USANA Health Sciences (NYSE:USNA) Q3 2020 Earnings Call

0:00 Good day, everyone, 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.

0:18 Good morning. We appreciate you joining us. 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, 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.

1:44 Good morning and thank you for joining us to review our third quarter. We reported strong results for the third quarter with record earnings per share and sales approaching $300 million. These results were driven by, first, continued strong demand for our high-quality nutritional products, and second, successful incentive programs that were well-received by our associates. 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 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.

2:34 While we look forward to being able to gather in person again, we learned a lot from these events and expect to leverage what we have learned 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 2020 results have been excellent during these unprecedented times, and I'm confident in the strength of USANA's underlying business. We look forward to delivering further growth in 2021. 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 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

3:31 Again, for any questions, that is star 1 now. We will take our first question today. And that is from Doug Lane with Lane Research. Please go ahead with your question.

3:51 Hi. Good morning, everybody. Kevin, this is the second straight quarter of really nice upside to expectations, but it's really with literally half your business. Can you talk about China and when you start to see 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 in 2017, 2018.

4:23 Yeah, Doug, I think we are still coming out of the effects of the 100-day issue that we had at all supplemental companies that had nutritional supplements as part of their product mix. And we are obviously, China experienced COVID like the rest of the world and virtually locked down the entire country. And so as we see things ramp up and the future growth as it relates to China, for me, we see China still as a strong, strong business. The upside for me was the growth we saw in the rest of the markets outside of China.

5:10 And we're seeing a strong effect in our markets as we are experiencing these crazy times of COVID.

5:21 I think the other flavor we put there, just to go back, even though the timing has taken a little bit longer than what we'd like to see, I think our thoughts and perspective on China's outlook is still very positive. But we are seeing a little bit lower recovery and gaining momentum again, but we still have the same confidence we've had historically. It's just taken a little bit longer.

5:50 Just to drill down on that, we've seen in the general press commentary that that's an improving macro environment and an improving consumer spending environment. I would imagine some of the restrictions from the 100-day review period and the aftermath are being lifted. 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 try to build some traction internally versus waiting for external factors?

6:23 I would assure you that we're not waiting. We have been very proactive in engaging there. I think what we see with what the individuals in China have gone through, you see a little bit higher savings rate, a little bit more caution towards pursuing different things, but I think we've had very good discussions. We hear enthusiasm from the field. and so we'll continue to go back and lean on that. We're starting to see a little bit more progress in some of the things that we're offering up to the sales force and the consumer base.

6:53 Okay, fair enough. And then just shifting gears on the margins, which would be my expectations, it's just the components are a little bit different in that you had a little bit higher incentives for your associates, a little bit higher cost of goods, but then your SG&A was a lot lower. So I'm thinking that's probably due to The shift this year, reaction to COVID, where you didn't have your global convention and you substituted other kind of marketing efforts. And maybe if you could just talk through how that played out in the third quarter and how you see that going into next year.

7:27 Really high level. We do see a little bit. You see the dynamics with the regions that we report on. We do see a little bit of an 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 some meaningful product sales, many times those are done at a lower gross margin. And so we had some of that last year, not this year. So even in spite of that, with some of the promotions we've run, we've seen a little bit of pressure on gross margin. And, you know, what you've seen on incentives is more surrounding the incentive offering and incentive programs that we offered in the third quarter.

8:04 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?

8:18 Yeah, I think for some of the ones that we've had earlier in the year, I think we're leaning towards virtual. For us to go back and reserve the venue and get everything coordinated, it's not something that we can decide with 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 of the year, you know, I think for certainty we'll have most of those events on a virtual, and then we'll kind of wait and evaluate and kind of see what the environment is.

8:47 Okay. Thanks, everybody. Thank you. And we'll move on to our next question, and that is from Sebastian Barbera with Jefferies. Please go ahead with your question.

9:00 Hi, Tim. Thanks for taking my question. I'd like to go back to the China topic and wondering if you could comment to the latest update with regards to in-person meetings. Are those fully authorized now? Are you still seeing some sort of restriction? And also, can you remind us... I was just going to add one more. Can you remind us the percentage of gridded China sales that come from Hong Kong?

9:27 So when it goes to the meetings, we're still seeing restrictions in the country, and that is having an effect. Of course, we've gone to virtual, and our associates in the field 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. I mean, there are small meetings that are happening, but when you get into those meetings, 50 or 100 people or larger, they're just not happening in China right now.

9:53 and it's about 5% of sales in the greater China region ballpark that's coming from Hong Kong.

10:00 Got it. Thank you. And I was wondering if you could quantify the benefit from promotions in the quarter?

10:07 Yeah, as a whole, we kind of weight both kind of year-to-year basis. 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 delivered from those relative to last year.

10:34 Got it. And my last one goes to a question. With the record earnings in the quarter, you know, we would have expected it to be active on the buybacks, and especially now the cash balance is nearing $300 million. But how are you thinking about capital allocation and any reason why you held back on repurchasing shares?

10:57 Yeah, and so capital allocation, the story has been fairly consistent for us. Our first priority is really growing the business organically. And then we've been far more active at looking at deal flow and looking at opportunities outside of what we typically do. whether it's to help accelerate, whether it's to look at a geographic region, a product, a technology. So we're definitely looking at an elevated level of opportunities out there. And then as far as the share repurchase, something that the board and management alike are engaged in that and looking for the right opportunity. We had certain criteria that we put into place that we didn't quite kind of trip over those to go back and really be aggressive in the share repurchase during the quarter. But it's something that I think the appetite and the Thank you. And we'll move on to our next question, and that is from Ivan Feinseth with Tigris Financial Partners. Please go ahead with your question.

11:58 Thank you. Congratulations on another great quarter and the great results. So what were some of the standout products, trends that continue to drive the good results?

12:14 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's been particularly active this year in kind of the cadence of rolling out different product offerings. I think more so than we really have the history of. of our presence in mainland China. So we've had some, you know, fairly exciting things. There's some things that will be introduced in the fourth quarter as well. I think one in particular was a collagen product that seemed to be very well received, and we're hearing from several of our other markets wanting to see if there's, you know, some way they could have some of those products. It's one of the nice benefits we get is kind of this cross-marketing and really kind of a whole process, you know, as one market has, another market doesn't, but I think we've had a higher cadence of kind of product rollout and supplement future I think we're pretty optimistic about.

13:10 And then what kind of feedback do you get from your distributors and they're getting from their customers as far as interests and concerns for health supplements?

13:22 Just like Doug said, I mean, there are products out there with immunity side that have been interesting and people look at it from a demand side. I think the questions we get from the field are the same ones we're getting on this call is when are we going to go back to in-person meetings and grow in our business like we have in the past. And with COVID, it's a question for all of us. You know, we're very hopeful mid-next year or this time next year we're getting back to something more stable from a COVID side. But those are really the big questions that come from the associates when they look at, you know, our virtual meetings and virtual conventions. They're excited and want to go back. into those in-person meetings.

14:01 I would also add on there, Ivan, I think with what we're hearing back from the sales teams, we hear pretty good feedback on the morale of our sales force really across the world and kind of on the trailing these trial incentives that we've been testing. We've heard some pretty good feedback and some excitement, so that has us pretty optimistic about some of the things that we've been trying out.

14:27 Who are the virtual meetings? Are you using any specific platform that USANA sponsors or people are just using their own choices of 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 save from not having the in-person I mean, it would 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 Zoom, like WebEx.

15:22 and the corporate side. So that looking at an investment really hasn't been a thing that we needed to do.

15:27 And I think the platforms that we see out there right now are readily accessible. There's familiarity with them. And so I think we can leverage the existing platforms. And I know from my perspective in sitting through that Americas in Europe virtual convention that we had, it was incredibly well done. And we're learning new things with every event and kind of layering that on and building towards the future. And we've heard a lot of good feedback. And as we have in the notes, we're reaching a broader audience. You know, sometimes that in-person product special that they have, we don't see the same level of live growth into product sales in the event, but in the grander scheme of things, it's really not a big part of it.

16:02 An interesting dynamic from an events perspective that 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 have been attending these events, which traditionally they don't because they have to fly somewhere or go somewhere. And so the accessibility to helping grow our customer count, our active customer count, 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 in Europe event, we had – A huge number of people from China that sat in on the event.

16:55 And it's happened in all our events where we're seeing people that normally would not be exposed to the information, the company, the new product launches, and so forth, are now taking advantage of technology. And so we found that for us, Zoom format is very, very easy, user-friendly, and especially those who aren't Kevin Guest, Walter Neidig,

17:52 And where are you in the rollout of the process for your active nutrition line?

18:00 Yeah, we're still looking at that for early next year. It's going to be a global rollout, so it'll 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's 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 – a positive impact next year.

18:25 And I would say the environment, Ivan, has slowed that down just a little bit. The equipment has some special nature to it to get people out here to kind of walk us through. That's been a little bit more of a challenge. But I think they've adapted and kind of accelerated after that's happened. So I think we're looking pretty good.

18:42 And can you give us, like, kind of a broad idea of some of the specific – From a product perspective, they all go hand in hand.

19:14 and the underlying vision of the company flows into our active nutrition, which is health and the health-based 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 we've utilized some athletes who are utilizing some of our products currently. So that will be part of the story. We see it as a competitive edge for us, our athletes offering and 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 to be the female, probably ages 25 to 35, will be a target audience from a demographic perspective.

20:23 But again, it all goes hand in hand, and our nutritional supplements, our vitamins, will be part of that program and included as a holistic approach to health. This will just be additives.

20:40 Okay, I have some specific product and supplement questions, but I would welcome the opportunity to speak later offline to go into more detail.

20:49 Sounds good, I agree.

20:50 Okay, thanks. Congratulations.

20:54 Thanks. Thank you. There are no further questions at this time. I will turn the conference back over to Mr. Patrick Richards.

21:05 Thank you, and thank you for your questions and 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. This concludes today's call. Thank you for your participation. You may now disconnect.