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USANA Health Sciences Inc (USNA) Q2 2019 Earnings Call Transcript

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USANA Health Sciences Inc (NYSE: USNA)
Q2 2019 Earnings Call
Jul 24, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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.

Patrique Richards -- Investor Relations

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.

Kevin G. Guest -- Chief Executive Officer and Director

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 will 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 and customer growth in China. However, the contribution of these promotions and incentives was significantly lower than we anticipated, we believe this is due to continued lower consumer sentiment in China toward 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 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 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, to 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 times to generate momentum in the business. We are 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, please open the line for questions.

Questions and Answers:

Operator

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

Timothy Ramey -- Pivotal Research Group -- Analyst

Hi, 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 months, Southeast Asia, and Americas, and Europe were both we -- can you comment -- do you -- I mean, I understand lots of times, there is a down line comingoing [Phonetic] issue that comes up, but why did we see more broad-based weakness in the queue?

Doug Hekking -- Chief Financial Officer

Tim, this is Doug. I think part of it 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. From sequential standpoint, we're looking at the -- for example, Americas and Europe, the US and 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, when we figure this out that hopefully we'll go back and fine tune those offerings, and you will see that kind of quick back up, but that's kind of the high level how we're viewing it.

Timothy Ramey -- Pivotal Research Group -- Analyst

Okay. And then relative to share repurchase, I would -- I thought that was a pretty stunning inclusion in the guidance to include share repurchase to get you down, 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?

Doug Hekking -- Chief Financial Officer

So Tim, we're seeing a blackout, so there is no -- there is nothing that's happened thus far. What -- one of the thing that did happen 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 has been. But you see some of those efforts on what the Board authorized the accelerated.

Timothy Ramey -- Pivotal Research Group -- Analyst

Doug, you don't have a 10b-5 in place, it's just open market purchases, is that right?

Doug Hekking -- Chief Financial Officer

That's correct.

Timothy Ramey -- Pivotal Research Group -- Analyst

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

Doug Hekking -- Chief Financial Officer

Correct.

Timothy Ramey -- Pivotal Research Group -- Analyst

Okay. Thanks so much.

Operator

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

Douglas M. Lane -- Lane Research -- Analyst

Yeah, hi, good morning, everybody. To 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 wonder 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?

Kevin G. Guest -- Chief Executive Officer and Director

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 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.

Douglas M. Lane -- Lane Research -- Analyst

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 business opportunity promotions. Can you elaborate on that a little bit?

Kevin G. Guest -- Chief Executive Officer and Director

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 hold 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.

Doug Hekking -- Chief Financial Officer

And I probably layer on there a little bit, you saw some of these promotions we ran into '17 and coming into ' 18 on the product side, and it's not as though what we didn't have response, but it was meaningfully diminish more 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 user you saw badly. As so you will see that targeted now kind of be the focal point of those going forward, just kind of in broader, broader sense and we've done those in the past and then received. 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 is 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 gives us something to work it.

Douglas M. Lane -- Lane Research -- Analyst

Okay, that makes sense. I'd like to press a little bit more on the non-China market, because I'm looking at Americas and Europe in particular, which is 20% of your business is not as big as China, but is still meaningful. And the local currency revenues have been down double-digit to 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 -- are there 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, in Europe this year off of a not so difficult comparison over the past two years?

Kevin G. Guest -- Chief Executive Officer and Director

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 of the companies are facing. As we introduced new technologies and pivot the adoption of those things is a process that it takes time and it takes time for us to move people into a new, self-enrollment type process, a 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. And 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 will 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 in one of the gig economy and the part-timer who wants 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 illicit 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 skin care line. So in comparison, it's relatively not as bleak of a story as of mine appear, as you think about it having last a whole new skin care line last year at the same time. And by the way, we are 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.

Douglas M. Lane -- Lane Research -- Analyst

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?

Doug Hekking -- Chief Financial Officer

Yeah, that's the plan now. In terms of the timing and helping this final bills come in a bit on the foods, foods point is really the -- kind of driving force of that kind of that take-up in there. You'll see on a normal basis over a longer period time, still be at roughly about 2% of sales clip is what we have built into our model for CapEx.

Douglas M. Lane -- Lane Research -- Analyst

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?

Doug Hekking -- Chief Financial Officer

Yeah, it's something all of our sales team is comparing those and dialogueing 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, still in the game to see have they similar response.

Kevin G. Guest -- Chief Executive Officer and Director

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

Douglas M. Lane -- Lane Research -- Analyst

Okay, that's helpful. Thanks.

Operator

(Operator Instructions) We'll hear next from Frank Camma of Sidoti.

Frank Anthony Camma -- Sidoti & Company, LLC -- Analyst

Hey, good morning.

Kevin G. Guest -- Chief Executive Officer and Director

Hi Frank.

Frank Anthony Camma -- Sidoti & Company, LLC -- Analyst

Sorry, I missed the beginning of the call. So I'm sorry if you already talked about this, but if you stripped out some of the -- because I understand that create a bit of a difficult comp selling from last year, 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 Americas?

Kevin G. Guest -- Chief Executive Officer and Director

Not a big impact in the current year, the comp that we had last year and what you see the average spend down a little bit, Frank, and a big part of lift [Indecipherable] was introduction that will be how that was going to roll down, and kind of be in early phase of -- and so that's one to comps we've had. And we've done some I think minimal thing, lot of the focal point has been on China, even though we've done thing in other markets, but you see that continue to go back to accelerate pick up as the year goes forward.

Frank Anthony Camma -- Sidoti & Company, LLC -- Analyst

Do you think part of the -- I just remember when I initiated coverage years ago, I mean, it seemed like the wide consensus among consumers was, it was taking vitamins was good for you. Then it sort of went to almost like in difference and now there it seems like you can't go a day or two without reading 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 due to sort of counter that messaging?

Kevin G. Guest -- Chief Executive Officer and Director

Well, I think that's business story of you saw since we started. The Journal of American Medical Association did recognize vitamin is doing anything good to tell about 10 years after you saw was in business and I think there will continue to be naysayers as relates to [Indecipherable]. From a 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, you saw for 27 years and I can't remember time and 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 you saw I think is very, very conservative and careful on the claims that we make and we always have been as it relates to what our products do and and how they perform. And our conservative nature and science based claims that we make have proven the service very well over the years, where you can continue to do that.

Doug Hekking -- Chief Financial Officer

And I would say the other thing, Frank, when we talk to our Science Group, the proponents of evidence is still heavily, heavily in the favor of supplementation and there is as many, if not more positive [Indecipherable] and then what you see kind of propagated in the press notes. It's a mixed bag and I know there's sometimes you want to attach and hang on to something, but when we talk to our the Ph.Ds there, I think we feel pretty comfortable the response, we're getting.

Frank Anthony Camma -- Sidoti & Company, LLC -- Analyst

I guess that's where I was going with that like, is there a way to -- to me, I think some of its loss on talking about the science, to be honest, we averse 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 and a way without violating, obviously, the restrictions you're under as far as making claims in a -- just by using what's out there. Because like just the other day, 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 land set for example. So to me like it almost valuable for you to be active and you're feeding those or maybe you already are, and I just, I'm not aware of that.

Doug Hekking -- Chief Financial Officer

Yeah. We have a group called Scientist [Indecipherable] what questions they ceased about their call and they can talk something can go back and respond to that a little bit better clarity. It's the best local reimbursement.

Kevin G. Guest -- Chief Executive Officer and Director

Yeah, I read that. As the market go, find the way, and again, I try and stay up on those kinds of things 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 toward and especially as it relates to really sound science and the one-off articles like that. I hate to draw attention to, because it only rates 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 information gets published and has the access to our customer base and the public at large.

Frank Anthony Camma -- Sidoti & Company, LLC -- Analyst

Okay. And 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 kind of upgrading the skincare over the years. Is there anything that you -- that your sales force comes to you and said, hey, I wish we had a X product, whatever it is. And I know you haven't been involved with a lot of that, how to say it, but sort of less validated products that might enhance fat burning or whatever, but is the sales 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?

Kevin G. Guest -- Chief Executive Officer and Director

Yes. We get all kinds of requests. We have to be very careful to not go after the shiny object that comes our way. Several year -- yes, several years back when in our space juices were very popular and selling very well, we actually feel is because we actually created a juice, that we brought the science team and when we found it had to have everything in it that would require to be, you saw the product, it just wasn't a viable commercial offering for us. But we have a whole host of products that are in research and development phase and testing in clinical trial base that would fit into that mold, that will be released over the next several years and several that we'll never see commercialization.

Frank Anthony Camma -- Sidoti & Company, LLC -- Analyst

Okay. Understood. Thanks guys.

Kevin G. Guest -- Chief Executive Officer and Director

Yeah. Thank you.

Doug Hekking -- Chief Financial Officer

Thanks, Frank.

Operator

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

Timothy Ramey -- Pivotal Research Group -- Analyst

Thanks for the follow-up. Should we infer that there are still some provinces in China that are not permitted 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 flat line?

Kevin G. Guest -- Chief Executive Officer and Director

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

Timothy Ramey -- Pivotal Research Group -- Analyst

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?

Doug Hekking -- Chief Financial Officer

No, most of those things tend there pay for performance from their pay for utilization. So I think, yeah, I think any type of thing, you'd see it would be more on a variable format.

Timothy Ramey -- Pivotal Research Group -- Analyst

Great. Thanks so much.

Doug Hekking -- Chief Financial Officer

All right. Thanks.

Operator

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.

Patrique Richards -- Investor Relations

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.

Operator

[Operator Closing Remarks]

Duration: 27 minutes

Call participants:

Patrique Richards -- Investor Relations

Kevin G. Guest -- Chief Executive Officer and Director

Doug Hekking -- Chief Financial Officer

Timothy Ramey -- Pivotal Research Group -- Analyst

Douglas M. Lane -- Lane Research -- Analyst

Frank Anthony Camma -- Sidoti & Company, LLC -- Analyst

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