Q3 2020 USANA Health Sciences Inc Earnings Call

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Good day, everyone and welcome to the USANA Health Sciences third quarter Conference call today's.

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.

Good morning, we appreciate you joining us today's conference call is being broadcast live webcast and can be accessed directly from our website at IR Dot USANA dot com.

Shortly following the call a replay will be available on our website at <unk>.

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 projections or forward looking statements. Examples of these statements, including 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 code.

19 damage to our business opt.

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 SEC.

During this morning by our CEO and chairman of the Board Kevin guest our President Jim Brown, our Chief Financial Officer, Doug Hekking as well as other executives yesterday. After the market closed we announced our third 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 third quarter, we reported strong results for the third quarter.

Record earnings per share and sales approaching 300 million.

These results were driven by first continued strong demand for our high quality nutritional products in the second.

Thats all incentive programs that were well received by our associates as a.

As a result, we also reported a record number of active customers for the quarter.

We also successfully executed our all virtual Americas, and Europe Convention and China National sales meeting during the quarter. This.

This virtual platform allowed us to reach a larger audience than our in person only events, while maintaining much of the camaraderie and culture of USANA.

Well, we look forward to being able to gather in person again, we learned a lot from these events and we expect to leverage what we have learned in future for future events.

As noted in our earnings release, we are raising our full year guidance to reflect our third quarter results and our expectations for the fourth quarter.

All things considered our 20 Twond and results have been excellent. During these unprecedented times and I'm confident in the strength that you saw it as underlying business.

We look forward to delivering further growth in 2021 with that.

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

Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned up to allow your signal to reach our equipment again.

Again for any questions that is star one now.

Okay.

We will take our first question today.

And that is from Doug Lane with Lean research. Please go ahead with your question.

Hi, good morning, everybody.

Kevin This is the second straight quarter of really nice upside to expectations, but it's really with literally half of your business.

Can you talk about China, and when you start to see the.

Any sort of acceleration there.

We've seen stabilization and maybe a little lift in the third quarter from the second quarter, but not really the kind of traction we saw.

2017 2018.

Yes, Doug I think we are still coming out of the effects of our 100 day.

Issue that we had it all supplemental companies that have nutritional supplements as part of their product mix.

And.

We are obviously, China experienced over like the rest of the world.

And.

Virtually walk down the entire country and.

So as we see things ramp up and the future growth as it relates to China for.

For me, we've seen China.

Still as a strong strong business the EPS.

The upside for me was the growth we saw in the rest of the markets outside of China.

And we're seeing.

Strong effect.

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In our markets as we are experiencing these crazy types of Cogan.

Do you think that or I mean.

I think the other player, but there and just to go back and even though the timing is taking a little bit longer than what we'd like to see I think our.

Our thoughts and prayers perspective on China's outlook is still very positive yes, but.

But we are seeing a little bit lower and our recovery and gaining momentum again, but we still have the same confidence we've had historically just taken a little bit longer.

Yeah, I mean, just to drill down on that yeah, we've seen just sort of in the general press commentary.

Commentary that that's an improving macro environment and improving consumer spending environment.

I would imagine some other restrictions from the 100 day review period, and the file and the aftermath or are being lifted.

It is the stage set now for you to start to get back in there with more aggressive promotions and incentives to try to revitalize that sales force and trying to build some traction internally versus waiting for external factors.

Yeah, I would assure you that we're not waiting we have been very proactive in engaging there I think what we see with what what the individual kind of gone through you see a little bit higher savings rate little bit more caution towards kind of pursuing different things, but I think we've had very good discussions we hear enthusiasm from Brazil.

And so we'll continue to go back and lean on that we're starting to see.

With more progress in some of the things, we're offering up to to the sales force and the consumer base.

Okay Fair enough and then just shifting gears on the margins, which would be my my expectations. It's just the components are a little bit different in that yeah.

You had a little bit higher incentives for your associates, a little bit higher cost of goods, but then your EPS DNA was a lot lower so I'm thinking that's probably due to the shifts this year reaction Nikobar, where you Didnt have your global convention and you substitute. It you know other kind of marketing efforts and maybe if you could just talk through how that played out in the third.

Order and how you see that going into next year.

It really high level, we do see a little bit do you see the dynamics with the regions that we report on we do see a little bit of an.

The impact from the market sales mix.

That we have out there and to what you alluded to without a doubt when we run some of these events and we have made in product sales. Many times those are done at a lower gross margin.

And so we have some of that last year not this year. So even in spite of that with some of the promotions. We run we've seen a little bit of pressure on gross margin.

And what you've seen on incentives is more surrounding the incentive offerings and incentive programs.

We offered in the third quarter.

Okay, and just lastly, I know, it's early days and you're talking very high level about 2021, but are you thinking about putting on another in person convention next year or is that still a wait and see.

Yes, I think for some of the ones that we had earlier in the year I think we're leaning towards virtual for us to go back reserved and then you get everything coordinated it's nothing that we can decide what a month or two left so we have to make some of these decisions well in advance. So I think real rough terms right now even though we don't have anything kind of written in stone really the first half the year.

Yeah, I think for certainty, we'll have most those events on a virtual.

There were kind of a wait and evaluate and kind of see what the environment is.

Okay. Thanks, everybody.

Thank you we'll move onto our next question and that is from Sebastian Barbera with Jefferies. Please go ahead with your question.

Hi, Thanks for taking my question I would like to go back to the China topic and why.

Wondering if you could comment to the latest update with regard to in person meetings a dose for the authors now you're still seeing some sort of restriction.

And also can you know Ryan this.

I was just going to add one more can you remind us.

On the percentage of greater China sales have come from Hong Kong.

So when it does have meetings were still seeing restrictions in the country and that is having an effect of course forgotten reversal and our associates and the sales are doing a very good job of hosting those meetings virtually but it's still not the same.

And you know honestly, we don't know exactly when those meetings are going to be opened up and in their small meetings that are happening, but you get into those meetings at your 100 gig wharf, our larger they're just not happening in China right now and it's about 5% of sales in the greater China region ballpark is coming from Hong Kong.

Got it. Thank you and I was wondering if you could quantify the benefit from promotions in the quarter.

Yes, as a whole we kind of weight both kind of your base is you're probably in that $30 million to $35 million range kind of would be a high level estimate.

We definitely had fewer but more focused and higher magnitude during the current year quarter versus kind of a higher variety in the prior year, but kind of net net that's about what we estimate that we will.

We delivered from those relative to last year.

Got it and my last one dose.

Two questions with the record earnings in the quarter, we would have expected it to be.

Active on on the buybacks and especially now the cash balance is nearing $300 million, but how you're thinking about capital allocation and.

Any reason why you held back on repurchasing shares.

Yeah, and so capital Okay. The story has been fairly consistent for us our first priority is really growing the business organically.

And then we've been a far more active at looking at deal flow looking at opportunities outside of what we typically do whether sales accelerate whether is to look at a geographic region of product. The technology. So we're definitely looking the elevated level of all.

Utilities out there and then as far as the share repurchase is something that the board management alike are are engaged in that and looking for the right opportunity we had certain.

Criteria that we put into place that we didnt quite penetrate those do go back and really be aggressive share repurchase during the quarter, but it's something that I think the appetite.

The willingness to participate if the opportunity presents itself.

Andy.

Thanks very much.

Thank you we'll move on to our next question and that is from Ivan finds that live Tigris Financial partners. Please go ahead with your question.

Thank you congratulations on another great quarter.

Next time so.

So what were some of the standout products trends that continue to drive the good results.

Yeah, I think we still see relative to past years, a lift in products that have been designed to support immune function.

Not quite like it was earlier in the year, but we still see some benefit there China has been particularly active this year in kind of the cadence of rolling out a different product offerings I think more so than we really have the history of.

Our presence in mainland China. So we've had some fairly exciting things. There is some things that are will be introduced in the fourth quarter as well I think one in particular was a college in product does seem to be very well received.

And we're hearing from several of our other markets wanting to see if there's some way they could the hazardous products is one of the nice benefits. We get is kind of this this cross marketing and and really kind of a poll process. You know this is what mark has another market does but I think we've had a higher gains of kind of product rollout and cellphones you drilling were pretty.

Optimistic about.

And then what kind of feedback you get from your distributors and they're getting from their their customers as far as interests and concerns.

For health supplements.

Well just like Doug said I mean, we there are products out there.

Immunity side, I mean interesting and people look at it from a demand side I think the questions. We get from the field that same once were getting on this on this call is when are we to go back to in person meetings and growing our business like we have in the past and but going into two question for all of US you know we're very hopeful.

Mid next year at this time next year, we're getting back to something more stable from a coli side, but those are really the big questions that come from their associates when they they look at you know our virtual meetings and a virtual convention there they're excited and want to go back into those in person meetings I would also add on there, but I think what with what we're.

Going back to the sales teams, we hear pretty good feedback on the morale.

Our sales force really across the world and kind of on the.

Trailing this these trial incentives that we've been we've been testing we've got some pretty good feedback and some excitement.

So that has a pretty optimistic about some of the things we've been trying now.

Where are the virtual meetings are you using any specific platform that USANA sponsors or people are just using their own.

Their own choices.

The platforms that are pretty much out there now and do you feel that with.

Obviously, the impact that you get and the money that you say from not.

Hi.

Having the in person events that you could invest in a platform that become.

Becomes.

An extension of the company that we would distribute views to engage with their customer base.

Marketing efforts.

I mean, it wouldn't be a possibility for us to invest in something like that I mean, the reality is our associates are gravitating to what works in their markets like zone like.

Web backs there theres a few in its market specific at this point in time for US it's been working from a corporate side. So that looking at an investment really hasn't been a thing that we needed to do and I think the platforms that we see out there right now really accessible there's millions already with them and so I think we can leverage existing platforms and I know from my perspective.

In sitting through that America's and Europe virtual condition that we had it was incredibly well done and were learning new things with every event kind of layering that on and building towards a fusion. We've heard a lot of good feedback thing is as we have the notes were reaching a broader audience.

Sometimes that in person product special that they have we don't see the same level of lift relative to product sales and event, but in the Grand scheme of things, it's really not a big part of the EPS and into.

An interesting dynamic from an events perspective.

We've seen throughout.

These last few conventions is the participation of non USANA customers and or distributors, who want to hear or learn about the company.

I have been attending these events was traditionally they don't because they have to fly somewhere go somewhere and so the accessibility to helping grow our customer counteracting customer count.

It has been certainly additive and so from a format perspective to your question, we want to be as globally as accessible as possible. So for instance, with our Americas and Europe event, we had a huge number of people from China that.

Sat in on the event and it's happened in our events.

Well, we're seeing people that normally would not be exposed to the information the company the new product launches and so forth. We are now taking advantage of technology and so.

We found that for us of zoom format is very very easy user friendly and especially those who are part of the USANA community understand and know how to operate the functionality of the zoo and so we've decided to be as mainstream as possible from a technology perspective.

As it relates to events.

And I haven't you had asked about the investment we have invested in contract Luzu. So it really is not an additional cost to those wanting to log on you. The events, we make that accessible and it really applies to as Kevin mentioned really to a broader and more global audience than it had historically.

Great and where are you in the rollout of your process for your active nutrition.

Line.

Yeah, we're still looking at that for early next year, it's going to be a global rollout. So it'd be market specific it won't be all at one time, mostly due to regulations you have to go in and register products and there is a timeframe that goes with that so we're excited about it.

It's moving forward.

We're working on the products that we're going to launch and everything else. So I mean, that's going to have an impact for next year ought to get back next year.

And I would say that environment Ivas has slowed that down just a little bit the quiver.

The equipment has some those special nature to it to get people out here to kind of walk through that's been a little bit more of a challenge, but I think they've they've adapted kind of accelerated after that's happened. So I think so I think we're looking pretty good.

And can you give us a kind of a broad idea of some of the specific.

The line based on kind of feedback or early.

Market research that you're doing and also how do you envision integrating this launch and these products with fewer.

Your large group of.

It's that you have as part of your.

Your marketing or.

Team.

From a product perspective, they all go hand in hand.

And the underlying vision of the company.

Flows into our active nutrition, which is helping to help based so.

Supplementation and being additive and having healthy alternatives.

To what we see in the marketplace, especially from an active nutrition, our athletes will certainly be part of the story.

And they have been involved.

And testing products and we've utilized some athletes who are utilizing some.

Some of our products Kurt.

Currently.

So that will be part of part of the story.

We see that as a competitive edge for us.

Our athletes offering in the end just the sheer volume of Olympic athletes and high performance athletes, so that will be part of the mix, but the target audience is really going.

Going to be the female probably ages 25 to 35.

We'll be at target audience from a demographic perspective.

But again it all goes hand in hand and.

Our our nutritional supplements, our vitamins will be part of that program.

And included.

As a holistic approach to health of this will just be additive.

Okay, I have some specific like product and supplement questions, but I would welcome the opportunity to speak later offline to go into more detail.

Okay sounds good I'm good.

Okay. Thanks congratulations.

Thanks, guys.

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Thank you there are no further questions at this time I will turn the conference back over to Mr. Patrick Richards.

Thank you and thank you for your questions. Your participation on today's conference call you have any remaining questions. Please feel free to contact Investor relations at eight year old one nine fight for 796 line.

Thank you. This concludes todays call. Thank you for your participation you may now disconnect.

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