Patrique Richards - IR Jim Brown - President and COO Josh Foukas - EVP.

Frank Camma - Sidoti Timothy Ramey - Pivotal Research Group.

Good day, and welcome to the USANA Health Sciences Fourth Quarter Conference Call. At this time, I would like to turn the conference over to Patrique Richards. Please go ahead..

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 our outlook for fiscal year 2018.

We caution you that these statements should be considered in conjunction with disclosures, including specific risk factors and financial data contained in our most recent filings with the SEC. Kevin Guest our CEO is currently travelling.

I'm joined this morning by our, President and Chief Operating Officer, Jim Brown our Chief Financial Officer, Doug Hekking; our Executive Vice President of Legal and Investor Relations, Josh Foukas; as well as other executives.

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

Thanks, Pat. Good morning, and thank you for joining us to review our fourth quarter and full year results. The quarter was certainly a strong finish to 2017. We're pleased to report our highest quarterly sales in company history. We stopped off to 15 consecutive year of record revenue for USANA.

Importantly we instituted several key initiatives during the year and completed strategic investments that have positioned the company for the next phase of growth. The announcement of prelaunch of our new skincare line Celavive was arguably our most significant initiative introduced in 2017.

Celavive is our completely new personalized skincare offering that features USANA's proprietary InCelligence technology. We began launching Celavive in flat markets in January and we'll continue systematically rolling it out around the world during the remainder of 2018.

We believe that Celavive is an opportunity to acquire our new custom demographic and believe that Celavive will grow our skincare line from 3% [ph] of net sales to a run rate of approximately 10% by the end of 2018.

During 2017 we also announced our plans for a mid-2018 entry to four new European markets, Germany, Spain, Italy and Romania and preparation for this expansion we have already made product available to preferred customers on a not for resale basis in these markets.

Finally, we strengthened our management team with the addition of new Chief Officer of Talent and made key investments in the business to help facilitate future growth. These changes and investments yielded an immediate benefit to our results in 2017. For example, we made meaningful progress in improving our global IT infrastructure during the year.

These improvements ensure that our systems meet the needs of our current business but also position USANA for future growth. They're providing us with the speed, efficiency and flexibility to run a business that operates in 20 markets around the world. I expect USANA to begin leveraging these investments in 2018.

Additionally, during 2018 we enhanced our process to discover, develop, and commercialize new products while enhancing our Smart Foods [ph] offering, we plan to introduce new foods products in 2018. Looking forward we are optimistic about our 2018 growth initiatives.

In addition to the worldwide launch of Celavive and European expansion, initiatives include growing our preferred customer business around the world, introducing a robust social sharing platform, pursuing additional product and technology innovation and continue our investment in our IT infrastructure, to create a better overall customer experience.

I will end by saying that I believe we're well positioned for accelerated growth, as indicated by our outlook we're expecting record sales results in 2018. We're also expecting improved earnings from operations and a strong bottom line results, I am confident that our 2018 growth initiatives will continue to drive momentum.

I'll now ask the operator to please open the line for questions..

Thank you. [Operator Instructions] And we'll take our first question from Frank Camma with Sidoti..

A couple of questions here, can we first talk about the growth in your network, particularly sort of in the composition active members versus preferred customers and it seems like to me there some language in the commentary kind of focusing a little bit more on the proffered customers than you traditionally have or maybe that's not the case, that will be sort of the first question..

The main change that we made during this release is we have had classic customers in china that we call China preferred customers and we have had those for quite some time now.

Historically we classified those customers as associates because they are not exactly like our preferred customers in other markets, meaning they have an opportunity to get referral benefits through product.

And so historically we have classified them as associates but since they are not earning money doing this other stuff, we think with how we are approaching those customer staff is best to go back and give that transparency and visibility with what that number is for those China preferred customers.

So, you see that reclassification during the quarter..

Okay, that makes sense. And I guess, the second part of the questions more going forward when you look into '18, are you emphasizing more the growth of the active Associates or the Preferred Customers -- like has that approach changed, I guess, that -- to clarify my question..

Frank it actually has. We are emphasizing more growth on preferred customers and that’s pretty much our ongoing strategy. We just feel that company building that base will help stabilize USANA from growth as well and then our associates will come from that base..

Sure. And so, the -- I guess, the other question to that is, since you're using more social marketing, does that help you attract more Preferred Customers that who might just say, look at the Celavive product or the supplements, and they just want to buy the product -- that's part of my question.

And who gets credit for that sale, I guess? Like, so let's say you're using the targeting marketing -- I am not saying you are using it but like on a Facebook -- the company, how does that work?.

You are right when we are looking at social sharing we are looking at different social platforms that could be Facebook, WeChat, Instagram the list goes on and our plan like we just introduced last week we made a lot of IT upgrades and the IT department has worked hard as well as creative and marketing a lot to get these out.

When you talk about that specific link it would be cluster, I mean product focused and the hope is that it would attract customers and assuming they use the link to get into our shopping cart that order would then go back to the person who had posted that link, it will be an automatic process.

You saw in general is never going to compete against our associates..

Right, okay. So, do you have always a mechanism to track all that in you're -- okay, that's good.

In staying on that second, because I think that's pretty poor in -- where are you in the IT investment cycle, both on the sort of CapEx and how we should think about it as it flows through the P&L versus the CapEx?.

I think the price feed has hit our on account of sweet spot as percent of sales, Frank. It's probably when we continue to invest as sales grow as well just so we can stay ahead of the game. But you are not going to see the same level of increase that we have seen in absolute dollars over the past years.

You see that more in line with what the growth of sales is..

And on the Philippines, specifically, there's not a on specific -- I know that wasn't called out anywhere here. I was just wondering; can you talk about the environment there since that historically was a really good market. It looks like you had some success in another market -- obviously, a lot of market is quite a bit.

Can you talk about the Philippines, specifically?.

Yes, Philippines has had years and years of success of growth and we have been off a little bit and we have been down a little bit, some initiatives and plans they have to go back and kind of flatten out that trend and get them turning in the right direction again but they were off a little bit this year from where they were in 2016..

Is that more of a macro factor or do you think just like with your network just come kind of high-level?.

I think it has to do more with the successes and the leaders there, that maybe they are not as hungry as they have been historically. I think they are comfortable and so it's really trying to go back in addition to supporting those leaders get new kind of group of leaders emerging and hungry for the growth in that market..

Okay, last question, and I'll hop off. Is the environment for direct selling in China, if you can give any general comments about that given how sizable it is? Can you just talk about -- has anything changed since the last conference calls, either in governmental side, or just how the consumer looks at direct selling there.

I know it's not technically the same as other markets..

So, you're right, China is a different market, but in terms of changes within the last quarter we haven't been made aware of any and we're regularly in touch with the China management team including our legal and external affairs groups over there, external affairs government relations, so we follow that very closely, quarter-over-quarter there hasn't been any noteworthy change that we would report..

[Operator Instructions] And we'll take our next question from Timothy Ramey with Pivotal Research Group..

A couple of things.

I noted that the rate of spending and the China investigation kind of doubled from the run rate of the previous couple of quarters, I know your bullet point language in the release that says we are not going really come in on that, but the thought of us being closer to the end in the beginning or is there any way to kind of quantify where we're at on that?.

We dropped in the same disclosure we've had historically and that disclosure is included intentionally and so beyond that we can't comment on the investigation other than I would just remind you that the investigation is still voluntary, it's an internal enquiry and we included the disclosure again but it's not quantitatively material and don't believe it'll materially affect our results of operations.

Beyond that we really can't comment on it..

And then relative to the commentary on the tax rate for next year I think I kind of get what the problem is, you've so too expenses in the U.S., and not enough earnings in the U.S., had the U.S. tax rate really mattered.

Obviously, there's lot of strategies that other countries have used to shift costs, maybe your foreign subs have to pay a royalty for the use of trademark or something like that.

How bullish are you that you'll be able to kind of mitigate some of those issues, number one? And number two what external tax rate is really driving you to assume 34% since I don't think many of those countries are much below that?.

So, Tim, essentially with the path in the U.S. tax reform you saw a key market in the U.S. go from one of the highest tax rates in the world to one of the lower ones.

And so that definitely changes how you approach the tax strategy so to your point and you are correct on that as you see a game plan to go back and shift cost have been supporting China from the U.S. over to China over the several year period, it's not going to be a light switch.

We are going to do things that makes sense that really supports the China market but that's definitely part of the game plan that we're addressing.

I would also comment is if you look at let's take '16 and '17 with the type of instruments that have been issued from an internal equity perspective and the spread of the price and what was outstanding we've generated excess tax benefits that have been pretty substantive in both 2016 and 2017, and when you strip those out the adjusted rate is like 34 forward in 2016 and 34 states in 2017, so the 34 is not too much different than what that illustrates..

Got it, and then just one more on China a very impressive growth in the fourth quarter and it wouldn’t lead one to believe that there was any kind of turmoil in that market or lack of leadership or issues that would emanate from the internal investigation.

Can you comment on how you are sort of firewalling the -- running the business versus conducting this investigation?.

I'll trying and then let Josh comment on some of the specifics there but I think what we're seeing we are very comfortable with the management team in China we're comfortable with the direction, we did you saw some commentary about our product promotion that was supportive of hose what you saw in the fourth quarter and China was probably good 70% to 75% of what the lift was from that broad promotion.

It was different than what you've seen in the past, we've had things that have been more incentive based and you see a drag on margins, this did not have that effect. And you did see any kind of dip in perspective sales effort that's why we are pretty excited about what we saw there and we really haven't seen that type of response historically.

So, it was a good product promotion. As far as the firewall and in the terms using there I think we just keep running the business and I think the investigation we've had here I wouldn’t say has been impact for performance in that market..

It's helpful if you just take a step back and take a look at the investigation for what it is right, it's a U.S. voluntary inquiry under U.S.

law and to certain particular rise activity in the China market and that’s like Dough said has not affected the sales arm of the business or the product arm of the business or our leaders who are out in the field selling the consumers or consumers who are purchasing our products and that’s what you continue to see in china is very strong consumer demand coupled with growth in leaders and success by leaders and so it is for use of your term firewall that's separate, there are separate focuses that don’t really relate to one another.

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And we have no further questions at this time. I would like to turn the call back over to Mr. Richard for any additional or closing remarks..

Well, 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 Thank you..

And this concludes today's conference. Thank you for your participation, and you may now disconnect..