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USANA Health Sciences Inc  (NYSE:USNA)
Q1 2019 Earnings Call
May. 01, 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 First Quarter Conference Call. Today's conference is being recorded. 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, sir.

Patrique Richards -- Executive Director of Investor Relations and Business Development

Good morning. We appreciate you joining us this morning to review our first quarter results. Today's 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 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. On April 2nd, USANA announced preliminary first quarter results. Yesterday, after the market closed, we announced our final first 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 Guest -- Chief Executive Officer and Director

Thanks, Patrique. Good morning and thank you for joining us this morning. We reported yesterday that our final first quarter results were in line with the preliminary results issued in early April. As reported several factors affected our sales performance during the quarter, most notably the lack of promotional activity around the world during the quarter. When we approved our annual operating plan, we aligned it with our promotional calendar and tried to offer additional promotions and incentives at the most strategic times throughout the year to drive momentum.

I believe our 2019 plan, as a whole was well developed. But it was light on promotional activity during the first quarter and instead calls for a ramp up of promotional activity as year progresses, starting with the second quarter. In hindsight, the lack of promotional activity during the quarter was a miscalculation on our part because it had a more significant impact on our worldwide momentum than we anticipated.

This was particularly true during a slowdown that, we experienced each year in many of our markets during Chinese New Year. A promotion of calendar has now kicked off and promotional activity is occurring around the world. For example, we just returned from our annual Asia-Pacific convention in Singapore, where we had a sold out event, introduced three new USANA products including, a fluoride-free Whitening Toothpaste and a revolutionary new Oral Probiotic tablet.

We're especially excited about these oral care products, which go far beyond general oral care that most people are familiar with. This oral care kit represents one of USANA's ongoing scientific initiative centered on the microbiome. USANA is committed to being a leader in the field of microbiome, which plays an extremely important role in our overall health. These new products were well-received by our associates and quickly sold out of the event.

We expect a similar response to these products when they are formally launched later this year. We're also introducing several new initiatives in the United States during the 2019, some of which will begin in the second quarter and others will commence later in the year. We are offering these initiatives on a trial basis to determine whether to offer them to our other markets. We are optimistic that these incentives will help us generate sales and customer growth in the United States and potentially other markets in the future.

Finally, we will begin offering customer focused promotions again in China later in the second quarter. We paused promotions in the market during the first quarter due to the 100-day review by the Chinese government. Although the 100-day review has now concluded, we will continue to proceed cautiously during the second quarter as we look for the China market to return to a more typical operating environment.

As such we will offer some customer focused promotions during the second quarter and anticipate additional promotional activity in this market during the second half of the year. Although, it takes time to regain momentum, we are confident that the promotions and initiatives we have planned for the year will generate sales and momentum for our business. I'll close by saying that we remain confident in our 2019 growth initiatives and are focused on executing them throughout the remainder of the year. I continue to expect year over year growth in customers net sales and earnings in 2019.

With that I'll now ask the operator to please open the lines for questions.

Questions and Answers:

Operator

Thank you. At this time we will open the floor for questions. (Operator Instructions) Our first question comes from Timothy Ramey with Pivotal Research Group.

Timothy Ramey -- Pivotal Research Group -- Analyst

Thanks so much and good morning. Love to hear a little more color about what occurred in China. We had the Nu Skin report last night and they indicated that they -- obviously the same issue they didn't hold meetings, but really stepped up their online presence and social selling presence in the first quarter and had a pretty good number actually from there. Their customer accounts in any case. I understand you are quite a bit of your sales are nutritional products in China. So you got a bigger wall to climb, but could you chat a little bit about what actually worked in the first quarter and then maybe the lack of promotion was the issue?

Kevin Guest -- Chief Executive Officer and Director

Well, t his is Kevin. You hit the nail right on the head. The government issues were centered around health nutritional supplements, which represents the majority of sales for us in China. And so it hit us squarely between the eyes and had an effect on us in a much different way that I'm guessing other companies, whose product offering category is different -- weighted differently in other areas for skin care for example. But like I said in hindsight, we wish we would have ramped up some more promotional activities in China through social media and other opportunities versus our meetings. And so that is an explanation that -- I can really see the difference between us and Nu Skin.

Timothy Ramey -- Pivotal Research Group -- Analyst

Okay, and then you mentioned as they did that that you're still somewhat cautious about holding meetings in the 2Q, that is not just a full speed ahead kind of strategy, but should we assume that you are stepping up your online presence in the 2Q?

Kevin Guest -- Chief Executive Officer and Director

Well, certainly we are -- from a digital perspective, we are improving and increasing our offering as it relates to WeChat, which is a format we're excited to have launched and are expanding locally within the market and so those platforms are certainly part of our strategy. But again we are cautiously proceeding and want to follow the government's lead as it relates to moving forward and we're still cautiously optimistic that things will resume in the near future back to our normal operations.

Timothy Ramey -- Pivotal Research Group -- Analyst

All right. And then if you were just -- if you didn't know about a 100-day thing and looked at your numbers, you'd say the bigger issue really was Americans and Europe. I mean Asia overall wasn't great as it was throughout most of 2018, but it wasn't horrible. But the Americans and Europe continued a negative trend, I guess. You're talking about some new things kicking off there. Can you give us any color on what might be the source of any optimism there and I understand this is a long process that's been going on for many years.

Kevin Guest -- Chief Executive Officer and Director

Yes, the Americas and Europe for us, Europe actually is showing some real positive signs of life and we're very optimistic there. In our other markets that we classify under the Americas is a continued uphill battle for us in those markets. We are excited by and optimistic as it relates to the Americas with the new initiatives that we'll be launching literally within the next week or so and then upcoming months throughout the year. That we believe as we listen to our sales force and our leaders, handle and answer some of the headwinds that they've been facing when they're out trying to grow their business and attract new customers and so we feel that we're embarking on some new waters as the the business model and the product offering evolves. We also feel like that as we talk about microbiome and some of our scientific advances, that we do have a competitive edge there that we can begin to capitalize on and will resonate in the Americas.

Timothy Ramey -- Pivotal Research Group -- Analyst

And just one final there. When you were mentioning microbiome, it seemed to be in conjunction with the oral care kits. But should we be thinking about that for gut microbiome as well, which is perhaps a bigger opportunity?

Kevin Guest -- Chief Executive Officer and Director

Yes absolutely.

Timothy Ramey -- Pivotal Research Group -- Analyst

Okay. Hey, thanks so much.

Kevin Guest -- Chief Executive Officer and Director

Thanks Tim.

Operator

(Operator Instructions) Our next question comes from Doug Lane with Lane recent research.

Douglas Lane -- Lane Research -- Analyst

Hi, good morning everybody.

Kevin Guest -- Chief Executive Officer and Director

Hey Doug, good morning.

Douglas Lane -- Lane Research -- Analyst

Staying on the new products here, is this your first entry into any kind of an oral care category, just thinking back?

Kevin Guest -- Chief Executive Officer and Director

Well we've had a toothpaste for several years, but the toothpaste really -- although this is all natural product, there wasn't really a differentiator and there wasn't from a scientific perspective any kind of advancements as it relates to a natural care products and so outside of the toothpaste, we haven't really been in the oral care world. But again from a microbiome perspective the mouth is so important from a bacteria perspective and how our bodies are populated and so that's why we're entering into this world with the oral care products the microbiome entry as it relates to oral care.

Douglas Lane -- Lane Research -- Analyst

Okay, so this won't be the last of it?

Kevin Guest -- Chief Executive Officer and Director

No.

Douglas Lane -- Lane Research -- Analyst

Okay. And obviously you're not prepared to talk about specific new products beyond these three oral products that you launched in Singapore. Can you just sort of help us directionally what are the areas of focus this year. Obviously, oral care is a new win and perhaps expansion there. But if I'm looking at personal care, nutrition and meal replacement what are the areas that we should probably look to for most of your new product activity this year?

Kevin Guest -- Chief Executive Officer and Director

Though, I won't speak to specifics, but I will speak generally from a strategic direction. If you think about our independent business owners and their stores and what they have to offer from an inventory perspective. Our strategy is to expand product categories, so they have more to offer to their customer base and to be able to attract new customers through a wider variety of products that fit within our health message. And so as we look at expanding our product offerings, we're going to expand into a few different product categories outside of just nutritional supplements.

Douglas Lane -- Lane Research -- Analyst

OK. And should we think of your increased focus on technology and social selling playing into this. I imagine these oral care products would play very well from a social selling standpoint?

Kevin Guest -- Chief Executive Officer and Director

Absolutely and again you've identified something that is critical for us. The oral care, for example with when there's a whole series of social selling strategies that we have in place as it relates to oral care and we're going to have some fun with it. We have some fun at the launch and we had some packs, one was called a Lover's pack that would help increase breath and so forth and so on, and there are some very social aspects to it that we believe will be very shareable.

And the great thing about these products is, you instantly feel their effect and feel a difference and your mouth feels differently and so different than taking a pill and swallowing a pill. This is something that is not only something you feel right away, but from a social perspective we believe it's highly shareable.

Douglas Lane -- Lane Research -- Analyst

Okay that's helpful. And then just a couple of things on China. Just looking at that -- you mentioned that the press coverage being a real factor there and the negativity toward the space in the general press, has that died down any since the 100-day review period expired? And I understand being cautious in getting back into the marketplace. So just, I know you don't give forecast quarterly, but just directionally are we looking at down, flat, up what kind of local currency numbers are we looking for in China on the path back to growth near-term. (Inaudible) was good in China in the second quarter and third quarter last year, so you do have a comparison issue as well.

Kevin Guest -- Chief Executive Officer and Director

Doug, similar to the first quarter. I think we'll see in second quarter, we started seeing some progress. But we expect to go back and see more of the ramp in the back half of the year. And what we're doing is -- we're really taking the cue from our government relations team in China and they're staying in regular contact. And we're trying to make sure that we're really kind of toeing the line and doing what we should do in the market as they go back and kind of gives the the thumbs up. And I think we feel a little bit better about being a little bit more aggressive and running different things in the China market.

And can you give us color or qualitative comments about the press coverage since the 100-day period expired?

It certainly decreased considerably and that's very helpful as it relates to our sales force over there. With the less noise they hear, the more confident they feel in sharing and -- but it has greatly decreased.

Douglas Lane -- Lane Research -- Analyst

Okay. Thank you.

Kevin Guest -- Chief Executive Officer and Director

Thanks Dough.

Operator

And we have a follow up from Timothy Ramey with Pivotal Research Group.

Timothy Ramey -- Pivotal Research Group -- Analyst

Thanks so much. I thought I'd build a bit on Doug's question. The Nu Skin mentioned this, I guess press conference of the regulatory agency held maybe two days ago, declaring an end to the 100-day period. What if any takeaways would you have from that? That's specifically about USANA's business, but what did they find? What were the issues? Do they feel like they got a handle around this and then I also have a follow up?

Joshua Foukas -- Chief Legal Officer & Corporate Secretary

Tim, this is Josh. So yes,, we're certainly aware of the press coverage and that goes into kind of the entire government relations analysis that our team performs in Chin. How the government communicates on certain issues? And how they communicate on other issues? So certainly, we expected something in the nature of press conference to conclude the 100-day review and the government's findings, what they announce were in line with our expectations. There's a different analysis, however, to how the government will communicate, we believe according to our teams in China on meetings for instance. And so we go through a different analysis with respect to that. The government will go through a different process, really more at the provincial level, the municipal level on the median analysis. And so that's kind of our takeaway from our leadership team here and especially our Government Relations External Affairs team in China on those issues.

Timothy Ramey -- Pivotal Research Group -- Analyst

And, is it a fair statement? Maybe you can say, maybe you can't, that the major issue that the government addressed was traditional Chinese herbal remedy kind of products, not so much the type of supplements that you traffic in?

Joshua Foukas -- Chief Legal Officer & Corporate Secretary

Going from the government's communications and obviously not speaking for them, this is just our interpretation of those communications. The government addressed first and foremost healthcare products, which includes nutritional supplements and which includes healthcare products sold through all channels including direct sales. So that was the focus and it was really the stability -- the social stability of the market of the country around those healthcare products. How they're regulated? How they're advertised? Right down to consumer protection issues. So that's our interpretation of their comments through the 100-day review period.

Timothy Ramey -- Pivotal Research Group -- Analyst

Sounds good. And then just one for Doug. If I did the math right, it looked like you maybe bought the shares in at an average price of something like (inaudible), which would have been not very close to the view up of the quarter. Was that just a single block trade or did I do that math right? Glad to see you buying in shares, but the the price was a little higher than I thought we might see.

Doug Hekking -- Chief Financial Officer

Yes, I think it just had to do with the timing Tim. By the time we got out the blackout with the year end and got into the market, we kind of set internal threshold with what we want to buy up to and just had to do with what the price was at that time.

Timothy Ramey -- Pivotal Research Group -- Analyst

Sounds good. Well, we love your continued and consistent share shrink. So keep it up.

Doug Hekking -- Chief Financial Officer

Thanks Tim.

Operator

(Operator Instructions) And at this time that does conclude today's Q&A session. I'll now turn the call back over to Patrique Richards.

Patrique Richards -- Executive Director of Investor Relations and Business Development

Thank you. for your questions and for your participation in today's conference call. If you have any remaining questions, please feel free to contact investor relations at (801) 954-7961.

Operator

Thank you ladies and gentlemen that does conclude today's teleconference. You may now disconnect.

Duration: 22 minutes

Call participants:

Patrique Richards -- Executive Director of Investor Relations and Business Development

Kevin Guest -- Chief Executive Officer and Director

Timothy Ramey -- Pivotal Research Group -- Analyst

Douglas Lane -- Lane Research -- Analyst

Joshua Foukas -- Chief Legal Officer & Corporate Secretary

Doug Hekking -- Chief Financial Officer

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