Q2 2021 USANA Health Sciences Inc Earnings Call

[music].

Good day and welcome to the East side of Health Sciences.

Second quarter Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Mr. Patrick Richards Executive director of Investor Relations and business development. Please go ahead Sir.

Good morning, we appreciate you joining us to review our second quarter results Today's conference call is being broadcast live via webcast.

It can be accessed directly from our website at IR Dot and China Dot com.

Shortly following the call a replay will be available on our website and.

As a reminder, during the course of this conference call management will make forward looking statements regarding future events or the future financial performance from our company.

Those statements involve risks and.

Is 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 2021, as well as uncertainty related to the magnitude and 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 the 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 our President and Jim Brown, Our Chief Financial Officer.

And then sort of hacking as well as other executives yesterday after the market closed we announced our second quarter results and posted our management commentary document on the company's website. We'll now hear brief remarks from Kevin before opening the call for questions.

Thank you Pat and good morning, everyone. We appreciate you.

Doug has to review another excellent quarter for use on them.

We're pleased to report record net sales earnings and active customers with double digit year over year sales growth and each of our regions much.

Much of this growth was propelled by a short term sales program, we offered during the quarter that.

Not surprisingly contributing contributed meaningful meaningfully to our results, which we expect to be not short lived we offered a similar sales program. During the third quarter of last year that was also very successful and we were pleased to see our sales force embraces program again this year.

Yeah.

Although we will not run and other sales program of this magnitude and the back half of the year. We have several other initiatives planned that we expect to contribute to results and the back half of the year, which we believe will curate customers as noted in our earnings release yesterday, we read and we reiterated our net.

Sales and earnings per share outlook for 2021, and remain confident and our long term growth strategy.

This strategy remains centered on customer growth and engagement and enhancing the overall experience of our customers.

And that they have when doing business with you saw on them as we continue to execute this strategy.

We will focus on improving our technology launching new products and product lines driving growth opportunities in existing markets pursuing international expansion opportunities and capitalizing on business development opportunities, including strategic investments and acquisitions.

In closing.

We are pleased with our performance and the first half of the year and believe we are well positioned to deliver another record year for you saw and with that I'll now ask the operator to please open the line for questions.

Thank you if you would like to ask a question. Please signal by pressing star.

1 on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star 1 to ask a question.

Our first question comes from Doug Lane line.

Lane research.

Yes, hi, good morning, everybody.

Just want to start off with.

The the dichotomy between such a strong second quarter and no change to your full year outlook, which really implies a sharp deceleration and for.

For the year.

And even adjusting for the extra week last year, you know, we're talking about going from 25% and sales growth over mid Twenty's this quarter to mid single digits and the rest of the year and I just wondered if you could elaborate on why such a sharp deceleration is expected here.

Yeah, Doug this is the other Doug here.

It was really kind of what we talked about at the end of last quarter. This sales program was really the lift there and it does have some short term nature to it and that's really the primary catalysts and we see an opportunity to go back and learn from the process and and acquire new customers can you just engage with them, but that's the primary catalyst to to what you were referring to as net sales.

Program and Q2 and it was in Q3 last year.

Oh.

I noticed after the sales program and Q3 last year your customer count dropped off and the fourth quarter last year. So are these customers somewhat fluid.

Fluid here and are we looking for a.

A reduction in your customers going into the third and fourth quarter. This year from the second quarter levels.

Yeah, I would expect at least a similar pattern to what we saw last year and we put some additional things into place this year and it'd be more proactive and reaching out and engaging those customers, but I would expect some of that same type of thing you know many of the customers could come.

Come onto social means and sometimes you see a 1 purchase and and not repeat but yes. It's a similar paradigm to what you saw last year and hopefully a little bit of progress this year.

Okay. That's helpful. And then you mentioned <unk>.

COVID-19, and your and your comments and I just wanted to get an update from you guys. If I could on how you.

Covid impacted your business now and in your various geographies around the world.

Yeah. Doug. This is Jim you know when we look at COVID-19, as a company in general we've had to really sit back and measure this by market to market like you're talking about and we were seeing and Asia Pacific.

CA markets have different types of lockdowns are or maybe not even a lockdown, but just different operating environment in general.

And we talked about the fact that we have a China convention plan in September we've just made a decision and move that to December because of the COVID-19 environment and Nanjing, where that is planned.

And in general, we're just having to pivot as we go along and our supply chain is another area that's been challenging but the reality is we've done a great job our operations departments have done a great job maintaining supply and having limited back orders probably back orders at the same rates before COVID-19, but we're just looking at that and our inventory.

He has gone up a little bit to about $90 million, we would look at inventory going up a little bit higher than that as we again try and work and the COVID-19 environment and make sure that we have a good supply chain.

So Jim just to see if I can.

Understand that the the impact here is it more of an impact.

Supply chain.

Chains and margins versus demand or is it about the same I mean, how would you characterize.

Where in the P&L it impacts the most.

Yeah, Doug This is Doug again, yeah. So the question is a good 1 and I think I think if you've seen historically the group's done a really good job of kind of leaning into it and manage and environment.

Environment, what we've really seen some prolonged.

Some of our key markets have a prolonged exposure and some markets are and the worst shape, they've really been and the COVID-19 environment that we're dealing with so just real high level I think some of those things there are some of those activities take their toll.

We'll lean into that and the back half of the year just like we did when we had COVID-19 and support those markets.

Additionally, we're starting to hear whispers and and indications of inflationary pressure on some of the material cost we're definitely seeing that on the labor side.

And what what what that's going to mean overall, it's probably not a great deal. This year, you'll probably see a little bit of of gross margin pressure, there, but I mean without a doubt you do see some cost pressure.

And you do see some disruption to business that we've at least historically managed well and we will continue to go back and work on that and the team has been fantastic and each of our markets and leaning into it yes. Just a good example is just just the logistics side of it it's taking another 4 to 6 weeks to get products.

Across the water to Asia Pacific So we've.

Gone into our ERP system and change some of the parameters too and that will increase inventory, but and the and we're trying to push more finished goods into the market. So they can react and run their businesses and accordingly and in the short term we've been air shipping stuff to the markets to make sure they have ample supply.

Okay that makes sense and just.

And lastly, Doug, giving an update on what your expected capital expenditures will be this year.

Yeah.

My Best guess at this point, we've been pretty low so far year to date, we definitely have some plants and the back half year I think part of the issue as we talk about supply chain a lot of the stuff that we planned for it to go back and receive some of the capital and has been delayed due to.

This thing, but I would say I would say somewhere between that 10 and $15 million range for the year would be my best guess at this time.

Okay, great. Thanks, guys.

Thanks, Doug.

Our next question comes from Stephanie Wissink Jefferies.

Thank you good day, everyone 2 questions.

If we could the first is just wanted to give you some time to share a little bit more about your native shopping app in China.

And the China numbers come back pretty strongly wondering how much of that you think is led by the digital tool deployment versus just the underlying recovery and demand.

Yeah. So we have Walter note, who oversees that and the.

And with US, we'll let him respond to that so our China shopping app, it's probably not 1 of the main reasons for our initial growth in China. We've had a lot of downloads, we've got a lot of usage.

It's been very it's been accepted by our China market and very excited about it but we take and MVP approach to our software development. So our first phase.

<unk> was shopping we're gonna add and kind of the auto order function, which which allows people to continue to reorder product and and set it up on our schedule and we're going to add more notifications and other tools and the next few months and so there's a lot more coming with that but I would just say that's kind of a strategy for us. It's a long term play it's not a short term play.

Yeah, I would also say, maybe Stephanie add on a little bit to what Walter said is the initial indication feedback from the customers and the market have been very positive.

It's far more familiar to them than what the shopping experience we've had in the past and we're making progress and it and it fits into what Kevin talked about what that customer experience and we.

We'll keep pushing that and keep layering on and keep building additional.

Commonality and things that that could be a catalyst to future revenue growth right. Now I think there's I think a lot more satisfaction from our consumers and the shopping experience, but there's more room to grow there and there's more coming for China shopping will add more shopping experience with web shopping and other things that are more Chinese native.

Yeah, and I thought that was interesting that you used the.

<unk> made it. So is this something that is designed in China for China or is this something that has a platform that could be deployed.

<unk> deployed around the world if you find that the consumer engagement is there to justify it.

It's different the Chinese shopping experience is different than non Chinese shopping experience just the way their user experience works.

And so we've designed these applications all of our work that we've done over the last year and a half which some of it's being deployed this quarter and next quarter and next quarter, we're going to it's going to start coming out but all of this is being done very native thats being done in China and its being done for China.

And the way the Chinese people shop.

As Jim just a different experience for them and and we are learning from that but we are adding and changing shopping experiences around the world.

And more localized for their markets.

That's great I wanted to jump over to active nutrition, because your comments suggest that it's coming out of the gate pretty strongly so I wanted to ask 2 questions.

1 is the cohort of associates that Youre seeing drive that business is it similar to the cohort that you would see and your core business or is this a new cohort of associates, that's coming on board and same question for preferred customers similar or different or unique relative to your core business.

Yes.

Jim.

Shop add on here Kevin after a.

To give you my thoughts on it.

I think for the most part of some of the same folks, but what you do see is a lean with some of the folks who are consuming our supplements and kind of our nutrition products, who have more of a lean towards kind of the weight management activity and and digestive health and.

And Jim Hydration and energy you see more of and the adoption. There was a unique unique way, we introduced that product category, but its been pretty limited and its introduction, so far and there's plants and maybe continue to roll that out throughout the year, maybe Jim can touch on kind of the rollout.

Yeah, we've rolled out to limited markets, mostly in North America at this point and time and then we have.

Our second phase, that's going to start rolling out and the third quarter really into the second quarter of 2022 is when this will all go out and then we have plans and we're working on products right now to enhance the Atlanta. The line. So even as we're rolling analysis and be more products more bars and different different offerings and in each of the markets coming out so.

Our long term strategy is to continue to support the line. We look at this line is a great introduction for associates to get more Pcs. Its very it can be a very sticky product you get and experience with it and then hopefully people that come on with active nutrition will then make the decision to stay with you saw and and get them to.

Chris North is kind of the roadmap that we have and Stephanie. This is Kevin 1 of the things strategically that we've talked about in past calls is the notion that we're appealing to lifestyle and.

And we're expanding our product offering base from outside.

And just nutritional vitamins and a pill so to speak.

By creating the new manufacturing plant that we call you saw and in north and other areas, where we're accumulating.

Our competitive advantages through our manufacturing skills.

We're seeing that all proceed.

Our niche according to plan.

And this year is looking like its moving forward. According to plan and what we had planned strategically from a digital <unk>.

Strat each strategy perspective, but also from a product perspective, as you think about active nutrition.

And I mentioned and my comments other products and product lines.

You'll see in the future that we're getting ready to release other things that will lead into usama being more of a health company as it relates to overall lifestyle and having a more holistic approach.

2 people as health becomes more and more of a concern a need and a.

And desire for and consumers globally.

Active nutrition is our first step.

And a strategic move from a lifestyle perspective, and you can look to more products and product lines.

Contributing to you saw and as we move forward.

And very helpful. Thank you very much.

Okay.

Our next question comes from Ivan and find Seth Tigress financial partners.

Good morning. Thank you for taking my question and congratulations on another quarter of great results.

And the congratulations on the launch of the active.

Nutrition line.

What areas and the launch have surprised you positively and.

May be disappointed and where do you see and new opportunities in that line.

Yeah, and I think some of the areas that debt.

Surprised us I guess with some of the forecasting we did on the line initially.

Was.

And you just beaten and general we had some of our products do 2 to 3 even 10 times, what we were expecting at the beginning which is very promising but again with the supply chain issues. We had it kind of slowed down that launch for a few weeks and we had to had to pivot on it but it's been accepted from the field really well.

Gross profit profit excuse me product is and metabolism product and it just went really well and we're excited about getting it into the other markets and just seeing what act and nutrition to do for really into 2022.

And then on your year.

Active nutrition App.

And what.

You know 1 of engagement have you seen and that and.

What other kinds of apps, you see coming out.

To follow that.

Yeah.

Yeah.

I think the people coming in and fill and kind of filling out the online survey and stuff I think it's gone pretty well.

As far as people are hitting the site and taking it and those who follow.

What kind of policy with the.

Kind of questions as they as they started so it's still really early and the game, but I think at least encouraged by the initial response there.

And then what kind of feedback are you getting from associates as far as their clients, what they're looking for what they like what they want to see more of.

Yes.

Who absolutely Jim go ahead, Yeah, I think 1 of the areas that we're getting a lot of feedback and it works well with US having you saw and in North and a bar line is just more options when it comes to bars, and we have that and and our future. We're gonna be looking at releasing another bar at the end of this year and potentially a couple more flavors into early next year. That's the type of feedback we get of course, we get other feedback.

And about taste and and wanting different types of flavors and we'll work with that we really have an opportunity having you saw and in north where we manufacture our bars and our powdered drinks to really satisfy the needs of our customers at a different level, because before and when youre dealing with third party manufacturing your.

That guy tied by minimum order quantities and a few other things that don't let you pivot as well.

Bringing it and internally is going to really solve some of these issues.

And then on the bar subject like from your because your investment and build brands. What do you see them happening there you're going to be launched and some co branded.

Our hands and wear them, helping you develop bars from your own brand.

Yeah, we're not going to we're not going to launch a cobranded built bar, but the intent with the investment was really to get expertise and speed up the R&D process to help us formulate new bars, and when I talked about just a minute ago that we'd have a bar at the end of the year.

And potentially more flavors and I've got a similar bar into next year that was really driven by the collaboration with Bill are built brands and it's just allowing us to move down that R&D into pilot batches and to real products much quicker and then if we were doing it ourselves long term, what we're doing and for building out our food labs.

Lab, that's already started and probably over the next launches of bars and the 22 there'll be bars that we've done ourselves, but it really help speed up that process. When we got into the collaboration with Bill bar.

Very good congratulations again and thanks for taking my question.

Thanks, Kevin.

Okay. We have no further questions in the queue at this time.

Thank you all for your questions and for your participation on today's conference call do you have any remaining questions. Please feel free to contact Investor relations at 8 year old 190, 547 to 1 zero.

Yeah.

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