USANA Health Sciences (NYSE: USNA) Q1 2020 Earnings Call Transcript

USANA Health Sciences Inc (USNA) Q1 2020 earnings call dated April 22, 2020

Corporate Participants:

Patrique Richards — Executive Director of Investor Relations and Business Development

Jim Brown — President

Doug Hekking — Chief Financial Officer

Analysts:

Steph Wissink — Jefferies — Analyst

Doug Lane — Lane Research — Analyst

Ivan Feinseth — Tigress Financial Partners — Analyst

Presentation:

Operator

Good day and welcome to the USANA Health Sciences’ First Quarter Conference Call. Today’s conference is being recorded and at this time, I would like to turn the conference over to Mr. Patrique Richards, Executive Director of Investor Relations and Business Development. Please go ahead.

Patrique Richards — Executive Director of Investor Relations and Business Development

Good morning, we appreciate you joining us this morning to review our first 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 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. Although our CEO, Kevin Guest is unable to attend the call this morning, I’m joined by our President, Jim Brown; our Chief Financial Officer, Doug Hekking as well as other executives.

To begin, we’d like to point out that the majority of USANA employees on the call have dialed in remotely from their respective homes. In early February, we successfully implemented a work-from-home plan for our non-manufacturing and non-distribution employees in our home office and around the world and expect to follow this plan until further notice. Yesterday, after the market closed, we announced our first quarter results and posted our management commentary results and outlook document on the company’s website. [Indecipherable] remarks for Jim before opening the call for questions.

Jim Brown — President

Good morning and thank you for joining us. The past several months have been a whirlwind for all of us marked by disruption and challenges in our personal lives and business operations, but the time here at USANA has also been filled with moments that make us proud to be part of this company. We’ve asked a lot of our employees and associates around the world and they responded quickly and professionally to solve real-time challenges as we’ve had to make adjustments in nearly every aspect of our business. For example, USANA employees in The Philippines moved their shipping facility to a new building overnight in order to keep deliveries on time. Our call center shifted to working from home in just two days and our leadership team comes together each day to overcome new challenges and continue planning for the future.

Before opening the call up for questions, I’d like to address a few key areas of the business that have been affected by COVID-19. First, our global manufacturing and distribution have remained fully operational. We continue to manufacture products and ship orders to homes around the world. As always, manufacturing is taking place in an exceptionally clean facility using good manufacturing practices to maintain our high quality standards. We’ve also added safety measures to protect our manufacturing and distribution employees and customers including additional protective equipment including masks, temperature checks, and physical distancing to keep our employees safe.

Second, we continue to actively manage our supply chain and address challenges as they arise. As our first quarter results indicate, we have continued to expand high demand for our high-quality health products. Generally, we have ample inventory in all of our markets and our operations teams has quickly addressed any temporary backlog orders. Third, it’s important that we continue to provide support to our associates at a time when many potential customers are searching for ways to improve their nutrition. We’re holding frequent trainings to ensure that our associates are familiar with our online sales tools and resources and importantly our associates and customers continue to receive the same great customer service in every market whether that’s via phone, email, WhatsApp or LINE.

Fourth, our research and development team is still hard at work on advancing nutritional and personal wellness through new product development. We fully expect new product launches to continue over the next year. Finally, we are being creative and shifting most of our large USANA sponsored associate events online. Our team is working to deliver content to associates and customer homes that we hope will be as engaging and motivating as our in-person events. Although we can’t know with certainty what the next few months will bring, we will continue to adapt and do everything we can to keep USANA on track. I am confident in the strength of USANA’s underlying business and believe that as we navigate through these unprecedented events with a long-term mindset, USANA’s business will be stronger than it was before. With that, I’ll now ask the operator to please open the line for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And we will take our first question from Steph Wissink with Jefferies. Go ahead.

Steph Wissink — Jefferies — Analyst

Thank you. Good morning, everyone. We have two questions if we could. The first is just to unpack the guidance a bit more. Can you talk a little bit about what you’re seeing in this June quarter and how we should think about modeling the June quarter. That would be very helpful just to think about scope quarter-to-quarter and then, you know, you implied acceleration in the back half, maybe give us some sense around your confidence in that back half acceleration?

Doug Hekking — Chief Financial Officer

Yes, Stephanie, this is Doug. We’re probably in our range right around that $250 million mark in Q2 and you go back and reflect earnings appropriately from there and then we do see some build. The biggest dynamic from quarter-to-quarter is timing of promotions with some product launches in the first quarter. I think particularly in China, we had a noticeable product launch and just seeing kind of a little bit of settling down of demand of certain products, but with the plans that we’ve seen from our sales teams across the globe, it definitely picks up in the back half of the year and that’s generally our expectation.

Steph Wissink — Jefferies — Analyst

Okay and then I want to isolate the China market because it’s so important for you guys and I think generally, many are looking at that as a proxy for the recovery post coronavirus worldwide. Maybe give us a sense of how does the business function during the down period. What things were you able to implement to help bridge some of the renewal period and then how should we think about the contribution of China into the back half recognizing that last year was a very unusual year as well, maybe even looking back at ’18 as a more base case proxy, how should we think about that market developing over the course of this year?

Jim Brown — President

Yeah, this is Jim. We had our challenges last year with the 100-day campaign and it was interesting enough when we were looking at 2020 and the plans for that. We were really excited about where China was going. We’d already seen some momentum change and were prepared for a great 2020 and then we had this pandemic come in and really like you said, in the past, China was the first one in and are kind of ahead of the curve right now where you see a lot of information where China is opening back up the economy and the market itself. For us, we’re seeing that as well.

For a while, we had an extended Chinese New Year. We extended that a few weeks per the government’s request and our provincial offices were closed down, the majority of those and now those are opened back up. For us, the challenge is what’s going to be the playing field in China over the next few weeks and few months because even though we have offices opened, there are still restrictions on those where a limited amount of people can come into those offices. We have smaller meetings. So the smaller meetings really are the challenge for us to see that momentum pick up. Luckily, what we’ve done over the past couple of years from an IT standpoint and having a lot of systems in place online really has prepared us for this where its forced us to go online, but you’re ahead of that curve just because we were working on our IT systems and getting them up and running.

Steph Wissink — Jefferies — Analyst

Okay and one more in because you mentioned product — new product development. Can you just give us a sense of how you’re thinking about your product development pipeline, if we do see a post-crisis attitude shift towards general wellness or well-being, anything that you’re focused on with respect to physical or mental well-being within that pipeline that might be a nice driver in the back half. Thank you.

Jim Brown — President

Yeah, we have — our product development, I won’t give specifics on naming [Phonetic] products because we use that product development and announcements of new products to help momentum in our field and create excitement, but we have talked about in the past that we still have our active nutrition, kind of an upgrade to our foods line that’s going to be launched early next year. We’re working on specific products for that. We have intention to have products launched at our Asia-Pacific — it would’ve been our Asia-Pacific convention, but we’ve canceled that and we’re doing more online, but that’s in the May time frame.

And then in August, we had our Americas and Europe again, we’ve canceled that from a face-to-face meeting to an online event, but we have products that are slated to be released at that time as well. And then in China, we have up to eight products that we’re planning on and Doug just talked about that, we did sell essentials earlier in the year, but we have an additional seven or so products that are going to be launched around the year in China at designated events. So that’s kind of where the product development is going and again, that’s going to help the momentum and excitement in the last half of the year.

Steph Wissink — Jefferies — Analyst

Thank you very much.

Jim Brown — President

Thanks,Stephanie.

Operator

And our next question will come from Doug Lane with Lane Research. Go ahead.

Doug Lane — Lane Research — Analyst

Yeah, hi, good morning everybody. Just on the product issue. Have you seen with the spread of the global pandemic any maybe unexpected shift in the product mix already just as the year has progressed?

Jim Brown — President

Yeah, Doug, we had at the beginning. That’s part of what helped us have a great first quarter, not a huge part, but we have seen some specific products, you probably see Proflavanol, Booster C and a few other ones where the demand for that literally has gone up tenfold at times and again that’s just the perception from the field of what those products do and the fact that, you know, us being a health company, its the timing for this, I mean not really the timing, but the opportunity from our field to take those products and use them to make sure that they feel comfortable with their own health has been somewhat impactful in the first quarter. We’re seeing that kind of fade back down to normal run rates and that’s when we talk about inventory and the fact that our inventory is a little bit lower and that would explain some of that, but yes, we have seen that. We’re very careful right now on how we explain what our products do and the claim that they make. We don’t want to go down a path of making claims that in the end, you know, get the regulators out there looking at us.

Doug Hekking — Chief Financial Officer

And Doug, this is Doug. Just a little bit of context on those products, to Jim’s point, we definitely saw a pick up in some of these products that were designed to support immune function and so we saw that those products collectively were relatively a small percentage of our sales and so we did see some substitute purchasing as well. So even though we did see some lift in the quarter, we also saw a shift to buying that at a higher level and not buying some other stuff. So I just want to put that in context. It was additive, but it was relatively a small part of the quarter.

Doug Lane — Lane Research — Analyst

Okay, fair enough. And then while we’re on the topic of slowing economy certainly provide an income opportunity to your associates. So have you thought about how you might pivot towards talking a little bit more about the income opportunity in the back half of the year?

Jim Brown — President

Yeah, Doug. That’s a big part of it. I mean, when you talk about the economy and once [Phonetic] you look historical with direct selling companies when the economies have shifted or gone down, multi-level marketing, direct selling companies have seen as a group their business increase. At USANA, we are health focused and focused on our products first. So when we go down the path, we always lead with our products and our hope is that people will start the business by taking our products and then see an opportunity from a business to become an associate. I don’t see that changing with the way that we introduce people to our business. We want to go product first because of our belief in our products and they are the best products in the world. So there is that opportunity, but I don’t see us changing the focus that we’re talking about the business first.

Doug Lane — Lane Research — Analyst

Okay, one of the upsides versus my number was the associate productivity here and I’m looking at your preferred customers particularly in Asia, I mean outside of Greater China, the Asia preferred customers outside of Greater China has been growing rapidly and they accelerated in the first quarter. So can you give us some color towards what’s driving that kind of customer growth in those markets?

Jim Brown — President

Yeah, Doug, I mean really over the last year to 18 months, we’ve really been emphasizing that customer profile for the company and that continues and I think in this environment, I think it resonates pretty well, particularly in some of the types of products that we sell. So I think that definitely contributed there. What you see in a little bit of the overall productivity is some of the pick up on the types of products that we sold during the quarter as well as the promotion in China were additive to that productivity figure that you referenced, but that customer focus will be — continue to go back and be an emphasis that we have for the foreseeable future as well.

Doug Lane — Lane Research — Analyst

Okay, thanks, that’s helpful. And just one last thing, can you remind me, what is the opportunity to convert those preferred customers into being actual associates?

Jim Brown — President

Yeah, I think we see it. You remember in our China business, everybody comes in as a customer and as they have success referring different customers and referring products, they also get some free product opportunity or free product discounts in China and so that — we’ve looked at that as it relates to the other markets, excuse me, we definitely have some potential there. We definitely had some plans for markets outside of China, didn’t go back and roll something similar, but has a similar kind of intent to go back and get the word of mouth spread in there. You know, I think a lot of people sign up based upon their intent. So I don’t think they are huge numbers, but I think you definitely see a path there and I think some of the folks who do end up converting and being an associate because they are just passionate about the products I think really have a good opportunity to be successful and carry some weight. So I think the numbers are small, but I think the impact can be pretty additive to the business if we’re successful.

Doug Lane — Lane Research — Analyst

Okay, thanks, Doug. Thanks, Jim.

Operator

And we will take our final question from Ivan Feinseth with Tigress Financial Partners. Please go ahead.

Ivan Feinseth — Tigress Financial Partners — Analyst

Thank you for taking my questions. Congratulations on the great results and the nice reaction in the stock. Following the theme that one of the upsides to this horrible situation we’re in is that there is an increasing focus — at least the belief that maybe one of the best ways to be healthy is to be healthy and pursue a good diet and taking supplements and I see you do have a nice complement of immune boosting products — you did see — you’re saying you did see a big spike in that because other nutritional companies I’m speaking to say they’ve pretty much sold out in many cases on some of these immune boosting products. So what kind of interest have you seen in these products?

Jim Brown — President

Yeah, I mean overall, especially initially when this came out probably four or five weeks ago, we saw a tremendous amount of interest in the products and it caused some short-term issues when it came to inventory management and availability of products. We reacted quickly and you can see that with some of our inventory numbers as well for the quarter, but we’ve reacted quickly to refill the supply chain. We’re in very good shape with that. We continue to tell that story of a healthy lifestyle and supplements to make sure that you continue to be healthy as a person just like you’re saying, but right now, we’re seeing that come back into a — kind of a normal range that we’ve seen in the past. So we feel very comfortable for this quarter and the future on those products that were highlighted.

Ivan Feinseth — Tigress Financial Partners — Analyst

And then reflecting from what’s happened in the past couple of months, what kind of direction do you see you’re going to try to take what’s happening and improve upon it for your company as far as new product development and new marketing initiatives and things like that?

Jim Brown — President

Yeah, when you look at new product development and our overall strategy, like I said earlier, we have already planned strategies to release products around our APC convention, our Americas and Europe time frame in August, we would also do products around the China National Meeting that will be online as well in November. We really haven’t changed that. We have a lot of our countries that don’t have specific products that have gone back and requested from our R&D group to get specific products, again, those that are identified as really healthy for the body and so, we’ll see some of the products being launched or rolled out throughout the year, but we haven’t really made any large strategic changes to our product announcements and the direction that we’re going to go in and I don’t think we’re going to change that.

Ivan Feinseth — Tigress Financial Partners — Analyst

Okay, thank you and congratulations again.

Jim Brown — President

Thank you, Ivan.

Doug Hekking — Chief Financial Officer

Thanks, Ivan.

Operator

And I would now like to turn the call back to Patrique Richards for any additional or closing remarks.

Patrique Richards — Executive Director of Investor Relations and Business Development

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 [Phonetic]. Thank you.

Operator

[Operator Closing Remarks]