

Josh Foukas

So Eric, this is Josh, that is correct. And so what I would do is just qualify the rest of our discussion by really the disclosure that’s in the release and the management commentary document, beyond that we can’t comment at this point, but I take your question and that is accurate.

Eric Gottlieb

Okay. Well then we will leave the issue alone. I’m wondering if you foresee that there could be any backlash or difficulties in conducting business due to the publicity.

Josh Foukas

Yes, so that’s one that we’re not going to comment on right now, Erich, as – again I would just refer you back to the disclosure that the investigation is a voluntary internal investigation in its early stage at this point.

Eric Gottlieb

Okay. And then switching gears to the IT investment, I think you said another bucket was coming in March and April, I’m wondering if that – is that still the case and then what are some of the projects coming online soon and how quickly do you think we will see the benefit to those.

Jim Brown

Eric, this is Jim Brown. So, looking at the IT spend, it’s actually going to go as we talked about through the year. A lot of the infrastructure is just getting prepared for the future. There is servers, there is all types of ways to support, make sure we support the markets we are looking at international areas for support as well to make our systems quicker, but we are looking at that for 2017 and they will go into 2018, but from a capital investment side it will be much smaller through the remaining years and it will be more of maintenance capital.

Josh Foukas

Eric, real quick. One of the challenges specifically in the IT side is finding the qualified personnel, if you are trying to go back and build up that infrastructure and we had pretty aggressive plans to on-board some of that talent and it doesn’t come on board as quick as you want, and so I think part of what you are saying on the investment is kind of the delayed effort there to go back and get the right talent on board.

Eric Gottlieb

What are you expecting for CapEx for the year and well you said throughout the year, so it should be fairly constant, but what’s your plans there?

Josh Foukas

I think we should model going forward Eric it is somewhere between 2% and 2.5% of sales for maintenance CapEx. If there is something outside of there that is an elevated level we will talk to that specifically, but between the production and having these two full operating production facilities and the recent fit out of China in addition to the ongoing investments in IT that’s a ballpark of where we would estimate it to be for next year in the foreseeable future.

Eric Gottlieb

Got it. And then here’s the line of questions that I have been asking a lot of my people in my college [ph] universe and that’s the changeover in the administration, I’m wondering what helps, what hurts obviously as lower corporate taxes come in that will help, best regulation expected at the FDA issues possibly with the exports especially to trade situation with Mexico, of things of that sort, could you just run through like positives and negatives and what you are expecting or you are just kind of wait and see and how it goes.

Jim Brown

I think part of it we’re trying to go back for us to really go back and quantify and I think we need to go back and kind of see what the final rules would be, if we were to go back and have some of these proposals push forward as we have seen in the paper, we probably see a small benefit, but given the profit distribution of an organization and so much of that growth happening in China and we’d have to go back and obviously go back and pay the taxes on e-business in China person and bring it back here, so we wouldn’t get that full gap. And so we’re not expecting a meaningful change in our base effective tax rate. I think you could probably see a little benefit, but nothing so far we would expect in 2017 that would be perspective after 2017.

Paul Jones

And Eric this is Paul and in addition to the tax rates, as far as just relations it’s really a wait-and-see. We don’t anticipate at this point that we’re going to have any more challenges getting product from the U.S. to the countries where we are doing business, we believe that at this point it will be business as usual and we have hope going forward that less regulations can help us not only in the U.S., but around the world, so it’s really a wait-and-see.

Eric Gottlieb

Got it. Okay. And then associated incentives of 46.5, was that blanket [ph] throughout the world or was it higher in China or other locations or things of that sort?

Kevin Guest

You know most of the markets have a little bit modestly different payout, but the elevation you are seeing in Q4 was really related to the promotion, we also had an award trip for some of our leaders that was a little bit higher than we expected, but that elevated payout was attributed to those two items in great part.

Eric Gottlieb

Okay. And then as far as the new plan, what’s the utilization in the quarter thus far and what is the pace that you expect for filling that out?

Jim Brown

This is Jim. When we look at the new facility just to clarify, it was built to support Mainland China only, and it was built with the expansion of mind, so it is kind of modular design if you think about it. We have the opportunity to add equipment into the clean rooms or upsize our equipment. So, our utilization right now is very small and for the foreseeable future we are set up when it comes to capacity.

Eric Gottlieb

Got it. And then that would explain the decline in inventory, how we moved over to the new facility or is there something else in inventories that I’m not seeing?

Jim Brown

Again, we plan for November and we hit that timeframe, but we did the buildup in case things happened and you have seen the drop through that transition from the two facilities.

Eric Gottlieb

Okay, and then lastly, sales in the U.S. region have been weak once again. I’m wondering if there is any plans the company has for reversing that trend or if there is any new events that happened in the market that is causing the trajectory to decline further?

Kevin Guest

This is Kevin. As we look at the U.S., the U.S. continues to be on our radar here and we are working on new strategies to see the market be re-energized and just specifically some things that are already in place and in motion. We have made some executive leadership changes that we believe will have a positive impact and we are already seeing through our sales force leadership the positive effects of some of our structural changes from an executive leadership perspective.

Secondly, we are going to this year and into the future we have a strategic plan where we are going to look at the U.S. market. Almost there is three separate markets individually. The Chinese market, the Hispanic market, and the Caucasian markets and begin to market to them effectively in segments from a tools perspective from a on the ground feel perspective, and how we communicate with them. One of the areas I’m most excited about is our enhancement of our customer program. We already have a robust customer program globally and I’m excited about that, but making some enhancements to that I think and I’m confident we’ll make a positive impact on the United States overall.

And then lastly, our business is largely driven by events and when we bring people together and we are changing that strategy this year as well to going to a more regional approach and a localized approach versus a single national approach, which we think will also bring excitements momentum and life into the marketplace. So, we are very actively pursuing the U.S. market and I feel confident in the direction we’re heading for 2017 into 2018. It’s a large ship to turn so to speak, but it is an area of focus for us.

Eric Gottlieb

Okay. Two more. Since you brought it up, you know the split between Chinese, Hispanic and Caucasian market segments right now? Rough percentages.

Kevin Guest

We don’t report on those at the granular level at this point in time, so I can’t comment to you and I don’t have those numbers in front of me.

Eric Gottlieb

Okay that’s fine and then just lastly, I was encouraged by the growth in China, I expected that to come sometime in early 2017, but it looks like we are a quarter or early, I assume that’s because you put a foot on the gas of the incentive programs there, but is there anything else going on that’s driving the growth?

Kevin Guest

I think you’re exactly right in your assumption from the promotions that we ran and again we’re going to be cautious in how we move in that direction from a long-term sustainability perspective, but we love, I shouldn’t say love, that is not a common word in this kind of dialogue, we’re encouraged by the direction we see in China and the growth that we see there and just overall, just from an organic perspective when you look at the size of the market it becomes just inherently more and more difficult to move the numbers at a growth percentage that we’ve seen traditionally just as the market grows in numbers, so we are encouraged by what we see there.

Eric Gottlieb

Got it. Okay, I appreciate the comments, with that I’ll pass it on. Thank you.

Kevin Guest

Thanks Eric.

Doug Hekking

Thanks Eric.

Operator

[Operator Instructions] It appears there are no further questions at this time. I’d like to turn the call back to management for any additional or closing remarks.

Kevin Guest

Thanks everyone for the participation today and joining the call. As always if you have additional questions you’re welcome to contact USANA Investor Relations at 801-954-7961. Thank you.

Operator

And ladies and gentlemen that does conclude today’s conference call. Thank you for your participation.

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