Good day, and welcome to the USANA 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. Patrique Richards, Executive Director of Investor Relations and Business Development. Please go ahead, sir..

Good morning. We appreciate you joining us this morning to review our second quarter results. 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 outlooks 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 with the SEC.

I’m joined this morning by our CEO, Kevin Guest; President and Chief Operating Officer, Jim Brown; our Chief Financial Officer, Doug Hekking as well as other executives. Yesterday, after the market closed, we announced our second 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. As we reported earlier this month, we continue to see a challenging market environment in China during the second quarter. When we reported our first quarter results, we believe that we would begin to see consumer sentiment in China improve during the second quarter, but that did not happen.

We offered promotions and incentives during the quarter that have historically generated meaningful sales of customer growth in China.

However, the contribution of these promotions and incentives was significantly lower than we anticipated, and we believe this is due to continued lower consumer sentiment in China towards the health products and direct selling industry.

Additionally, while we began holding distributor meetings again in several provinces and municipalities, there were some areas where we were unable to hold meetings. Although our ability to hold meetings was somewhat limited, the challenging consumer environment was primarily – the primary factor that affected our performance for the quarter.

Notwithstanding the challenging conditions we have seen in China during 2019, we continue to have confidence in our long-term growth potential in China. It continues to be a huge opportunity for USANA. And although it may take several months to see consumer sentiment return, we are committed to pursuing long-term growth in this important market.

With that, I’ll comment briefly on our outlook and our plans for the second-half of 2019, before turning the call over for questions. We will continue to execute our 2019 plan, which includes offering various promotions and incentives throughout the second-half of the year.

For example, in China, we will first offer both a product-focused promotion and a separate business incentive during the quarter. And second, introduce new products at our China National Meeting in Macau during the fourth quarter, where we will again offer product promotions.

Outside of China, we will also introduce new products and offer planned promotional activity in the second-half of the year across most of our markets. This plan is tailored to ensure that we have strategic offerings in the appropriate markets at the appropriate time to generate momentum in the business.

We’re currently preparing for our Annual International Convention, which will take place here in Salt Lake City in mid-August. At this event, we will introduce new incentives, technology and products to our sales force.

I’ll close by saying that we remain confident in the strategies that we are pursuing for the long-term health of our business, and then our overall long-term growth potential in China and our other markets around the world. With that, I’ll now ask the operator to please open the line for questions..

Thank you. [Operator Instructions] And we will hear first from Tim Ramey of Pivotal Research Group..

Good morning. Thanks, Kevin. Hey, we – the weakness wasn’t as bad in China, as I thought, but was more broad-based than I thought based on your comments earlier in the month, Southeast Asia and Americas and Europe were both weak. Can you comment – do you – I mean, I understand lots of times, there’s a down line commingling issue that comes up.

But why did we see more broad-based weakness in the Q?.

Hey, Tim, this is Doug. I think part is what we had going on last year and that definitely factors in with the Celavive launch, the promotions that we had in the first and second quarters of last year and the momentum kind of carrying through there.

I think from a sequential standpoint, we’re looking at – the, for example, Americans and Europe, the U.S. was roughly flat Q1 to Q2. We did see a little bit more softness in a few of our other markets in that region and had a little bit of a currency issue. But for the most part, I think, it has a lot to do with year-over-year comp.

And we – even we talked about some of the promotional activity not having the same impact in China. We saw a little bit of that trend in the other markets as well. And as we go through and we figure this out that, hopefully, we’ll go back and fine tune those offerings, and you’ll see that kind of quick back up.

But that’s kind of a high level how we’re viewing it...

Okay. And then relative to share repurchase, I was – I thought that was a pretty stunning inclusion in the guidance to include share repurchase to get you down to, I think, it was $22.7 million fully diluted average shares outstanding, which would imply a pretty big share repurchase, either in the second-half or maybe it’s already occurred in July.

I mean, how do you feel comfortable going out on a limb forecasting that? Can you disclose if there were already share repurchase activity in early 3Q?.

So, Tim, we’re still in a blackout. So there’s no – there’s nothing that’s happened thus far. One of the things that did happen that – at the first of the third quarter as we – that you saw the stock got included in S&P 600 small cap index. I’m sure you’ve noticed that our volumes are quite a bit higher than it had been historically.

So our ability to go back and purchase on a daily basis is higher than what it had been. But you still see some of those efforts on what the Board authorized the accelerated..

Doug, you don’t have a 10b5 in place, it’s just open market purchases, is that right?.

That’s correct..

So you – the normal blackout periods have applied and will apply going forward?.

Correct..

Okay. Thanks so much..

Yes..

And our next question comes from Doug Lane of Lane Research..

Yes. Hi, good morning, everybody. You start with just a little bit more color on China here, Kevin. You mentioned in the releases and also in your comments today about promotions that have worked in the past, it didn’t work this time.

I wondered if you could just maybe explain a little bit more depth, what kind of promotions they were and why do you think it was different this time?.

Well, typically in the past, any – as we launch promotions in China, we see an immediate response as it relates to our sales force from a reactionary perspective.

And because of the hesitancy from the consumer base based on what’s happened in the media over there, it’s making it more difficult just the discussions with our distributors and attracting new customers based upon the scrutiny that’s been issued from a nutritional supplement perspective and direct sales has been somewhat linked to that.

And so as we’ve launched various product promotions and try to move the market forward from that perspective, there’s just a hesitancy in the marketplace right now, overall, as it relates to nutritional supplements because of the media exposure that’s come from the various media outlets in China..

So that it was mostly product promotions discounting or buy one, get one things like that. And then going forward, you mentioned you’re going to broaden that to business opportunity promotions.

Can you elaborate on that a little bit?.

The answer is, yes, mostly product promotions. And yes, we will have business-related incentives. We haven’t yet publicly commented and haven’t told our distributor force what we’re going to do.

And so I would withhold comment on specifics on what we’re going to do, but they will be at helping us drive the business from an incentives perspective outside of just product promotions..

And, Doug, I probably layer on there a little bit. You saw some of these promotions we ran into 2017 and coming into 2018 on the product side. And it’s not as though what we did didn’t have response, but it was meaningfully diminished from what it had been and we will run the business promotions.

And most of those are circulating around just going back and getting more and more product users in the USANA family. Ands so you will see that target and that will kind of be the focal point of those going forward, just kind of in a broader sense and we’ve done those in the past that didn’t receive.

And I think the reality is, we have responsibility and our field is working really hard in all our markets. We have a responsibility to go back and help contribute help kind of stimulate some momentum in those markets, where we have seen a little bit of a struggle. And so we’ll continue to be active there.

And I think over a period of time as this kind of consumer sentiment improves in China, we’ll start seeing more traction, but we’ll still be active even as we’re kind of coming out of that. Just trying to go back and give them something to look forward to and get them something to work there..

Okay, that makes sense. And I’d like to press a little bit more on the non-China markets, because I’m looking at Americas and Europe, in particular, which is 20% of your business is not as big as China, but it’s still meaningful.

And the local currency revenues have been down double digits this year, and we’re talking about negative comps in 2018 and 2017.

So I’m wondering if there is something in the product portfolio or the product reception is not being received, as well as you would like? Is there something else going on some sort of compensation plan changes or something that’s really resulted in a weakening in the Americas and Europe this year off of a not so difficult comparison over the past two years?.

Well, I think just generally speaking, the climate of how people interact with companies that do business has changed dramatically. If we look at just the direct selling industry as a whole, in those markets, there are headwinds that all the companies are facing.

As we introduce new technologies and pivot, the adoption of those things is a process and it takes time. And it takes time for us to move people into a new self-enrollment type process, the new online tools and other things like that.

And the adoption and the ability for them to change how they’re doing business takes some time and we’re in the middle of that right now. Some of the things we’ve spoken about over the past few years are actually being executed as we speak. And we anticipated that it would take time from an adoption perspective.

Also, we’re seeing a change in the marketplace from the full-time entrepreneur who would do things full-time, but what is the gig economy and the part-timer who wants to just make a little bit of money here and there.

And so we have made some adjustments to our compensation plan from a preferred customer bonuses, as an example to elicit sales and transactional type commissions, which again is a change and is taking time from an adoption perspective. But remember, what Doug said about the sequential comparison is relatively flat.

And as compared to last year, we launched our whole new skincare line. So in comparison, it’s relatively not as bleak of a story as of mine appear, as you think about it having launched a whole new skincare line last year at the same time.

And by the way, we’re going to be launching new products that are international convention, as I stated in the opening comments, which we believe will help specifically, strategically help in these regions..

Okay. No, that makes sense.

And to that end, Doug, are you still looking for a big jump in CapEx this year? I think I have $32 million or something in my model these days?.

Yes, that’s the plan now. It depends on the timing of how soon these final bills come in, depending on the foods process [ph]. [The food part ][ph] is really the kind of the driving force of that kind of the tick up in there.

And you’ll see us on a normal basis over a longer period of time, still be at roughly about 2% of sales clip is what we have built into our model for CapEx..

Okay, got it. And then just lastly, on the flip side, Korea is just really going strong. I think it was up 30% in the quarter.

Are there any learnings there you can translate to China or the Americas and Europe, or is that pretty much a market-specific thing going on now?.

Yes. It’s something that our sales team is comparing notes and dialoguing and collaborating and you see a few markets that are trying to go back and mimic what Korea is doing. And we’re waiting to go back and see [they serving the game], [ph] to see if they have a similar response..

And, Doug, momentum is a big part of what we’re doing. And we just have beautiful momentum in the Korean marketplace. The very optimistic thing that we see in Korea and several of our other markets is that, we see the demographic being much and much younger, which is very positive for us as we move on.

And so we’re seeing that several of these initiatives that we are currently launching are appealing to a younger audience, a younger demographic. And so that’s very pleasing and we see that in Korea..

Okay, that’s helpful. Thanks..

Thanks, Doug..

[Operator Instructions] We’ll hear next from Frank Camma of Sidoti..

Hey, good morning, guys..

Hi, Frank..

Hey, Frank..

Sorry. I missed the beginning of the call. So I’m sorry if you already talked about this. But if you stripped out Celavive, because I understand that created a bit of a difficult comp to selling from last year.

And excluding China, when you look at promotions, so just on the supplement side, what kind of impact did those promotions have on your market in other regions, particularly in the Americas?.

Not a big impact in the current year. The comp that we had last year and what you see is, you see the average spend down a little bit, Frank. And then the big part of the lift in last year was the introduction of Celavive, but how that was kind of rolled out and kind of be in the early phase of it. So that’s one of the comps we’ve had.

And we’ve done some – having minimal, I think a lot of the focal point has been on China even though we don’t think in other markets. But you’ll see that continue to go back, accelerate and pick up as the year goes forward..

Do you think part of the problem, I just remembered from when I initiated coverage years ago? I mean, it seemed like the wide consensus among consumers was take – taking vitamins was good for you, then it sort of went to almost like an indifference.

And now there, it seems like you can’t go a day or two without reading an article about how vitamins actually might be unhealthy for you.

Do you think part of that is impacting your sales, or are your customers a little different, and they tend to be on that healthier side? Can you address that? And what you might do to sort of counteract that messaging?.

Well, I think that’s been the story of USANA since we started. The Journal of American Medical Association did recognize vitamins as doing anything good until about 10 years after USANA was in business. And I think there will continue to be naysayers as it relates to supplements.

From an anecdotal perspective, I speak to our customer base and our distributors regularly, and I’m not hearing that as a reason. There is negative press, but I’ve been involved in USANA for 27 years and I can’t remember a time when we didn’t have that noise out in the marketplace. And I think we’ll continue to have those types of things happening.

I will say, USANA is very, very conservative and careful on the claims that we make and we always have been as it relate to what our products do and how they perform. And our conservative nature and science-based claims that we make have proven to serve us very well over the years. We’re going to continue to do that..

And I would say, I think, Frank, when we – when we’ve talked to our science group, the preponderance of evidence is still heavily, heavily in the favor of supplementation. And there’s as many, if not more, positive articles is all depend on what you see kind of propagated in the press..

Yes..

So it’s a mixed bag. And I know that sometimes people want to attach and hang on to something. But when we talk to our – the PhDs there, I think, we feel pretty comfortable with the response we are getting..

I guess that’s where I was going with that. Like is there a way to me, I think, some of it’s lost on talking about the science to be honest with you versus – for the consumer, because like I don’t know if that really translates too well to the average consumer.

Like is there a way to change the messaging in a way without violating, obviously, the restrictions you’re under as far as making claims in USANA – just by using what’s out there, because like, just the other day, I read how potentially taking vitamin D could actually lead to higher cancer occurrences. And that wasn’t just a joke.

It was like something in The Lancet, for example.

So to me, like, it’s almost valuable for you to be active in refuting those or maybe you already are, and I just, I’m not aware of that?.

We have a group called Ask the Scientists. And if people have a question, they see stuff out there that they call them they can talk to them. They can go back and respond to that with a little bit better clarity and it’s the best kind of what we….

Okay..

Yes, I read that same article, by the way. And, again, I try and stay up on those kinds of things. And from a just a strategic perspective, from my position.

I never want to be in the defensive side of things as it relates to our customer base, because we have so much positive point our customers towards and especially as it relates to really sound science. And the one-off articles like that, I hate to draw attention to them, because it only raises the relevance.

So generally, we don’t respond to those kinds of things. But your point is well taken and we will and do continue to engage in scientific research with universities and other clinical trials and studies and make sure that, that information gets published and has access to our customer base and the public is at large..

Okay.

My last question sort of similar related to that on the product portfolio is just – is there any products that, I mean, your product portfolio has been pretty consistent, right, other than that kind of upgrading the skincare over the years? But is there anything that you – that your sales force comes to you and says, “Hey, I wish we had a X product, whatever it is.” And I know you haven’t been involved with a lot of the – I don’t know how else to say it, but sort of less validated products that might enhance fat burning or whatever.

But is the sale force coming to you and saying, “Hey, we wish we had a product like this in order to rejuvenate sales.

Are you hearing any of those types of requests?.

Yes. We get all kinds of request. We have to be very careful to not go after the shiny object that comes our way. Several years, yes, several years back, when in our space, juices were very popular and selling very well. We actually – the field was coming to us. We actually created a juice that we brought to the science team.

And when we found it had to have everything in it that would require to be a USANA product. It just wasn’t a viable commercial offering for us. But we have a whole….

Okay..

…host of products that are in research and development phase and testing and clinical trial phase that would fit into that mold that will be released over the next several years and several that will never see commercialization..

Okay. Understood. Thanks, guys..

Yes. Thank you..

Thanks, Frank..

And we’ll go to a follow-up question from Tim Ramey of Pivotal Research Group..

Thanks for the follow-up.

Should we infer that there are still some provinces in China that are not permitting meetings and how relevant is that? And relative to China, did you feel like the curve of activity was upward sloping into the right, or just kind of flatlined?.

So the answer is yes. There are still a few areas where we’re not able to hold meetings in China. But for the most part, we’re able to conduct meetings as usual, business as usual, very cautiously. We do see – we have seen from our last promotional activity an uptick in the trend, but then it settled back down after the promotional activity.

And so, again, we were really focused on consumer sentiment and as it relates to nutritional supplements in the marketplace and gaining that trust and sentiment back and arming our distributor with tools and products that they need to be able to go out and build their businesses..

And did the second quarter promotions have an impact on margins? Were there sort of fixed costs associated with them, or were they mostly variable cost that just didn’t get utilized?.

No. Most of these, Tim, they’re pay for performance and they’re pay for utilization. So I think any type of thing you see would be more in a variable format..

Great. Thanks so much..

All right. Thanks..

And there are no further questions in the queue at this time. Mr. Richards, I’d like to turn the conference back to you for any additional or closing remarks..

Great. 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..

And so that does conclude the call. We would like to thank everyone for your participation, and you may now disconnect..