USANA Health Sciences Inc (USNA) 2020 Q2 法說會逐字稿

Good day, and welcome to the USANA Health Sciences second quarter conference call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Patrique Richards, Executive Director of Investor Relations and Business Development. Please go ahead, sir.

Thank you, and good morning. We appreciate you all joining us this morning to discuss our second quarter. 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 2020 as well as uncertainty related to the magnitude, scope and duration of the impact of the COVID-19 pandemic to our business, operations and financial results. 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 and Chairman of the Board, Kevin Guest; President, Jim Brown; our Chief Financial Officer, Doug Hekking; as well as other executives.

Yesterday after the market closed, we announced our second quarter results and posted our management commentary results and outlook document on the company's website.

We'll now hear brief remarks from Kevin before opening the call for questions.

Good morning, and thank you for joining us to review our second quarter. Over these past several months, we've proven to be nimble and adaptive, and our results reflect these efforts. Our employees have adjusted quickly to working from home and are providing our customers with the same great customer experience and level of service they have come to expect. We've also remain committed to executing on our many growth initiatives and continue to focus on the long-term growth of USANA. Not surprisingly, our associates are extremely resourceful. They are leveraging social media and other technology-based tools provided by USANA to reach more customers who are looking for high-quality health and wellness products such as ours.

We also deployed several successful promotions during the quarter. These promotions helped generate additional momentum in customer growth that we expect to continue in the back half of the year.

We also successfully hosted our first all-virtual Asia Pacific Convention. Each year, we host several live events that are well-attended and a large part of the camaraderie and culture of USANA. While we are disappointed to break the tradition this year, we were pleased with the attendance of the event and have received positive feedback from attendees. While we look forward to resuming live events in the future, we are making the most of our virtual events in 2020 and leveraging the repurposed resources to reach even -- an even larger audience.

Before opening the call for questions, I'll comment briefly on our expectations and outlook for the back half of the year. While we recognize that we cannot anticipate all of the challenges that might arise as a result of the ongoing COVID-19 pandemic, we believe we've positioned ourselves well to continue adapting to an evolving operating environment. The health, wellness and safety of our employees, associates and customers around the world remain our top priorities and our operating plan will continue to reflect those priorities.

Accordingly, many of our employees will continue to work from home, and our manufacturing and shipping employees will continue to work under our new operating procedures for the foreseeable future.

As noted in our earnings release, we are raising our full year guidance to reflect a solid second quarter as well as the current momentum in the business. We plan on an increased cadence of promotions and incentives to support this momentum, particularly in the third quarter. We continue to manage our cost structure to align with sales performance and to ensure our financial flexibility to adapt to a changing environment. Additionally, we will continue investing in our long-term growth strategies.

Overall, I am confident in the strength in USANA's underlying business and the growth strategies we have in place for the remainder of 2020 and beyond.

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

(Operator Instructions) Our first question comes from Steph Wissink of Jefferies.

We have a few questions we'd like to unpack or themes we'd like to unpack with you.

First, just starting with the comments on promotions and incentives. It sounds like you're going to be stepping those up Q2 to Q3. So wondering if you can just help us contextualize how much of a benefit you felt like you saw in Q2 from those effective promotions and incentives? And then what we should be thinking about in terms of the incrementality in Q3, both on the cost side and then your anticipation for accelerated momentum as a result of those promotions?

Yes, Steph, this is Doug. Year-on-year, we had a lot of similar things that we ran both in the second quarter of 2019 and 2020. We have modestly better success in 2020 on many of those product value propositions and pricing opportunities, those types of promotions that we ran towards the end of the second quarter. We introduced a new promotion that got some pretty good traction, and that promotion runs into Q3. And so we're seeing some pretty good results there that we're optimistic about. And so as a whole, that promotion probably added between $9 million and $10 million to the quarter, somewhere in that range.

Going forward, in the third quarter, it's really a matter of the calendar. And with the entirety of the focus really adapting to the COVID environment in the first half of the year, that was really a big part of the focus. And so many of the calendar items got pushed back to the third quarter that many of our markets have, and so you'll see a lot of that kind of landing in the third quarter. Fourth quarter is a lot lighter than Q3 on promotions, and so we expect a pretty decent lift from those promotions that we see in the third quarter. We haven't commented on the third quarter, but we're expecting a solid quarter.

Okay. That's really helpful. So we should be thinking about this as a bit of a lift and shift versus you developing new promotions for the back half of the year, maybe some things that just got pushed out that would have been executed in the first half, so a recoupment of some of those promotions in the second half or in Q3?

Yes. The one -- the promotion we started about -- in the end of Q2 was something that really wasn't on the calendar, that we had some appetite from our sales team to run. And so I think we're -- based upon the outline of that and how it's performed so far, that one's a little bit incremental relative to our initial plan, and we're seeing some good results there so far.

And just another comment. This is Kevin. As we look at some of these promotions, our business is very much tied to us being connected to our customer base, and these promotions help us stay connected and help keep the momentum building and growing. And so in this unique environment where we're used to gathering and getting together and having meetings, this gives us a different venue, so to speak, to stay connected to those customers and those independent business owners in our sales force. And it's proven to be very successful.

And Doug, where should we map those incremental promotions than in the P&L? Are those largely going to show up in gross margin or does it also factor into your associate incentive line?

You'll see a little bit of both. And so you can tell from the guidance and the EPS release that we'll probably see a little bit of discount in operating margin in the back half of the year. But you can see from the top end of sales, we're expecting a little bit of lift as well. And so you'll see a little bit in bulk. You'll see a little bit in incentives and also a little bit of gross margin pressure. But nothing too distorted really across the front. It's a balanced offering.

Okay. And then the second topic we want to just look at was China. We were anticipating some improvement there, but it seems like it's delayed a bit. So maybe you could just help us diagnostically look at that market relative to the success you've had in other parts of Asia? Can you talk a little bit about China and China's strategy for the back half?

Yes. It's interesting with COVID-19 in China and where they sit, they're really one of the markets that's coming back to more of a normal operating procedures. And one of the things -- they still have limitations on meetings throughout China, but all of our offices are open in China. And the one thing that we're really doing up from a promotions and specials direction is product offerings through the year. We've already offered 4 or 5 this year, and we have another handful of products to go into the remaining half of the year. And then we're looking -- in November, usually, we have our China National Meeting. We've moved that up to September this year, and it's going to be an online event. So we're expecting to have some great momentum around that as well. Yes, the other thing we're kind of hearing from the market, Stephanie, is that -- I think you -- last year, you had the 100-day review, and that kind of rolls forward into the COVID environment, and then you see the economic outlook a little bit deteriorate -- deteriorated in China. And so you see the consumers maybe being a little bit more guarded with their spend. We're still seeing growth in China, and I think we -- with some of the activity we're seeing now, we're optimistic about what we'll see in the back half of the year. But a lot of what you see in that greater China region. China grew at just under 2% in constant currency. Really, the drag, the scenario in Hong Kong right now has been a tough environment for many companies doing business there just with what's going on. And so that was -- when you look at the Greater China region, that was kind of the real story that drug it down.

Okay. That's very helpful. And then the last one, I just wanted to give you a chance to talk about competitive environment because the growth you've seen in your business over the last several years has really been on the back of a fairly robust macroeconomic expansion cycle. And just wanted to have you think through or help us think through how the competitive environment might change in terms of price value as well as how you think about your value equation into maybe a bit more of a lower-growth or no-growth macro?

From our standpoint, we've been so focused on what we've been executing. We have not seen meaningful competitive pressure, but I think your context is right, and that's something that's ever-present, really in our thought process, is that value proposition and how we approach the customers and making sure that they really perceive that value there. And so that will be just an ongoing part of our valuation and our adjustments as we move forward. But I don't think there's an immediate, pressing need to be overly responsive with that, I think it's just part of our basic process that we have in place.

Our next question comes from Doug Lane of Lane Research.

Yes. I wanted to talk -- or ask you if you talk about your plans for conventions this year with going to these virtual meetings and the annual convention in Salt Lake City is a big deal. So how are you approaching conventions specifically? And how is that going to be reflected in spending and SG&A and what have you for the third quarter?

So we're taking a very similar approach that we took to our Asia Pacific Convention. It will be a virtual convention. We still will have product launches. We'll still have specials. We'll still have entertainment, performers. We'll still have our recognition segments, and we will have participants of who will log on. We're setting it up where we'll have some VIP-type participation that will be special training sessions. And then we'll have, just open to the general public, who will have access. And so it will be very similar, from a content perspective, as to what we have. There'll be presentations from executive management and several leaders, and we're bringing in some trainers to work and -- but it will be all virtual. And as we saw in our Asia Pacific Convention, the numbers who actually will attend virtually is far greater than the people who would have attended in-person. And we do see good momentum, a good lift, that we have a nice format. What we're doing is right-sizing some of the information that we're putting out. So the speeches aren't as long, the trainings aren't as long. They have access to modules and different training modules. And it's very user-friendly from that perspective. You can sign up and attend what is meaningful to you.

But again, it will all be virtual. There'll be a few -- very few portions that will be prerecorded and most of it will be live as it's presented in format. We're having some national entertainment, 2 performance segments and Q&A.

And so again, in content, it will be very similar. It will just be change because of the format of watching it on a screen versus being there in-person, but our expectations are that we will have multiples -- multiple times the people actually participating than normally would, but we're still going to continue, again, with our product launches and promotions just as we would in years past. It will just all be done virtually.

And as to your comment on SG&A, obviously, there is cost savings as it relates to these events, and we are rolling some of those cost savings into some of our promotional activities. But yes, it is less expensive to do a virtual convention than it is to have everybody come to Salt Lake City.

No, that makes sense. But -- and I know it's early days here, Kevin, the global conventions yet to be pulled off here, but you've been through the Asia Pacific, and just thinking forward here, assuming we reenter a post-COVID world, does this really change the way you think about having these conventions going forward?

Certainly, we need to learn from this experience. I think my vision is that we'll move into some sort of hybrid when we actually can meet in-person, because I think there is power in meeting in-person. But how can we leverage what we're learning through technology to those who can't afford to travel around the world to come to an event? And so we will leverage that experience and opportunity into how we redo our events.

And I think it will be a hybrid. We will, I think, continue to use -- utilize technology in a greater form from an events perspective, but I do expect this to return to our in-person conventions as well. They might be a little more limited. We can typically do national kickoff events in every market -- in all of our markets, and we might go more virtual there and rely more heavily on technology from that perspective. Where we do spend a lot of money and then focus more the in-person on the global-type events.

Okay. That's helpful. And then shifting gears back to China. Because in the normal seasonality of your business, I would assume that the second quarter should be a bigger number in China than the first quarter because of the first quarter having Chinese New Year. And I know there's currency and there's Hong Kong and Taiwan involved here. But Doug, can you confirm whether or not the local currency sales, the absolute dollars in sales in China in the second quarter, was comparable or higher or lower than it was in the first quarter?

Yes. I'm just pulling this up now for you, Doug.

No, I appreciate it. What I'm getting at -- pardon me?

China was down about 4% sequentially.

So that goes sort of counter to my thinking, which is on normal seasonality. So I wondered what changed in the first quarter that wouldn't result in a sequential improvement? Was it because you were particularly successful with your promotions in the first quarter or was there an actual change on the ground in the second quarter that resulted in the lower -- the sequentially lower sales?

Yes. If you recall our narrative in the first quarter, we did have a promotion in China that was pretty successful in the first quarter. So I think a lot of these quarters, when you look at them in discrete period, you have to go back and factor that in. I think the primary difference is the -- is the promotional stuff. I think our just organic run rate seems pretty consistent right now.

So yes, what I'm driving at is you had the step down last year with 100-day review period, but we definitely saw stabilization heading into the back half of the year. So I just want to make sure that there's not something else going on there that's driving another step-down. But it sounds like you would consider stabilization characterization, if you will, still applicable?

Yes. Yes, there's no new information or no new event to talk about in China at this point.

Our next question comes from Ivan Feinseth of Tigress Financial Partners.

Congratulations on another great quarter. So when you mentioned the promotions within the quarter, can you give me some idea of what type of promotions these are, how they work and how you measure their impact?

Yes. Ivan, more and more -- if you would have talked to us 5 years ago, so many of the promotions that we ran were more incentive-based and toward sales on acquiring new customers. And you've seen that tilt pretty heavily towards more product promotions. And so many of the things that we've been running as far as the -- just the sheer count, a lot of that is really a value proposition play on product offering or if you buy these products in a limited period of time, you're going to get the product for free. And that's probably the lion's share of what we do on a regular basis. And we are seeing -- with China, they've entered -- they started having a little bit more robust product offering and a heavier calendar for introducing new products this year. And so we think that's -- it's going to be additive, it's going to take time to traction, but I think that's moving us in the right direction.

And what were your most successful products or product categories this quarter? And how did you see like the current pandemic environment helping that?

No. I mean similar to right after kind of COVID come out, we've seen the products that are designed to provide immunity support, continue to go back and perform strong, not near what they -- kind of initial reaction was, but still at a higher level than historical levels.

China introduced a collagen product, and it was introduced, and it did okay, but it really seems to go back and be getting some traction, and have been very well received, and they have some -- we typically don't get into specifics of future product launches just because of some of the implications of that. But some of the things that China has on the horizon here, they're pretty excited about as well.

And then just maybe you talked a little bit -- further into the horizon on the calendar about some different product offerings too coming out?

Yes. Like Doug said, we have a road map for 2020, the remainder of that in China and around the world. We have products that are going to be launched at our Americas and Europe convention in August. As well as we talked about it in the past that our Active Nutrition line is being worked on now for launches in 2021, and they'll go throughout the year in 2021 in all of our markets or most of the markets that have a Foods line or Active Nutrition, as we're going to call it in the future. So we're really excited about that product launch strategy for the next couple of years.

Right. Did you experience any product shortages or run out of products that you could have sold more if you had more? Or was your supply chain robust enough, it supported demand for everything that was selling well throughout the quarter?

In this quarter, our supply chain hasn't been really an issue. When we first had the COVID, and what Doug talked about is we have some products that have an immunity association with them, we saw some really high numbers of that. And it was just a short amount of time where we had some stock-outs. But we've gotten that under control.

And in general, from a supply chain, we've been able to manage that extremely well with everything that's going on. Right now, with the last promotions that we've had, we have some stress with supply chain, but that would be a short period of time as well.

It was the collagen product demand -- like for example, the pandemic has people using an excessive amount of hand sanitizer that has alcohol, which causes a depletion in collagen. Do you think that was part of the cause of the demand or what do you think the demand for the collagen products was driven by?

Yes. I think it's just the normal demand when we launch a new product. We have a lot of our existing associates and preferred customers who want to try it. So we see a spike at the beginning. And then it normalizes over time. I think with the collagen, we saw that, and then we're seeing a really good run rate in general on that product because of the excitement levels.

And I think just the attributes of that product in general, Ivan, I think, are the selling points of it. At least to my knowledge, I haven't heard anybody linking that to depletion of collagen from hand sanitizers. It's just been very well received.

Okay. And like, can you give us some like detail or just an overview of your Active Nutrition product line? Push? Thought process? How you envision this coming out, rolling out and the products that will be included?

Yes. I can give some color to that. I mean, when you look at it, we're looking at rolling it out in the beginning of the year in the first quarter in a few of our markets and we're concentrating on U.S., Canada, Mexico, Australia and New Zealand probably being the first round of products, and then they would roll out to the other markets. There's always some delays in our rollouts when it comes to registration of products, and we just have to deal with that to make it as smooth, to make sure that we can give a large offering to those countries that have a little bit more of a regulatory environment -- or a tougher regulatory environment to get products in.

Right now in our food products, there are really 2 major products. You have powdered drinks, meal replacements, and then you have bars or food-type replacements. And then we have some support that goes along with it when it comes to the online support, the ability for recipes and everything else that goes along with a great Foods and product line. We're going to look at more of that lack of nutrition. That's going to be an expansion of the line. We're also doing, at this point in time, going to keep the existing line for the foreseeable future just to make sure that the rollout goes extremely smooth.

I think the biggest difference that we're going to have is more support around the line this time, more programs, trying to build a community and all those things that we've seen with other companies that they've launched extremely strong foods-type categories. That support system is very important. So that's one of the areas that's going to be an enhancement. Plus, we'll have all-new powdered drinks, new formulas as well as more bars to support the line.

And Ivan, I would add in there the fact that in the past, when we view third-party for some of the stuff, all of this is going to be in-house now, which gives us really the ability to be a lot more responsive and not worry about small batch sizes with some of this stuff. So we think that's a real positive.

And like Jim said, it really is more of a holistic offering and I think we're very excited about that. And I think it's -- you'll see that kind of -- it just has so much potential to grow and expand going forward. I think it's a great footprint as we get ready to enter that space with a little bit more breadth than what we had in the past.

And since you have a large number of athletes that are kind of -- are brand ambassadors, how are you going to, let's say, integrate them or in the marketing effort for your Active Nutrition product line?

Yes. I think it will be a support to the product line with the athletes as well as other influencers that we have. We'll also use them, as we can for -- you look at -- if you have these great athletes, you'd love to have them in a workout video or talking about recipes and all the things that affects their life from a very healthy offering and we'll do the same with this group. I mean, we literally, like you say, we have over 3,500 athletes around the world. So it's a huge amount of -- it's a huge opportunity for us to use specific ones in the program.

And at this time, we have no further questions in queue. So I'd like to turn it back over to Mr. Pat Richards.

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. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.