Yahoo Finance USANA Health Sciences Inc (USNA) Q4 2018 Earnings Conference Call Transcript
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USANA Health Sciences Inc (NYSE: USNA)
Q4 2018 Earnings Conference Call
Feb. 06, 2019, 11:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
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 -- Head of Investor Relations
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 closed we announced our fourth quarter results and posted our management commentary results and outlook document on the company's website.
We'll first hear brief remarks from Kevin before opening the call for questions.
Kevin G. Guest -- Chief Executive Officer & Director
Thanks, 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 quarter 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 continued 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 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 customer's 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're 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've 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 developing submarkets. 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 sales force and customers. With these initiatives and the overall strength we're experiencing in our business, we expect 2019 to be another record year of revenue, earnings and active customers.
With that, I'll now ask the operator to please open the lines for questions.
Questions and Answers:
Operator
(Operator Instructions) And we will be taking our first question today from Tim Ramey. Please go ahead, sir.
Timothy Scott Ramey -- Pivotal Research Group -- Analyst
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 associate spending? Does it mean 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 -- Chief Financial Officer
Yes. Tim, this is Doug. I think many of the area you see outlined in the MCRO document investments -- Kevin talked about these initiatives I think particularly in the U.S. we'll be investing millions of dollars in those initiatives. And those will be kind of trickled out throughout the year. And the return's probably not going to be an immediate thing, if you go back and see it correlates, 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 the MCRO, the product innovation and Kevin and Jim chime in here, but we probably have a fuller pipeline of what we're looking at for product introductions than we've had for quite some time. I'm very excited about that. And it's really focusing on existing market growth and putting resources toward focusing on each of our existing markets, but particularly ones that have been lagging a little bit. Those are the areas that we're really --
Kevin G. Guest -- Chief Executive Officer & Director
The good news for us is 16 years of record growth. And as we are -- 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. And this year is really as it relates to our outlook a timing issue and how we expect and expected to take time for these initiatives to have an effect on our overall business model. So that's why we're extremely positive where we're at in strategies and place as we look forward, but we expect that this will not be an immediate return.
Doug Hekking -- Chief Financial Officer
I would also say just more of a philosophical approach from our standpoint. We've evaluated over the years as what's the right amount to go back and return back in the earnings and operations. And we've invest consistently to go back and keep that top line growing a double-digit at constant currency rate. And so it's just been our approach internally.
Timothy Scott Ramey -- Pivotal Research Group -- Analyst
Great. 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 just give us an idea of what the categories are that you'll be approaching?
Kevin G. Guest -- Chief Executive Officer & Director
Well, the strategy behind it is, if you think about 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 new traditional nutritional supplements. But they would still be aligned with the fact that we are a health nutritional supplement provider.
And so we are -- 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 a pill there's not an immediate reaction. There's 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 Scott Ramey -- Pivotal Research Group -- Analyst
Okay. And I wonder if you would clarify, you mentioned that you are expecting a softer 1Q. Does that -- should we be thinking that that's a down quarter? Or is that just a mid-single digit quarter?
Doug Hekking -- Chief Financial Officer
Yeah. I think we'll see modest growth Tim, but it's not going to be the cliff that you've been seeing. I think really it's more the matter of timing on our global calendar. We have a variety of promotional activity, incentive offerings in different products we'll be coming out with throughout the year. But the first quarter is really like that. So you really start seeing that pick up in Q2 and we'll see that accelerate throughout the year is our anticipation.
Timothy Scott Ramey -- Pivotal Research Group -- Analyst
Thanks, Doug.
Operator
And we will take our next question from Doug Lane, Lane Research. Please go ahead.
Doug Lane -- Lane research -- Analyst
Yeah, hi, good morning everybody. I'm just picking up on the --
Doug Hekking -- Chief Financial Officer
Good morning.
Doug Lane -- Lane research -- Analyst
Good morning -- 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 product? Will that be in conjunction with your convention in the second half? Or will it be -- will there be launches ahead of that?
Kevin G. Guest -- Chief Executive Officer & Director
So we have a Asia Pacific convention coming up in April. We're going to do a launch of a couple 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 the few of the products. But the actual launch will take place in the third quarter at our International Convention.
Doug Lane -- Lane research -- Analyst
Okay, got it. And just to clarify on the margin structure, it sounds like the investment you're talking about are more SG&A investments than anything to do with tweaking associate incentives. Is that a good way to look at it?
Doug Hekking -- Chief Financial Officer
Yeah. In great part that's an accurate statement.
Doug Lane -- Lane research -- Analyst
Okay. And along the same fronts, Doug do you have a CapEx number for 2018 and an initial outlook for 2019?
Doug Hekking -- Chief Financial Officer
Yes. Let me give you those. So for 2019 our model shows about $32 million. We did about $11.5 million in 2018. And what I'd like to do as you asked that question, maybe I'll go back and ask Jim to maybe talk about some more of our key strategic initiatives that we kind of launch in 2019 and try to get arms around.
Jim Brown -- President and Chief Operating Officer
Yes. In 2019, we'll 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 as into 2020 as we're looking at bringing some of our food products internal our powdered beverage line as well as our bars. We're going to start a facility here.
Over the years, historically, we've had issues from a supply chain and we always feel that we have control when we bring that in and internalize it here at USANA.
Doug Lane -- Lane research -- Analyst
Okay. That's helpful. That is a big jump in your CapEx here. But even with that -- with the jump in CapEx, you generated a lot of free cash flow. And I think if my math is right, you're over $11 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 here?
Doug Hekking -- Chief Financial Officer
Yes. So kind of just looking from a historical context is as you USANA is always taking a great deal of pride of kind of manufacturing internal products in-house. And Jim just kind of walked you through kind of what we're looking at on the food side and bringing the production in house and I think we're excited about it. I think our sales force and our customers are excited about it. That's 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 development and sit out in China. One of the areas that we're looking at Doug is, do we start trading off from these facilities these branch location or even key strategic locations around the world. Do we start buying some of those real estate? Is that a good long-term investment? So those are some things we're evaluating.
And then as we go back and focus on kind of that organic side, we are being much more active in evaluating different opportunities on the business development side. There's nothing that's imminent or close to that point, but it's something we're much more actively going through at this point.
And then obviously if we see kind of that piece there that we're going to be sitting with excess cash, I think the primary tool that we used in the past and probably will for the foreseeable future would kind of a share buyback program, that's been about 65% of our free cash flow over kind of the last historical tranche we look at a three-year, five-year, 10-year period somewhere in that range.
Doug Lane -- Lane research -- Analyst
Okay. Thanks, Doug. That's helpful.
Operator
And we will take our next question from Frank Camma from Sidoti. Please go ahead, sir.
Frank Camma -- Sidoti -- Analyst
Good morning, guys. Thanks for taking the questions.
Doug Hekking -- Chief Financial Officer
Good morning.
Frank Camma -- Sidoti -- Analyst
My first question is just on China. Obviously, some companies seeing some slow down there you're obviously not. Can you just say whether the consumers so do they view USANA as an American brand? I'm just trying to get a feel for whether that's 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.
Kevin G. Guest -- Chief Executive Officer & Director
The answer is yes. They see the American company and the American brand as one of the strengths. Like you said, even though we do manufacture our products in-country, it is an asset for us to be perceived as an American brand in China.
Frank Camma -- Sidoti -- Analyst
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 an 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 -- Chief Financial Officer
Yeah. Frank, it's kind of fall into this similar routine that we've had with familiar products. I think we're hoping for a little bit more stickiness. I think what we're finding is the quantities provided in the packaging that we're 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, probably than what we're anticipating. I think we definitely have some ambassadors out there who are really excited about it, and I think we've learned a lot. We've had some follow-on product offerings in the form of a mask that we've seen a great deal of excitement with. But I think as a whole, we're pretty close. 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 -- Sidoti -- Analyst
Okay. And did some of that lead to the -- I mean you talked about the inventory build, but did some of that lead to the inventory build, because you specifically called out personal care. I mean I don't see as much of a problem since these -- I'm assuming these products don't really have a short expiration. Am I right about that?
Doug Hekking -- Chief Financial Officer
Yeah. We have a longer expiration of the products. And you're exactly right. The reason that you're seeing a lift in inventory is directly relatable to our sales of the product offering. We're using the third-party right now in markets outside of China to produce that and we acquired enough inventory that 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'd 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 -- Sidoti -- Analyst
Okay. Last question is a strategy question, because when I -- historically, from covering you, you've had a very tight portfolio of products in the last couple of years. You've definitely been more willing to expand beyond that and it seems like, obviously, this year you've given what you said on the healthy living products.
You're going to go even further, which I think is positive. But are you getting that directional input from your sales force 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 G. Guest -- Chief Executive Officer & Director
Yeah. 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've looked at other companies, none of them have had as limited of a product offering who've sustained long-term growth like USANA has.
But given what's happening in the marketplace, we call it around here the Amazonification of what's 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're providing those healthy 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'd see is Flintstones and One A Day about and now their entire department is sort of 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're thinking forward many years in advance to see where 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're listening to our customer base and they have really been lobbying for us to expand the base. Secondly, we're doing outside research with outside companies. And then lastly, we're very active in the direct-selling space and being aware of what's happening in the marketplaces as an industry. And so we believe this is the future where we're headed or paving the path by changing that strategy.
Frank Camma -- Sidoti -- Analyst
That's great. I agree. Thanks.
Kevin G. Guest -- Chief Executive Officer & Director
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 -- Tigress Financial Partners -- Analyst
Hi. Thank you. Thank you for taking my questions and congratulations on another record year.
Kevin G. Guest -- Chief Executive Officer & Director
Thank you.
Doug Hekking -- Chief Financial Officer
Thanks, Ivan.
Ivan Feinseth -- Tigress Financial Partners -- Analyst
My first question in China, where you're seeing the most initial interest either and feedback from your agents or from customers on let's say skincare or nutritional products?
Kevin G. Guest -- Chief Executive Officer & Director
I am very confident at our nutritional products. We-the skin care is a new launch for us there and it's only been weeks 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, because I don't have the numbers in front of me, but certainly the nutritional products in China.
Doug Hekking -- Chief Financial Officer
It's heavily toward nutritional in China. Now we just -- Ivan keep in mind we just launched our best Celavive product line in the fourth quarter as well.
Ivan Feinseth -- Tigress Financial Partners -- Analyst
Yes. But I think overall there seems to be a big interest among Chinese consumers about skincare products and that has been at least the feedback I've gotten from other similar companies. So congratulations, I think this could be a successful product line. And 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're taking there?
Kevin G. Guest -- Chief Executive Officer & Director
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're applying to ourselves or that we have as part of our daily routine within our homes. And so if you 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're going to offer as far as products.
Ivan Feinseth -- Tigress Financial Partners -- Analyst
You're going to have to be focusing on let's say prebiotics and postbiotics?
Kevin G. Guest -- Chief Executive Officer & Director
Certainly the whole microbiome 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 microbiome which is all of the prebiotic, probiotics side of things. So the answer to that is yes.
Ivan Feinseth -- Tigress Financial Partners -- Analyst
Okay. Then on your upcoming CapEx and your marketing spend can you give us some idea of what the focus is going to be?
Doug Hekking -- Chief Financial Officer
Yes a lot of it Ivan is Jim talked a little bit early in the call about spend on facility and equipment for bidding out of foods plants so we can go back internally make our own bars and drinks. So that's a big part of it. And a lot of the other stuff is more of a maintenance CapEx. Go ahead Jim? No but you mentioned on the marketing CapEx. Yes I mean again a lot of them -- go ahead Ivan.
Ivan Feinseth -- Tigress Financial Partners -- Analyst
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 supporting the agents or what direct to consumer? Like brand awareness things like that?
James Bramble -- Chief Legal Officer and Corporate Secretary
So yes on both of those. So when we look at from a technology spend and marketing or CapEx or capital investments to make our technology more customer focused. Again what Kevin said earlier is the Amazonification. And we want to make sure that we're going down that path, so that our customers can easily, like we would say, one quick sale as well as from a 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 of that will roll into more CapEx and more technology through this year and next year. And when we look at our marketing spend we're really looking at the same type of strategy we've had in the past. So a lot of our marketing spend are with our athletes and we'll continue down that path as well as some of our others social people who can help us with our social sharing.
Kevin G. Guest -- Chief Executive Officer & Director
Yes our -- 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're going to continue down that path and look at opportunities where we can even expand our athlete base as it relates to utilizing our products.
Ivan Feinseth -- Tigress Financial Partners -- Analyst
Okay. And looking at the Celavive product line, it looks pretty much focused on women. Are you considering any type of men skincare products?
Kevin G. Guest -- Chief Executive Officer & Director
So the current approach is, yes. Even -- not even new products, these products are very relevant to men as it relates to shaving and when you're using the product 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 the chute appealing to women. Our target market demographic is a female base and they're generally the decision makers in the family from a money spend and disposable income perspective. And so that's our out of the chute, but we are right now working with and continuing to market to men with skincare.
Ivan Feinseth -- Tigress Financial Partners -- Analyst
All right. 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 G. Guest -- Chief Executive Officer & Director
So, 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're 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 -- Chief Financial Officer
And again that's our customer focus. 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 very associate-based enrollment as well as just the purchasing.
So, WeChat like we talked about enrollment base initially, but we have multiple phases throughout 2019 that will stretch into 2020 to make this the platform in China to be used pretty much for everything.
Ivan Feinseth -- Tigress Financial Partners -- Analyst
Okay, very good. I have a lot of other questions, but I look forward to speaking offline. Congratulations and thanks again.
Kevin G. Guest -- Chief Executive Officer & Director
Thanks.
Operator
And we will now take a follow-up question from Tim Ramey at Pivotal Research Group. Please go ahead sir.
Timothy Scott Ramey -- Pivotal Research Group -- Analyst
Thanks so much. Just a clarification, but I think I know the answer. Your share guidance does not imply any future share repurchase beyond what's already been effectuated, is that correct?
Kevin G. Guest -- Chief Executive Officer & Director
It implies enough to offset kind of the equity being issued by the company through its equity comp programs to that extent.
Timothy Scott Ramey -- Pivotal Research Group -- Analyst
Right. But not necessarily discretionary?
Kevin G. Guest -- Chief Executive Officer & Director
Correct.
Timothy Scott Ramey -- Pivotal Research Group -- Analyst
That's it. Thank you.
Kevin G. Guest -- Chief Executive Officer & Director
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 -- Head of Investor Relations
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
And this concludes today's call. Thank you for your participation. You may now disconnect.
Duration: 31 minutes
Call participants:
Patrique Richards -- Head of Investor Relations
Kevin G. Guest -- Chief Executive Officer & Director
Timothy Scott Ramey -- Pivotal Research Group -- Analyst
Doug Hekking -- Chief Financial Officer
Doug Lane -- Lane research -- Analyst
Jim Brown -- President and Chief Operating Officer
Frank Camma -- Sidoti -- Analyst
Ivan Feinseth -- Tigress Financial Partners -- Analyst
James Bramble -- Chief Legal Officer and Corporate Secretary
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