Q2 2020 USANA Health Sciences Inc Earnings Call
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Good day and welcome to Sean 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., Patrick Richard Executive Director of Investor Relations and business development. Please go ahead Sir.
Thank you good morning.
Thank you joining gosh this morning to discuss your second quarter.
Today's conference call being broadcast live.
And can be accessed directly from our website.
Thank you Shannon Dot com.
Oh, we call a replay will be available.
Right.
As a reminder, during the course this conference call management will make forward looking statements regarding future events on the future financial performance for our company.
And involve risks and uncertainties.
That could cause actual results to differ perhaps materially results project in such forward looking statements.
Examples of these statements include those regarding our strategies and outlook for fiscal year 2020.
Well this uncertainty related to the magnitude scope the duration has the impact of the Kobin 19 endemic 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 S. Eight.
I'm joined this morning by our CEO and chairman of the board and Kevin Yes.
Jim Brown, our Chief Financial Officer, Doug Hekking as well as other executives.
Yesterday after the market close we announced our second quarter results and posted our management commentary results and outlook document on the company's website.
Now if you're a 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 the level of service they've come to expect.
Also remain committed to executing on or maybe growth initiatives and continue to focus on the long term growth of you saw on.
Not surprisingly our associates are extremely resourceful, they're leveraging social media and other technology based tools provided by you saw in to reach for 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 of 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 you saw him.
While we're 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.
Making the most of our virtual events in 2020, and leveraging the re purpose resources to reach even 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 can added cannot anticipate all of the challenges that might arise as result of the ongoing Kogas 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 at 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're raising our full year guidance to reflect the solid second quarter.
Well as the current momentum in the business.
We plan on an increase 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 changing environment. Additionally, we will continue investing in our long term growth strategies.
Overall I'm confident in the strength and you saw as 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, please open the lines for questions.
Thank you at this time, we will open the floor for questions if you'd like to ask a question. Please press the star Keith followed by the one key Star. One question audio question, if you're using a speakerphone. Please make sure to pick kept the handset to allow your signal to reach our equipment again that will start plan.
Our first question comes from Jeff We think of Jefferies.
Hi, Thank you good morning, everyone. We've a few questions, we'd like to unpack or seems like Tom talk 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 I'm wondering if you can just help us contextualize.
How much of a benefit you felt like you saw on 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 definitely this is Doug year on year, we had a lot of similar things. We ran both in second quarter 2019, and 2020 with modestly better success in 2020 on on many of those product value propositions and pricing opportunities.
Those types of promotion that we ran towards the end of the second quarter, we introduced a new promotion that 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 nine and 10 million to the quarter.
Somewhere in that range going forward in the third quarter and really it's really a matter of the calendar and with the the entirety of the focus really adapting to the code environment in first half the year that was really a big part of the focus and so many the calendar items got pushed back to the third quarter that many of our market.
We have and so you'll see a lot of that kind of landing in the third quarter fourth quarters lot wider 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 third quarter, but we're expecting a solid solid quarter.
Okay. That's really helpful. So we should be thinking about this is a bit of a lift and shift versus.
You developing new promotions for the back half of the or maybe some things I just got pushed out and would've been executed in the first half recruitment of some of those promotions.
In the second half during Q3.
Yes, the what the promotion we start going into the end of Q2 was something it really wasn't on the calendar.
We had some some appetite from our sales team to run and so I think were.
On the outline of that and how it performed so far that 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 in so in this unique environment, where we're used to gathering and getting too.
Gathering having meetings this gives us a different.
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Then you so to speak to stay connected.
To those customers and those independent business owners in ourselves for us and that's proven to be very successful.
And Doug where should we map those incremental promotions than in the PML are those largely going to show up in gross margin or does it also factor into your associate incentive mines.
Did you will see a little bit AFFO and so you can you can tell from the guidance, yes release that we'll probably see a little bit.
Discount and operating margin the back half the year, but you can see from the top into sales were expecting little bit of lift as well, so you'll see a little bit to invoke you'll see a little bit in incentives and also a little bit of gross margin pressure, but nothing to distorted really across the fronts about as a balanced offering.
Okay and then the second topic. We wanted just look I was on China, we were anticipating some improvement there, but it seems like it's delayed a bit so maybe you could just help us.
Ignostic, we look at that market relative to the success you've had in other parts of Asia to talk a little bit about China antenna strategy for the back half.
Yes, it's interesting when code 19 in China, and where they sit there really one of the market that's coming back to more of a normal operating.
Procedures and what are the things I still have limitations on meetings throughout China, but all in drops 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 off for four or five this year and we have another handful of products to go into.
The remaining half of.
The year and then we're looking at November use, but we have our China National meeting, we move that up to September this year and is going to be in online event. So we're expecting to have great momentum around that as well.
The other thing we're kind of hearing from from the market. Stephanie is I think you last year you had 100 day review in that kind of rolls forward into the code environment do you see the economic outlook, a little bit to deteriorate deteriorated in China, and so you see the consumers maybe being a little bit more guarded.
Theres been 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 was in the back half the year.
But a lot of what you see that greater China region, China grew at just under 2% in constant currency.
Really the drag the scenario on Hong Kong right now has been a tough environment for many companies doing business. There just with what's going on so that was.
When you look at a greater China region that that was kind of the real story the drug it down.
Okay. That's very helpful. And then a lesson I just wanted to give you a chance to talk about the 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.
You know from our standpoint, we've been so focused on what we've been executing we have not seen meaningful competitive pressure.
But I think you contacted right and Thats something thats 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. So that will be just an ongoing part of our evaluation and our adjustments as we move forward.
But I don't think theres, an immediate pressing need to.
To be overly response was I think is part of our our base in process that we have in place.
Great. That's all for us Thank you very much.
Thanks.
Our next question comes from Juggling of Lane research.
Hi, good morning, everybody on older talk or.
We ask you if you could talk about your plans for convention. This year, we're going to these virtual meetings and the annual convention in Salt Lake City that Big deal. So how are you approaching convention, specifically and how is that going to be reflected in spending.
Hey, 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 will still have specials.
We'll still have entertainment performers, we'll still have our recognition segments and we will have participants who are long gone, we're setting it up where.
We'll have some VIP tight participation that will be special training sessions and then we'll have just opened to the general public.
Who will have access.
And so it'll be very similar it from a content perspective as to what we have the be presentations from executive management and.
Several leaders are we're bringing in some trainers.
To work and and but it will be all virtual.
And so as we saw him or Asia Pacific Convention.
The numbers, who actually will attend virtually.
As far greater than the people, who would have attended in person and we do see good momentum at good lift that we havent got nice format.
What we're doing as Rightsizing some of the information that we're putting out so speeches aren't as long the trainings aren't as long we have access the modules and different training modules and it's very user friendly from that perspective, you can sign up in the 10 what is meaningfully.
You, but again it will all be virtual.
There will be.
A few very few portions that will be pre recorded at most of it will be lies.
As it is presented in format.
We're having some national entertainment do or performance segments and culinary and.
And so again in content will be very similar it'll just be.
Change because of the format of watching it on the screen versus being their person, but our expectations are that we will have multiples.
Multiple times the people actually participating that normally would but we're still going to continue again with our product launches and promotions just as we would.
In years past it just be all be Doug virtually.
And as to your comment on X gene 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 that it is to have everybody come to Salt Lake City.
No that makes sense, but.
I know, it's early days here, Kevin the global conventions.
Yet to be.
Pull off here, but you've been through the Asia Pacific and just thinking forward here.
It is assuming we re Andrew opposed Kobin World does this really changed the way you think about having these conventions.
Going forward.
Certainly we need to learn from this experience I think.
My vision as the woeful low.
Moving to some sort of hybrid when we actually can meet in person because I think there is powered meeting a person, but how can we leverage what we're learning through technology to those who can afford to travel around the world to come to an event and so we will leverage.
That experienced an opportunity into how green redo our events.
And I think it'll be a hybrid.
We will I think continue to use utilize technology integrator form from an events perspective, but I I do expect us to return to our in person.
Conventions as well.
They might be a little more limited.
We typically do national kickoff events in every market and all of our markets.
And we might go more virtual there and rely more heavily on technology from that perspective.
Where are 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 in the first quarter because of the first quarter, having Chinese new year and I know this currency in us 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 call.
There was.
Comparable or higher or lower than it was in the first quarter.
Yes, just open this up.
Now for you.
No I appreciate everyone I'm getting at.
Army.
But to China was down about 4% sequentially.
So that that go sort of countered am I thinking which is which is on.
On normal seasonality, so I wonder what changed in the first quarter that would 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 lowers the sequentially lower sales.
Yes, if you recall on air in the first quarter, we did have a promotion China was.
It was pretty successful in the first quarter on so I think a lot of these quarters. When you look at them just repair and you have to go back from factor that in I think the primary difference in the isn't promotional stuff I think are just organic run rate seems pretty consistent right now.
So we are driving at is you had to step down last year was 100 day review period, but we definitely saw stabilization heading into the back half years I just want to make sure that there is not something else going on there that's driving another step down but it sounds like you would consider this stabilization characterization, if you will still applicable.
Yes, yes, theres, no new information or no new event.
Talk about in China This point.
Okay. Thank you.
Yes.
Our next question comes from I've been census of Tigris financial partners.
Thank you congratulations on another great quarter. So when you mentioned the promotions within the quarter can you give me some idea of what type of promotion sees our how they work and how you measure their impact.
Yes, I haven't more Mark you had talked was five years, though so many of the promotions that we ran we're more incentive base and towards sales on acquiring new customers and you've seen that feel pretty heavily towards more product promotions. So many things that we've been running as far as the just the share count.
Lot of that is really a value proposition play on product offering or if you buy these prices limited very time, you're going against product for free and that.
That's probably the lions share of what we do on a regular basis.
And we are seeing when China. They have 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 is going to take time to get traction, but I think thats moving us into right direction.
So what will your most successful products or product categories. This quarter and how did you see like the current pandemic environment, helping.
Yes.
I think similar to right after kind of focused come out we've seen that products that are designed to provide immunity support.
Continue to go back performed strong not near what they kind of initial reaction was but still at a higher level than historical levels.
China introduced a college and product and it was introduced and it did okay, but it really seems to go back and be getting some traction and been very well received and they have some we typically don't get into specifics of future product launches just because of.
The implications of that but some of the things that China has on the on the horizon here they are pretty excited about as well.
And then maybe challenging.
A little bit further into horizon on the calendar bumps in different product offerings to covenant like Doug said, we have a roadmap for 2020, the remainder of that in China is around the world.
Have products that are going to be launched their Americas Europe mentioned in August as well as we've talked about in the past that are active nutrition line is being worked on now for launches in 2021 and they'll go throughout the year end 2021, and all of our markets are most of the market should have a foods line or active nutrition as we're going to call in the future. So really excited about.
That product launch strategy for the next couple of years.
I did did you experience any products shortages or we're now the products that you could have sold more if you have more or what's your supply chain robust enough and supported demand for everything that was.
Selling well throughout the quarter.
And this quarter, our supply chain hasn't been really in issue. When we first had to coded and what John talked about as we have some products that have an immunity association with them. We saw some really high numbers at that and it was just short amount of time or we have some stock outs, but we gotten that under control and in general from.
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 strep a supply chain would that be short period of time as well.
There was the college in product demand like for example, you know the them because people using them in excess of amount of hand, sanitizer that has alcohol, which causes the depletion in college and what do you think that was part of the cause of the demand or what do you think the demand for the college and products was driven by.
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Yes, I think it's just the normal demand when we launched a new product we have a lot of our existing associates and preferred customers, who want to try it that we see a spike at the beginning and then it normalizes over time I think with the college and we saw that and then we're seeing a really good run rate in general on that product because of excitement level, you and I think just the attributes of that that product in general.
Hi than I think are the selling points of it.
At least to my knowledge I haven't heard anybody linking that to depletion of college in from hands and she has been very well received.
Okay and can you give us some like detail or just an overview of your active nutrition product line push thought process.
What how you envision this.
Coming out rolling out and.
No the products that will be included.
Yeah, I can give some color to that I mean, when you looked at it we're looking at rolling it out.
Getting a year in the first quarter in a few of our markets more concentrating on you X cat.
Mexico, Australia, New Zealand, probably being the first round that products and then that 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 make it a smooth make sure that we can give an on large offering.
Those countries that have a little bit more on the.
Regulatory environment, or a tougher regulatory environment to get products and right now in our food products are really two major products you have powdered drinks.
Meal replacements, and then you have.
Bars, or food food type replacements and venue and we have some support that goes along with it when it comes to.
The online support.
Ability for recipes and everything else that goes along with a great foods product line, we're going to look at more of that with active nutrition, that's going to be an expansion of the line. We're also doing at this point in time and keep the existing lines for the foreseeable future just to make sure that rollout goes extremely smooth.
I think the biggest difference ever going to have is more support around the line. This time I'm more programs trying to build the community and all those things that we've seen with other companies that they launched.
Extremely strong foods type categories that support system is very important so thats why 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 I I, but I would add in there.
The fact that in the past and we use third party for some of the stuff. All this is going to be in house, now, which gives us really the the ability to be a lot more responsive and not worry about small batch size. Some of the stuff. So we think thats 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 its you'll see that kind of it just have so much potential to grow and spend going forward. Thanks, thanks, and great footprint as we get ready to add a space with a little bit more breadth and what we have in the past.
And since you have a large number of athletes at the kind of our brand ambassadors, how you're going to let's say integrate them or in the marketing effort for your active nutrition product line.
Yes, I think it'll be a support to the product line with the athletes as well as other endpoints. We have will also use them as we can for you'd look at if you have great App as you look 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.
With this group I mean, we literally like you say, we have over 3500 athletes around the world. So it's a huge amount of <unk>, it's a huge opportunity for us to use specific ones in the program.
Okay.
Okay, well I look forward to the upcoming events and new products. Congratulations again on another great quarter.
Thanks. Thanks.
Okay.
And that we have no further questions in queue. So I'd like to turn it back the friction stir 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 at 18.19 Fivefour 7961.
Okay.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.
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