Q1 2022 USANA Health Sciences Inc Earnings Call

Yes.

Please standby we're about to begin.

Good day and welcome to the you saw the Health Sciences first quarter Conference call. Today's conference is being recorded at.

At this time I would like to turn the conference over to Mr. Andrew Masuda Director of Investor Relations. Please go ahead Sir.

Good morning, we appreciate you joining us to review our first quarter results. Today's conference call is being broadcast live via webcast and can be accessed directly from our website at IR Dot <unk> dot 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 our outlook for fiscal year 'twenty to 'twenty, two 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 by our CEO and chairman of the Board Kevin guest our President Jim Brown, our Chief Financial Officer, Doug hacking as well as other executives.

Yesterday after the market close we announced our first quarter results and posted our management commentary document on the company's website.

We'll now hear brief remarks from Kevin before opening up the call for questions.

Thank you Andrew and good morning, everyone. We appreciate you joining us to review our first quarter results.

You saw on a delivered solid first quarter results in the face of continued challenges across several key markets.

Despite these challenges both net sales and diluted EPS grew sequentially during the quarter.

Our operating results for the first quarter varied across several key regions and markets. For example, the U S market generated year over year sales growth and perform modestly above our expectations. Conversely, some key markets in southeast Asia Pacific generated softer than expected results during <unk>.

After the lunar new year holiday, despite our efforts to offset the seasonality through promotional offerings. Nonetheless.

Nonetheless worldwide sales and operating results were in the range of internal expectations.

During the quarter, we made progress on several of our 2022 strategic initiatives, we resumed the rollout of our active nutrition line across certain markets and we continued to make enhancements to the overall customer experience through strategic digital investments.

As we all have seen the operating environment in China has become more challenging and unpredictable due to the escalation of COVID-19, and the accompanying lockdowns restrictions and other disruptions to individuals and businesses share.

Shanghai has experienced citywide lockdowns and the Chinese government recently began implementing restrictions and parts of Beijing.

At this point, we do not have transparency into whether these restrictions will continue to increase in the coming weeks in Beijing and other areas of China that are important to our business.

Nevertheless, given the current circumstances, we anticipate some negative impact on our results in China, and we have lowered our fiscal 2022 outlook to reflect this uncertain environment rigs.

Regardless, we remain committed to supporting our associates customers and employees in this key market and we will continue to adapt to these ever changing conditions to generate momentum in the business.

In closing we remain confident that the successful execution of our global strategies will position usama to deliver long term sustainable growth in the future with that I'll now ask the operator to please open the lines for questions.

Thank you ladies and gentlemen, if you have a question or comment it is star one on your Touchtone telephone again that is star one for any question.

Well go first to Christine Yamato set Jefferies. Your line is open. Please go ahead Sir.

Great. Thanks, everyone for the questions I wanted to ask about China and Asia Pacific.

Specifics of maybe starting with China still sequential improvement despite the new year and some of the more extreme restrictions right. So can you talk about how maybe that market progress was in the quarter maybe months by months are you seeing more digital uptake offsetting some of those external pressures or maybe just help us think about how youre able to support customers in that market.

Yeah, Hey, this is Brent.

We started a little sluggish in January and we did see an uptake in February and March and I think that was primarily due to a lot of the initiatives that we rolled out.

In the latter half of the quarter. So its very optimistic to see that especially given the challenging circumstances that are there throughout the country.

We're very pleased with the effort that we made and the results that we were able to deliver despite the challenging circumstances.

Great and then maybe on Asia Pacific could you unpack for us the macro trends, you're seeing specifically in Malaysia and the Philippines.

I know you mentioned, some COVID-19 fatigue with customer count seem to be hanging in there. So what are you hearing or seeing as it relates to productivity in those markets and is there any sort of kind of clearing of that you would be able to.

0.2, as we move through the year.

Yes, and I think you have two different stories really I think the Philippines is coming off a really challenging year and they've been working I think similar to what I'm trying to have been working very diligently to go back and get the momentum turned and moved in a good direction and I think we saw some some flattening on a sequential basis and a little bit better performance sequentially, but we can.

Got some work to do there in Malaysia, which has really been one of our top performing markets year on year, you had a little bit of dynamic of year over year comps on.

The timing of promotions and kind of the cadence of promotions between the two quarters.

And it really is the first time in Malaysia as we're starting to see this in a few markets as the first time that many of these folks are able to go out and see their families. During the lunar new year, and we saw a little bit more of that than I think what we had banked and so we saw a little bit deeper dip during the Chinese new year and we saw some of these multiple paths that we typically surround to that period of time, maybe not red.

Net in quite as strong as what they did last year and I think so a host of factors, but I think thats a market that we are still incredibly high on and expect to go back and see some progress as the year goes on.

Got it and then just last one for me just on input cost trends I think last quarter, you flagged about 5% to 7% of pressure on materials, but the new guidance implies maybe that's maybe stepped up since a couple of months ago. So is that how should we be thinking about it.

And maybe if you could help us think about how that trend evolves through the year or are you seeing any sort of relative stability in those baskets.

Well it because the last time, we've updated there hasnt been that much time, that's passed I think we're still worried in that same range that we have but it's definitely something with with our operations group were watching is kind of we're bringing in the raws and finish it will go back and market and sell in and so we will definitely report on that as the year progresses, but right now.

Just because it's so recent to when we reported the year, there's not that much more to add there at this time.

Got it thanks, everyone.

Thank you.

We'll go next to Doug Lane in Lane Research. Your line is open. Please go ahead.

Yes, hi, good morning, everybody.

Good morning to inflation costs.

And then on the inflation front.

Have you enacted any price increases or what's your plan for price increases for the remainder of the year.

Yes, we have and we spent a great deal of time with each of the individual markets. We've met as an executive team.

And we've tried to go back and take a kind of a moderate approach and not being too forward leaning on that so towards the end of the quarter mid to late first quarter. Most of these price changes were enacted but they were relatively small in.

In comparison to some of the inflation pressures were seeing in kind of given our our gross margin. We felt that was kind of the appropriate Tac to go back and take so youre somewhere in that.

2% to 5% range on a weighted basis.

On some of that but that definitely wasn't reflected for the full quarter.

Got it.

And.

Looking at your operating margin assumption I think you took 50 basis points out of your range.

Sure.

Cost of goods and the associated incentives have been pretty stable.

Really the pressure has been the deleveraging on the SG&A.

It is most of that 50 basis point reduction just further deleveraging on the SG&A because your sales reduction or do you anticipate a little bit more gross margin pressure didn't been seeing the last couple of quarters.

Yeah, I think we've definitely seen an elevated pressure on kind of the cost of materials that were producing.

But a lot of what youre seeing in at least the first quarter relative to expectation I think really was a little bit deleveraging on the sales line.

And you could go back and clearly see that just on the year on year comparison, there thats, where the bulk of the operating margin was last year on year.

And kind of that.

Loss of leverage on the sales performance in Q1.

Okay, Yes.

Definitely and.

All your sales reduction because again the sales number in the first quarter. It looks like it would be what people were expecting and so that means obviously.

Reduction in second third and fourth quarter.

You mentioned, the secondhand or do you still anticipate growth.

But not as much as before but it's really the bulk of the revenue reduction going to hit the second quarter because of the Lockdowns in China.

Yeah, I wouldn't I wouldn't say that there is some timing of events. When you look at the second quarter of last year. We had this short term program around every market data in the second quarter last year, and we have space that that program out. So you see more of a distributed.

During this year through markets and so China, one of our bigger markets performed well on this.

Really we're kind of wrapping that up and having a big part of that in second quarter.

Yeah, I think it's been a little bit more challenging environment. I think is the government has kind of elevated kind of how they've handled the COVID-19 environment.

And it's not an opportune time to go back and run something like this but it was already underway, but I think as a whole I think we saw some reasonably good performance, there and maybe a little bit different than what we've seen in past years, but.

So I think Youll go back and see a little bit of progress sequentially in the second quarter, and we're hoping to go back and get a little bit more visibility Doug as far as what that situation is in China.

What we saw this time just it wasn't the same response.

From the government that we saw the first time, we kind of went through the initial COVID-19 .

And so we're adapting responding to <unk> point I think the team has done a great job I think we have some new digital assets and the studio in house that really allows us to to kind of be pretty active in that environment, but.

I think the main reason that you've seen some of the softening in our guidance is just from some of the unknowns, we're seeing in that environment.

And is it is it impacting your ability to sell products or your ability to get products out to your customers.

Well I think for a period of time really towards in the first quarter. We had a small bump in deferred revenue I think particularly in trying to go back and get products delivered to Shanghai because of some of the Lockdowns and shutdowns there.

And so we've been able to day gift products manufactured products, but there has been some disruption in delivery relative to.

Some of the positions of the government had we've we've been trying to fine compliant productive ways to try to get product out, but we're definitely going back and staying in touch with the government as we do this just to stay in good standing.

Okay. That's helpful and just lastly, you mentioned on previous call that you were planning to have an in person event in China in the second half.

You made a call on that yet or you still wait and see on that.

Yeah, Doug just given the uncertainty we decided to change the event that we had we had initially planned for Nanjing in September and we've decided to go to a hybrid event.

So as Doug already mentioned, we have an in house media studio. So we're going to leverage that asset and produce some high quality content from our studio and <unk>.

Plan on more small in person gatherings throughout our branches and distributor workshops throughout the country.

I think given the current environment.

It would be really unreasonable, if we weren't able to actually pull in a burnt off in person at that magnitude.

Got it makes sense all right. Thank you.

Thanks, Doug.

Once again, ladies and gentlemen, it was star one if you had a question. We will go next to Linda Bolton Weiser of D. A Davidson. Your line is open. Please go ahead.

Yes, hi, thank you.

So I was just curious about the.

In the Americas, and Europe region, which I think I think it was down about 3% in constant currency and yet the U S. I think was up 5%.

I'm just kind of wondering was the decline so big.

The other part of the reason that that offset the growth in you out there can you just give a little more color on that region. Thanks.

Yeah. Thanks, Thanks, Linda Yeah. The primary catalyst there as we saw modest softening in Canada, which is a great market for us, but I think the bigger challenge we had in our Mexico market.

And Mexico has had some competitive.

Issues in some kind of going through some stuff and so we've been we've been actively supporting them and I think we're optimistic but yeah year over year, Mexico was tougher.

Performance quarter for them.

Okay.

And then I know when you had reported and talked about.

The fourth quarter. Our results you gave a little bit of <unk>.

Sequential guidance for revenue.

<unk>.

Thinking in the same way now I mean, I'm kind of seeing that revenue has to be down sequentially in the second quarter from the first quarter am I thinking of that correctly.

Yes, what we have and we typically don't do a great deal of talking on a quarter to quarter basis, but we're expecting to see.

Some some incremental progress I don't think theres going to be dramatic, but we are expecting to go back in and take some steps forward on kind of revenue performance in Q2.

So you mean, you mean sequential.

Revenue level in dollars.

Correct.

Okay.

Okay, and then just I saw that you added like a small amount of debt to the balance sheet is that just related to you are.

Casualty Patriate center like what was the reason for that.

Yes, it's just timing I think from time to time, we will go on the line just as different things in our operations dictate we did do a little bit of buyback activity in the first quarter roughly $25 million and so it really is a matter of timing and some of that comes with capital or inventory buying or payment of annual bonuses and so.

Wolf load on that periodically and sometimes it's in and out before the quarter is over and sometimes there is there is a small residual layover, but that that was really the nature of that.

Okay. Thank you very much I appreciate it.

Alright, Thank you Linda.

And with no other questions holding I'll turn the conference back for any additional or closing comments.

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 seven to one.

And ladies and gentlemen that will conclude today's call. We thank you for your participation you may disconnect at this time.

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