Q3 2019 Earnings Call
Good day and welcome to the USANA Health Sciences third quarter Conference call Today's conference is being recorded.
At this time I would like to turn the conference over to Mr., Patrick Richards Executive director of Investor Relations and business development. Please go ahead Sir.
Good morning, we appreciate you joining us this morning's review our third quarter results Today's conference calls being broadcast live webcast can be accessed directly from our website at <unk> IR taught you saw net dot com.
The following the call a replay will be available on our website.
As a reminder, during the course this conference call management will make forward looking statements regarding future events for the future financial performance for our company. The statements involve risks and uncertainties that could cause actual results to differ perhaps materially the results projection such forward looking statements. Examples of these statements.
Those regarding our strategies 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 yes.
I'm joined this morning by our CEO , Kevin guess, our President Jim Brown, our Chief Financial Officer, Doug Hekking as well as other executive Chairman room today.
Yesterday after the market close we announced our third quarter results posted our management commentary results and outlook document on the company's website will now here brief remarks from Kevin before opening the call for questions.
Good morning, and thanks for joining US third quarter 2019 was a successful quarter, where you saw on several fronts.
Although net sales were down on a year over year basis. Several efforts during the quarter helped us generate modest growth in both net sales an active customers on a sequential quarter basis.
In August we held our annual global Convention in Salt Lake City.
This event always generates a lot of excitement and this year did not disappoint.
On the recognition and training that we offer a view that we also introduced several new products business incentives to thousands of customers and attendance.
We're pleased to see our customers respond positively to the promotions and incentives that we offered throughout the quarter.
These offerings contributed meaningfully to our results for the quarter and are part of our efforts to Reengage associates and generate positive momentum in our business.
In China, we continue to actively monitor consumer sentiment towards health products.
Although we continue to experience a challenging consumer environment in China. We were pleased to see a strong customer response to a product promotions sales incentive that we offered in China during the third quarter.
The results generated by these incentives indicate to us that we'd have the REIT strategies in place to return China's your growth as consumer sentiment improves over time.
We plan to continue offerings strategic promotions throughout the coming quarters degenerate momentum in this key market.
Additionally, we're hosting our annual China National sales meeting in November .
Which will once again, we attended by nearly 10000 customers in Macau.
At this event, we will offer our attendees a preview of our plans for China in 2020.
Before opening the call the questions I'll comment briefly on our outlook for the fourth quarter.
And our earnings release for the second quarter, we indicated that we expected the negative impact on net sales from currency exchange rate of approximately $25 million for fiscal 2019.
As noted in our third quarter earnings release, we now believe that the negative impact on net sales due to currency exchange rates will be approximately $39 million or $14 million.
Greater than previously estimated for 2019.
As a result, we've narrowed our sales guidance ranges to reflect this new expectation.
Finally, while we continue working to a light spending was sales performance in expectations, we will continue making the necessary investments generate momentum and drive long term growth in the business across all our markets during the fourth quarter in plan to continue offering promotions and incentives.
Well this year has not included the year over year growth that we originally anticipated we remain confident in our the overall strength of our business and expected finished the year strong.
With that I'll now ask the operator, please open the lines for questions.
Thank you if you like to ask an audio question. Please signal by pressing star one on your telephone keypad, if you're using a speakerphone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask an audio question.
We'll pause for a brief moment to allow everyone an opportunity to signal for questions.
Well take our first question from Doug Lane with Lane Research. Please go ahead.
Hi, good morning, everybody.
The thing that sticks out that I wanted to ask about in China is that the account the active associates the preferred customers in the region still take down sequentially from June now you've had a full quarter away from me 100 Day review period.
I wondered if.
Youre surprised at the number decelerated in September from June and what do you think you can do to start getting your active associate count and your customer count heading north again.
Yes.
Doug I would say it really doesn't surprise I think it's been playing a little bit a catch up here I'm trying to go back in in Houston momentum and try to go back and aggressive consumer sentiment, it's very hard for our associates now and even our served our customers there.
Get some product benefits from referring folks.
It's been challenged I think thats flattening and time will go back and VR Allied here, but it's going to take some time to go back and see that stabilized and we continue to go back as Kevin mentioned in his prepared remarks.
We'll go back and do initiatives and promotions and different incentives to go back and stimulate market and return there are firm belief is we'll get there, but it is going to take some time and we're going to have to be active and played a role and having that recurring to too.
Levels, where we see kind of regular increases.
[noise] can we expect then in the fourth quarter more of these product promotions in sales incentives that you.
I mentioned in the third quarter or are going to be sort of a change in tactic there.
Jimmy we have these things and we've had these we have promotions and and different contests and stuff going on on a regular base throughout the company's history, what we didnt third quarter was a little bit larger sales impact and what you would typically see so we're definitely active in the fourth quarter, we're not anticipating the same type of sales lift that.
We had in Q3 in Q4 from the activities, we're going to do what we do think they are additive importantly market.
Okay, and just shifting gears a margins.
Sequentially improved certainly in the quarter.
From the outside it looks like you.
We sized if you will trigger to your lower sales levels are we still Doug looking at longer term operating margin targets in the 14% to 15% range is that the rate range.
Yeah, I think for now that's a longer term thing I think with current sales levels. That's a bit of a challenge I think specifically given some of the longer term.
Strategy that we want to go back and pursuing as as we kind of consistently.
Good day and welcome to the USANA Health Sciences third quarter Conference call. Today's conference is being recorded at this time I would like to turn the copper it's over to Mr., Patrick Richards Executive director of Investor Relations and business development. Please go ahead Sir.
Good morning.
Appreciate you joining us this morning to review our third quarter results Today's conference calls being broadcast live by webcast can be accessed directly from our website and I are taught you saw net dot com.
The following the call a replay will be available on our website.
As a reminder, during the course this conference call management will make forward looking statements regarding future events for the future financial performance. 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.
Those regarding our strategies 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 yes.
I'm joined this morning by our CEO , Kevin guests, our President Jim Brown, our Chief Financial Officer, Doug Hekking as well as other executive Chairman room today.
Yesterday after the market close we announced our third quarter results posted our management commentary results and outlook document on the company's website will now here brief remarks from Kevin before opening the call for questions.
Good morning, and thanks for joining as the third quarter of 2019 was unsuccessful quarter, where you saw the on several fronts.
Although net sales were down on a year over year basis. Several efforts during the quarter helped us generate modest growth in both net sales inactive customers on a sequential quarter basis.
In August we held our annual global Convention in Salt Lake City.
This event always generates a lot of excitement and this year did not disappoint.
On the recognition and training that we offer a view that we also introduced several new products business incentives to thousands of customers and attendance.
We're pleased to see our customers respond positively to the promotions and incentives that we offered throughout the quarter.
These offerings contributed meaningfully to our results for the quarter and are part of our efforts to Reengage associates and generate positive momentum in our business.
In China, we continue to actively monitor consumer sentiment towards health products.
Although we continue to experience a challenging consumer environment in China. We were pleased to see a strong customer response to a product promotion sales incentive that we offered in China during the third quarter.
The results generated by these incentives indicate to us that we'd have the REIT strategies in place to return Chinas real growth as consumer sentiment improves over time.
We plan to continue offerings strategic promotions throughout the coming quarters degenerate momentum in this key market.
Additionally, we're hosting our annual China National sales meeting in November which will once again, we attended by nearly 10000 customers in Macau.
At this event, we will offer our attendees of preview of our plans for China in 2020.
Before opening the call the questions I'll comment briefly on our outlook for the fourth quarter.
In our earnings release for the second quarter, we indicated that we expected a negative impact on net sales from currency exchange rates of approximately $25 million for fiscal 2019.
As noted in our third quarter earnings release, we now believe that the negative impact on net sales due to currency exchange rates will be approximately $39 million were $14 million.
Greater than previously estimated for 2019.
As a result, we've narrowed our sales guidance range to reflect this new expectation.
Finally, while we continue working to a light spending when sales performance in expectations, we will continue making the necessary investments to generate momentum and drive long term growth in the business across all our markets.
During the fourth quarter, we plan to continue offering promotions and incentives.
Well this year has not included the year over year growth that we originally anticipated we remain confident in our the overall strength of our business and expected finished the year strong.
With that I'll now ask the operator, please open the lines for questions.
Thank you if you like to ask an audio question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to asking audio question.
We'll pause for a brief moment to allow everyone an opportunity to signal for questions.
We will take our first question from Doug Lane with Lane Research. Please go ahead.
Hi, good morning, everybody.
The thing that sticks out that I wanted to ask about in China is that the account the active associates the preferred customers in the region.
We'll take down sequentially from June now you've had a full quarter away from the 100 day review period and I wondered if you.
Youre surprised at the number decelerated in September from June and what do you think you can do to start getting your active associate count and your customer count heading north again.
Yes.
Yeah.
Doug I would say it really doesn't surprise I think it's been playing a little bit a catch up here on trying to go back in Houston, Momentums, and and cutting back and aggressive consumer sentiment, it's very hard for our associates now and even our served our customers there who get some product benefits from referring folks.
It's been challenged I think thats flattening and time will go back and VR Allied here, but it's going to take some time to go back and see that stabilizing we continue to go back as Kevin mentioned in his prepared remarks, well continue to go back and do initiatives and promotions and different incentives to go back and stimulate market and returned there are.
I believe is we'll get there, but it is going to take some time and we're going to have to be active in played a role and having that recurring to too.
Levels, where we see kind of regular increases.
[noise] can we expect then in the fourth quarter more of these product promotions in sales incentives that you.
I mentioned in the third quarter or are going to be sort of a change in tactic there.
And can be better we have these things and we've had these we have promotions and and different content and stuff going on on a regular base throughout the company's history. What we did the third quarter was a little bit larger sales impact than what you would typically see so we're definitely active in the fourth quarter, we're not anticipating the same type of sales lift.
We had in Q3 in Q4 from the activities, we're going to do what we do think they are additive imported to the market.
Okay, and just shifting gears a margins.
You know sequentially improved certainly in the quarter.
From the outside it looks like you.
We sized if you will to your to your lower sales levels, while we still Doug looking at longer term operating margin targets in the 14% to 15% range is that the right range.
Yeah, I think for now that's a longer term thing I think with current sales levels. That's a bit of a challenge I think specifically given some of the longer term.
Strategy that we want to go back and pursuing as as we kind of consistently mentioned, we're going to keep investing in the future. So as we see that sales line return that I think we'll go back to pickup a little operating margin along the way.
Yes.
Hi, gentlemen on the gross margins down again.
The second quarter here is that is that more of a mix shift. This is that because the mix shift out of China or what's going on in the gross margin line, that's coming in a little bit not as much as it wasn't the second quarter, but still down year over year in the third quarter.
Yeah mixes some currency plays a role.
The leverage on some costs are more fixed in nature.
In in cost of sales also played a role over really the primary contributors to.
A little bit of gross margin pressure, but the definitely market mix does play a role there.
Okay. That's good and just lastly on the buyback.
Picked it up pretty pretty heavily in the third quarter and you've got I guess only 30 million remaining on the authorization can you comment on.
Going forward, what's your view is on buyback and should we see authorization go up sometime over the next quarter or too.
Yeah, I, probably won't commented authorization till the board gives it at a it did not come up heavily.
The more recent meetings here I think what we will do is will be active too.
Hi shares back to offset the impact of the management equity program and I think thats. The extent of until we go back maybe see opportunity or well what makes sense to the company those things will be a dialogue and coordinate with the board of directors long with Kevin and Jim.
Okay, that's great. Thanks, everybody.
Thank you we'll take our next question from Stephanie Wissink with Jefferies. Please go ahead.
Thanks, Good morning, everyone. We have two questions. The first relates to dump earlier question on China wondering if you could just give us a sense of what tools you are using in that market that you're seeing somewhat affected to help improve the rate of sale.
Just looking at the quarter to quarter progression looks like you did see a bit of.
The improvement there and then on the promotions and sales incentives that you referenced can you talk a little bit about how much of that is more of a temporary.
Infusion to can stimulate sales or how much of that is building new programs into the overall marketing kept that you're using to really managed sales growth higher coming out of that this period, particularly in China. Thank you.
Yeah. So this is Kevin in China.
As we as we look at our activity and what we're doing in where we're investing we've made a large investment in technology.
Especially as it relates to we chat.
And the ability for our customers have access the very simple easy way through their mobile devices to be able to interactive work in deal with the company.
And so we're making great progress from a shopping experience as well as for those who want to be involved deeper into song up from a mobile at a we chat.
Perspective, and so that's been an area, where we have focused.
And we continue to see activity and we are growing our technology.
As human and our technology presence.
In China greatly as well as in the rest of the world, but chives specifically.
As we think about our promotions and.
From a long term perspective.
We are hoping and anticipate that this is not a hit and run type promotions that it is encouraging our long term behavior in customer acquisition.
To participate and be part of you saw from a long term perspective, and so our promotions and incentives are directed at customer acquisition and.
And a long term customer acquisition not a short term now we did do some product promotions that would be incremental type sales that were received very well in the quarter.
But strategically.
Our promotions are focused that increasing that active customer count those referred to on our last question and we believe those were lucky up the numbers that that we're seeing a positive results as we grow or active customer count in China.
Great. Thank you.
Thank you we will take our next question from Frank Camma with Sidoti. Please go ahead.
Hey, good morning, guys.
Hey, Greg Greg can you talk about what kind of sales bump you get for your.
Convention in Macau.
Yes, we can talk.
Frank Historically, we haven't sold products at that have been before last year.
Last year, we we sent product packs over there and the way we position and stuff I think we learned a little bit from there I think we generate roughly five and a half million sales last year in product sales, we expect that to be somewhere that million happened 2 million next year and we're trying to go back one of the challenge right now I think specifically environment they have.
It is I think we've made a challenging just because they are going to Macau back to mainland we made analogy for them bring products back over and not get tax and stuff. So I think we're looking at things differently trying to be very mindful that experience at our our attendees are consumers or have we don't want to create headwinds for them. So the whole work on some stuff invention and we'll probably have follow up.
Type activities in that market after that event.
But that's that's that's kind of where we've been last couple of years anyway.
Okay and can you just give a little more detailing this.
Second review in China that you mentioned in the release in the commentary.
And what that entails it doesn't sound like it's really disrupting necessary incrementally I guess disrupting the environment, but can you just tell us what the government silicon further.
Yes, Frank So this is Josh so the this follow on review or look back review was anticipated by the industry and so it really didnt.
Catch us through our peers by surprise and really what we've gone off so far there the direct communications from the Chinese government as to the duration and the scope of the review, which again is product focus.
Yes, you know focusing on the healthy foods aspect of the business. It's a look back to the government to get a greater understanding about the effectiveness of the initial review whether companies have implemented the requested changes the government brought up in the initial review and advertising.
Quite honestly how companies.
Our advertising health products with an M and also outside of the direct sales industry and so at this point. We're just following the lead to the government will cooperate in anything were asked to do and you are correct and we mentioned this in the release, we have not seen the negative media.
Impacts.
We saw earlier in the year we've also.
Not at need.
Any requests for council or restrictions from the government on meetings and various provinces.
Okay, and I know, it's a fairly small part of your geography. There is obviously was a bigger onetime but can you comment on Hong Kong I mean, as they basically have sales there essentially stalled altogether or what are your so what do you see him out there does it.
Spread into the mainland at all or like geographically and or Jason season, just trying to figure out what impact that might have on you.
You don't Hong Kong is not a real large mark first right now, but they've got in there with all the with all the news are they seeing kind of the geopolitical issues. There they are underway.
But the reality is we haven't seen a great deal growth from Hong Kong right over the last year's as a whole and so it's kind of hanging in there I think given the environment kind of that's around I think what they've done they've done a pretty decent job.
Okay.
Final question is I mean, the numbers out of South Korea continue to be extremely impressive could just tell us.
How much of a portion of sales South Korea now represents.
Roughly are you talking such the mix.
Yeah, well there just a percentage revenue like South Korea now does it seems like it must be a decent size is your total sales given the growth rate over the last couple of years.
It.
Just below 9% for the last quarter Okay.
Instead of Q as you alluded to with that kind of have an upward trajectory and that's flattening out being down.
As a whole due to to the circumstances, we talked about creates taken up market share as well within the U.S on group. So I mean, I guess I can imply that that's I.
I mean, I guess, you won't disclose until later, but that that must be your second largest single country market right.
I mean I figure they get.
It it depends on which time for me look at it will be there is not good junior.
Right Okay.
Fair enough. Thank you.
Thanks Frank.
Thank you.
Our final question today comes from I've been find stuff with Tigris Financial partners. Please go ahead.
Thank you congratulations on the great progress on a nice reaction to the stock.
Thanks, Hey, sorry.
I have a couple of questions as far as you know the recent new product introductions can you give me some idea what things are doing better than expected have somewhat disappointed.
What has been some of the uptake from your associates and clients.
Yeah, we have.
One product that is really.
Performing well.
I'd recommend you tried to habit of Copel crime.
Is it.
It's been an outstanding product and across the board.
When we when we launch as we sold out of everything we had at least we're we're exceeding our.
Sales expectation.
Forecast on the Copa Prime products, which is a cognitive.
Brain.
Hands type product based upon traditional Chinese.
And we're excited about that product is how well is doing.
We also launched some oral care products.
That are performing below expectation.
But we do believe that the oral care, especially the.
The probiotic products that we launched is a prime product for social selling in social interaction because of.
How is a interaction and there are several things so you take it at night.
It the probiotics go to work in and.
Work on the unfriendly bacteria that gives you got breadth in the morning, So you wake up with.
Good breath versus bad breath, and so there's a good social aspect as far as.
Campaigns that we can handle there was we will.
Focus on into the next year.
Yeah Copa Prime is a a new product and product in the traditional Chinese medicine world.
Which is somewhat new for us.
At a launch in it is performing very well.
That does some very interesting.
Congratulations on that how about skincare and the salary line how has that been performing.
In carrying ourselves right.
Has been performing okay.
We have some new products, we will launch in 2020 as it relates to skin care.
We believe will enhance the line it and address regional.
For various parts of.
That have different needs than others, and so we're looking to expand our skin care line. So that we can be more.
Regionally conscious of for instance in Asia. They prefer something that has a whitening type component, but as an example, we're in.
The United States side of things, that's not a product at all that that resonates and so we are we're making advancements and skin care and.
Hope to see it be a larger percentage for ourselves.
One.
Okay.
I appreciate your questions again congratulations.
Well thanks Ivan.
Thank you.
This now concludes the question and answer session I would now like to turn the conference over to Mr. Pat Richard.
Thank you for your questions and for your participation on today's conference call. You have any remaining questions. Please feel free to contact Investor relations, an eight year old 1954796.
Ladies and gentlemen, thank you for joining todays conference call. The calls now concluded. Please disconnect your lines and have a great day.