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..

Thank you and good morning. We appreciate you all joining us this morning to discuss our second 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 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; President, 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 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 and level of service they have come to expect. We also remain committed to executing on our many growth initiatives and continue to focus on the long-term growth of USANA.

Not surprisingly, our associates are extremely resourceful. They are leveraging social media and other technology based tools provided by USANA to reach more 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 all virtual Asia-Pacific Convention. Each year, we host several live events that are well attended. And a large part of the camaraderie [ph] and culture of USANA.

While we are disappointed to break the tradition this year, we were pleased with the attendants of the event and have received positive feedback from attendees. While we look forward to resuming live events in the future, we are making the most of our virtual events in 2020 and leveraging the repurpose resources to reach 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 cannot anticipate all of the challenges that might arise as a result of the ongoing with COVID-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 and 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 are raising our full-year guidance to reflect the solid second quarter as well as the current momentum in the business. We plan on an increased 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 a changing environment. Additionally, we will continue investing in our long term growth strategies.

Overall, I am confident in the strength of USANA's underlying business and the growth strategies we have in place for the remainder of 2020 and beyond. With that, I will now ask the operator to please open the lines for questions..

Thank you. At this time, we will open the floor for questions. [Operator Instructions] Our first question comes from Steph Wissink of Jefferies..

Hi, thank you. Good morning, everyone. We have a few questions we'd like to unpack or themes we'd like to unpack 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 in 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 Stephanie, this is Doug. Year-on-year we had a lot of similar things we ran both in the second quarter of 2019 and 2020. We've modestly better success in 2020 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 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 $9 million and $10 million to the quarter, somewhere in that range.

Going forward in the third quarter, it really -- it's really a matter of the calendar and with the -- the entirety of the focus really adapting to the COVID environment in the first half of the year, that was really a big part of the focus. And so many of the calendar items got pushed back to the third quarter that many of our markets have.

And so you'll see a lot of that kind of landing in the third quarter. Fourth quarter is a lot lighter than Q3 on promotions, and so we expect a pretty decent lift from those promotions that we've seen in the third quarter. We haven't commented on the third quarter, but we're expecting a solid quarter..

Okay. That's really helpful. So we should be thinking about this as a bit of a lift in shift versus you developing new promotions for the back half of the year, maybe some things that just got pushed out that would have been executed in the first half, the recoupment of some of those promotions in the second half or in Q3..

Yes, the promotion we started about at end of Q2 was something that really wasn't on the calendar that we had some appetite from our sales team to run.

And so I think we're, based upon the outline of that and how they are performing so far, that one is 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. So in this unique environment, we're used to gathering and getting together and having meetings.

This gives us a different venue so to speak to stay connected to those customers and those independent business owners in our sales force, and it's proven to be very successful..

And Doug, where should we map those incremental promotions in the P&L, are those largely going to show up in gross margin or does it also factor into your associate incentive lines?.

You'll see a little bit of both. And so you can tell from the guidance we just released that we'll probably see a little bit of a discount and operating margin in the back half of the year, but you can see from the top end sales, we're expecting a little bit of lift as well.

So you'll see a little bit in both, you'll see a little bit in incentives and also a little bit gross margin pressure, but nothing too distorted really across the front, it is a balanced offering..

Okay. And then the second topic we want to just look at was China.

We were anticipating some improvement there, but it seems like it's delayed a bit, so maybe you could just help us diagnostically look at that market relative to the success you've had in other parts of Asia, you talk a little bit about China and China Strategy for the back half?.

Yes, it's interesting with COVID-19 in China and where they sit, they're really one of the market that is coming back to more of a normal operating procedures. And one of the things they still have limitations on meetings throughout China, but all of our offices are open in China.

But one thing that we're really doing up from a promotions and specials direction is product offerings through the year.

We've already offered 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 -- in November usually we have our China national meeting, we moved that up to September this year and it's going to be an online event. So we're expecting to have great momentum around that as well.

The other thing we are kind of hearing from the market, Stephanie is that I think last year you had the 100-day review and that kind of rolls forward into the COVID environment and then you see the economic outlook, a little bit deteriorated in China. And so you see the consumers might been a little bit more guarded with their spend.

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 we see in the back half of the year, but a lot of what you see in that Greater China region, China grew at just under 2% in constant currency.

Really the drag, you know the scenario on Hong Kong right now, has been a tough environment for many companies doing business there just with what's going on. And so that was, when you look at the Greater China region, that was kind of the real story that brought it down..

Okay, that's very helpful. And then the last one 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 your context is right and that's something that's ever-present really in our thought process is that value proposition and how we -- how we approach the customers and making sure that they really perceive that value there.

And so that will be just an ongoing part of our evaluation and our adjustments as we move forward, but I don't think there is an immediate pressing need to be overly response. I think it is just part of our basic process that we have in place..

Great. That's all from us. Thank you very much..

Thanks, Stephanie..

Our next question comes from Doug Lane of Lane Research..

Yes, hi, good morning everybody. I wanted to talk or ask you if you could talk about your plans for convention this year with going to these virtual meetings and the annual convention in Salt Lake City is a big deal.

So how are you approaching convention specifically? And how is that going to be reflected in spending in SG&A or 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, we'll still have specials, we'll still have entertainment performers, we'll still have our recognition segments and we'll have participants who will log on, we're setting it up where we'll have some VIP type participation, there will be special training sessions and then we will have just open to the general public, who will have access and so it will be very similar from a content perspective as to what we have the presentations from executive management and several leaders and we're bringing in some trainers to work and -- but it will be all virtual.

And as we saw in our Asia-Pacific Convention, the numbers who actually will attend virtually is far greater than the people who would have attended in person. And we do see good momentum and good lift, that we have a nice format. What we're doing is rightsizing some of the information that we're putting out.

So the speeches aren't as long, the trainings aren't as long, they have access to modules, and different training modules and it's very user friendly from that perspective, you can sign up and attend what is meaningful to you, but again it will all be virtual.

There'll be a few -- very few portions that will be pre-recorded and most of it will be live as it's presented in format. We are having some national entertainment, do a performance segments in Q&A, and so again content will be very similar. It will just be changed because of the format of watching it on a screen versus being there in person.

But our expectations are that we will have multiples times the people actually participating than normally would, but we're still going to continue again with our product launches and promotions, just as we would in years past. It will just all be done virtually.

And as to your comment on SG&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 than it is to have everybody come to Salt Lake City..

No, that makes sense.

But and I know it's early days here, Kevin the global conventions yet to be pulled of here, but you've been through the Asia-Pacific and just thinking forward here, assuming we re-enter a post COVID world, does this really change the way you think about having these conventions going forward?.

Certainly we need to learn from this experience. I think my vision is that we will move into some sort of hybrid when we actually can meet in person, because I think there is power in meeting in 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 experience and opportunity and to how we do our events. And I think it will be a hybrid. We will I think continue to utilize technology in a greater form from an events perspective, but I do expect us to return to our in-person convention as well. They might be a little more limited.

We typically do national kick off events in every market, in all of our markets and we might go more virtual there and rely more heavily on technology from that perspective, where we do spend a lot of money and then focus more of 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 than the first quarter because of the first quarter having Chinese New Year.

And I know there's currency and there is 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 quarter was comparable or higher or lower than it was in the first quarter?.

Yes, I'm just pulling this up now for you, Doug..

I think what I'm getting at -- pardon me..

China was down about 4% sequentially..

So that goes sort of counter to my thinking, which is on normal seasonality.

So I wondered what changed in the first quarter that wouldn't 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 lower sequentially lower sales?.

Yes, if you recall our narrative in the first quarter, we did have a promotion in China that was -- was pretty successful in the first quarter. And so I think a lot of these quarters when you look at discrete period you have to go back and factor that in. I think the primary difference is the -- is the promotional stuff.

I think our just organic run rate seems pretty consistent right now..

So yes, what I'm driving at is, you had to step down last year with 100-day review period, but we definitely saw stabilization heading into the back half of the year.

So I just want to make sure that there's not something else going on there that's driving another step down, but it sounds like you would consider the stabilization characterization, if you will still applicable..

Yes. Yes, there is no new information or no new event to talk about in China at this point..

Okay, thank you..

Our next question comes from Ivan Feinseth of Tigress 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 promotions these are? How they work? And how do you measure their impact?.

Yes, Ivan, more and more -- if you would have talked to us five years ago, so many of the promotions that we ran were more incentive based and towards sales on acquiring new customers and you've seen that till pretty heavily towards more product promotion.

So many of the things that we've been running as far as the just the share count, a lot of that is really a value proposition play on product offering or if you buy these products limited period time you're going to get this product for free. And that's probably the lion's share of what we do on a regular basis.

And we are seeing with China 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 it's going to be additive, it is going to take time on the attraction. But I think that's moving in the right direction..

What was your most successful products or product categories this quarter? And how did you see like the current pandemic environment helping that?.

Yes, I think similar to right after kind of COVID come out, we've seen the products that are designed to provide immunity support, continue to go back and perform strong, not near what they kind of initial reaction was, but still at a higher level than historical levels.

China introduced a collagen 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 don't get into specifics of future product launches, just because of -- from the implications of that.

But some of the things that China has on the -- on the horizon here are pretty excited about as well. [Indiscernible] a little bit further into horizon on the calendar, about some different product offerings too coming out..

Yes, like Doug said we have a roadmap for 2020 the remainder of that in China and around the world.

We have products that are going to be launched at Americas and Europe convention in August as well as we've talked about in the past that our Active Nutrition line is being worked on now for launches in 2021 and they'll go throughout the year in 2021 in all of our markets or most of the markets that have a foods lines or Active Nutrition as we're going to call them in the future.

So we are really excited about that product launch strategy for the next couple of years..

Did you experience any product shortages or run out of products that you could have sold more if you had more or was your supply chain robust enough, it supported demand for everything that was selling well throughout the quarter?.

In this quarter, our supply chain hasn't been really an issue. When we first had the COVID and what Doug talked about is we have some products that have an immunity association with them. We saw some really high numbers of that and it was just short amount of time where we had some stock-outs, but we've gotten that under control.

And in general from a 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 strength of the supply chain, but that will be short period of time as well..

So was the collagen product demand, like for example, the pandemic has people using in excess of the amount of hand sanitizer, that has alcohol, which causes a depletion in collagen.

Do you think that was part of the cause of the demand or what do you think the demand for the collagen products was driven by?.

Yes, I think it's just the normal demand. When we launch a new product, we have a lot of our existing associates and preferred customers who want to try it. So we see a spike at the beginning and then it normalizes over time. I think with the collagen we saw that.

Then we're seeing a really a good run rate in general on that product because of the excitement levels..

And I think just the attributes of that product in general, Ivan, I think are the selling points of it. At least to my knowledge, I haven't heard anybody linking that to replace some collagen from hand sanitizers, it just 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.

How you envision this coming out, rolling out, and the products that will be included?.

Yes, I can give some color to that. I mean, when you look at it, we're looking at rolling it out at the beginning of the year in the first quarter in a few of our markets. And we're concentrating on US, Canada, Mexico and Australia, New Zealand probably being the first round of 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 to make it a smooth, make sure that we can give an large offering to those countries that have a little bit more of a regulatory environment or a tougher regulatory environment to get products in.

Right now food products, there are really two major products, you have powdered drinks, meal replacements, and then you have bars or food type replacements. And then we have some support that goes along with it when it comes to the online support, the ability for recipes and everything else that goes along with a great foods and product line.

We're going to look at more of that with Active Nutrition, it's going to be an expansion of the line. We're also going at this point in time, going to keep the existing line for the foreseeable future just to make sure that the rollout goes extremely smooth.

I think the biggest difference that we're going to have is more support around the line this time, more programs, trying to build a community and all those things that we've seen with other companies that they've launched extremely strong foods type categories that support system is very important.

So that one of the areas that's going to be an enhancement, plus we'll have all new powder drinks, new formula as well as more bars to support the line..

And I would add in there. The fact that in the past, when we view third-party for some of the stuff all this is going to be in-house now, which gives us really the ability to be a lot more responsive and not worry about small batch sizes, some of the stuff. So we think that's 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 it's -- you'll see that kind of -- it just has so much potential to grow and expand going forward. So I think it's a great footprint as we get ready to enter that space with a little bit more breadth than what we have in the past..

And since you have a large number of athletes that are kind of -- are brand ambassadors.

How are you going to, let's say, integrate them or in the marketing effort for your Active Nutrition product line?.

Yes, I think it will be a support to the product line with the athletes as well as other influencers that we have.

We'll also use them as we can for you'd look at, if you these great athletes you love to have them in a work out 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 this group. But I mean we literally, like you say, we have over 3500 athletes around the world.

So it's huge amount of -- it's a huge opportunity for us to use specific ones in the program..

Okay. Well, I look forward to the upcoming events and new products. Congratulations again on another great quarter..

Thanks..

And at this time we have no further questions in queue. So I'd like to turn it back over to Mr. Pat Richards..

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..

Thank you, ladies and gentleman. This concludes today's teleconference. You may now disconnect..