Q2 2022 USANA Health Sciences Inc Earnings Call
Please standby were about to begin.
Good day and welcome to the you saw on our 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. Andrew Masuda Director of Investor Relations. Please go ahead Sir.
Thank you and good morning, everyone. We appreciate you joining us 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 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 be making 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.
These statements include those regarding our strategies and outlook for fiscal year 2022, 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 <unk>.
Junction with disclosures, including specific risk factors and financial data contained in our most recent filings with the SEC.
Im joined today 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 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 Andrew and good morning, everyone. We appreciate you joining us to review our second quarter results.
Six pre release and our final earnings release for the second quarter yesterday, our operating performance during the second quarter was negatively impacted by Covid related lockdowns and restrictions and other disruptions in several key markets.
These disruptions also had a negative effect on the regional sales programs, we offered during the quarter.
Despite the short term disruptions to our business, we remain confident in our business strategy and our prospects for future customer and sales growth.
Though we continue to prioritize the alignment of spending with sales performance in the near term.
Health of our balance sheet and our generation of free cash flow will allow us to continue making the necessary investments to position you sign up for future growth.
During the quarter, we made progress on our strategy in several areas, including the introduction and launch of enhancements to our associate Onboarding program with streamline the onboarding process process provide associates with additional tools to set up and operate their business. We believe this will help support and increase our.
<unk> base over the long term.
Additionally, our digital strategy remains a primary focus for our team moving forward.
We look forward to celebrating our 30 <unk> anniversary at our upcoming global Convention in Salt Lake City, and a few weeks.
This will be a hybrid event with unexpected in person attendance of approximately 4000 associates and tens of thousands participating virtually we also have selected events and modest promotional activities planned in conjunction with the celebration who helped generate excitement surrounding this event.
In closing we remain confident in the strategies, we are pursuing for the long term health of our business and in our overall long term growth potential in our markets globally with that I'll now ask the operator to please open the lines for questions.
Thank you if you'd like to ask a question on today's call that is star one on your telephone keypad.
And we'll go first to Stephanie Wissink with Jefferies.
Hey, everyone, it's Chris near minus on for Steph. Thanks for taking the question. The first one I have.
Maybe help us understand a little bit better the diverging.
Performance between preferred customers.
Really seem to be kind of holding up versus associate counts, which are trending down. So is there something maybe structural we should be thinking about or what kind of color can you offer to kind of reconcile those two pieces and then can you remind us again is that conversion potential from preferred customers to associate and if so what does that typically look like.
Yes, Chris this is Doug and I'll, let Kevin and Jim jump on and kind of give you.
Big picture narrative, if I missed something here, but we over the last several years have really leaned into making preferred customers or priority. We've had several structural things that we've done we've been testing programs in the Americas and Europe region in particular.
<unk> tested a program that really was scheduled to end in March we bumped it out a couple of months and Thats why you see a little bit of sequential change in the Americas and Europe on PC from Q1 to Q2, but it really is from from the strategies and what we've been focusing on and how we've been really approach in the business as far as.
Building that preferred customer base and the mix of customers. The second part is is there an opportunity for transition or movement from becoming an associate if you're a preferred customer yet that.
<unk> available it doesn't happen as much as you think but I think some of our best associates are those that are really passionate and believe heavy belief in the products and a lot of that starts with the consumption of the product. So I think that does happen. It just it's not a real high clip right now.
Got it and then to answer you.
I'm sorry go ahead.
I just wanted to answer your question you asked about the possibility of preferred customers becoming associates, yes.
They can they can elect if they want to become an associated and sell the products and we actually hope.
That would be a great transition because they will have had an experience with the products and we will be able to sell them more effectively.
I don't have off top my head the conversion rate from our preferred customers to associates, Doug I don't know if you it's been low to date, but I think the ones that have made the move I think really provides proved to be really successful associates, because they are understanding and belief in the product and and I just want to add.
Color on this.
Being 30 years old.
We have really done so data mining and some research and looked at we really have a an excellent.
Had historically excellent distributor experience, meaning someone who's selling and building a business and earning income as they share our product experience. Our focus has been recently over the last probably 18 months at least a customer experience and how do we interact and deal with customer.
Because we feel that one of our main competitors is the experience they expect to receive when they come in and interact with our company and if that experience isn't seamless.
They'll go somewhere else that's why our digital strategy is so critical to the growth of the company.
Because it has to be a seamless.
Experienced for someone who simply just wants to take our products.
We really care about people utilizing our products every day and so it's just an expansion of our overall strategy.
Got it that's super helpful color and maybe just as a follow up to all of that could you give us any color.
On the trends Youre, seeing especially kind of in the context of your your enhanced Onboarding program any trends on new associates coming into the business.
Well this is Kevin again, it's too early to tell at this point, we just barely are releasing the first versions of our Onboarding program, but one of the key objectives to the Onboarding is a retention and customer connection.
And one another key focus of our overall high level strategy is connecting especially in these COVID-19 days, we've not had the opportunity to connect as we normally would on a personal basis and so this whole customer connection and interaction and touch points as they go throughout their journey.
<unk> is becoming more and more critical and our onboarding processes, just a heightened level of connection.
And the interaction as our associates move through their journey of building a business.
Yeah.
Got it and then you touched on Covid briefly there I was just kind of segways into my next question, but as we look across your markets.
Honestly you have these COVID-19 related disruption and softening the topline, but I'm surprised that performance in greater China actually improved sequentially.
Firstly, given kind of all of the headlines related to restrictions. So why does the market like China performed better on a sequential basis than others, which I would assume would be less restrictive, but perhaps I'm wrong.
Well I think youre exactly right. It is it's more restrictive in China than what we see in the other markets.
And really the catalyst for why you saw sequential improvements as is for the last three years. We've run this kind of sales program that we've been testing and evaluating and tweaking and adjusting and China moved up their plans from running that later in the year to the second quarter and Thats why you saw the improvement from Q1 to Q2.
And as we noted in our comments in our release I think we're generally disappointed across most of our markets with how that program performed.
But I think we're committed to going back and making structural changes that create sustainable.
Growth traction and not trying to go back and just give something that Pops short term and do this other stuff. So I think the changes that but no change that we've made are there, but I think the environmental factors with Covid.
The drag on the economy consumers, having to go back and select out.
And just making some tough choices, how they're going to pursue things it creates a challenging environment in China is still continues to go.
Go in and out of Lockdowns, maybe on a lesser scale than what they've had in the not too distant past, but I think some of the investments that Brent <unk>, who oversees our market there and his team have made I think are really going to pay dividends going forward really related to what Kevin said on the digital strategy, Yes, and just a little more color just speaking for myself I 10.
To look through the lens of the United States as I think about how we're moving forward, but really we are a global business and if you take markets like the Philippines, where they're completely shut down but most all of their business is dependent upon will call and working in an office environment versus here in the United States will get things.
<unk> one.
When COVID-19 restrictions are in place that has a huge negative impact just on people receiving products doing businesses interacting and we see that in Malaysia.
In other markets in Asia, where we're really strong.
And so the person to person side of things it has a bigger impact for us outside of the United States, just because of how they inherently do business.
Got it that's great and then last question before I hand, it off maybe just on the purchases that are being made.
Are you noticing anything different in terms of average basket size or should we be thinking about that.
Maybe the softer topline number is primarily driven by the overall number of transactions. So maybe any color there.
Yes, I think long term I think the simple answer is we're not seeing anything that's definitive enough. I mean, we are a little bit off on the average spend this quarter I think some of that can be tethered to the promotional activity and what happens during those those cycles, but as a whole we have seen that trend pretty close within a relevant range and really not be that meaningfully different.
Thank you.
Yes. Thank you.
We'll go next to Doug Lane with Lane research.
Yes, hi, good morning, everybody.
Staying on <unk>.
Looking at the second half year I understand.
What went on in the second quarter as a bump in China sequentially, particularly with the preferred customers.
A little bit more promotional related so we should probably see that settle back to where it was in the.
The first quarter and fourth quarter looking into the second half of the year.
Yes, we would expect that just from the nature of how we count the active customers, we would expect to see a little bit softening the customer numbers I think we have a lot of real important things going on in that market, but I think just just relative to how that calculation takes place yes, that's accurate.
And Doug this is Kevin.
Just want to remind everyone are especially as we're coming out of unprecedented times that we're really playing the long term game here and we've done some of these promotional activities to try and maintain and keeping an excitement level in a marketplace, where we normally can't traditionally do our best.
Business as we would.
But we feel like in the second half of the year and as we move more into a normal pace of business that continue to pursue those promotional activities.
Is it necessarily in the best interest of the long term health of the company.
As we move forward and so we're choosing.
This route for the long term betterment of the company from a strategic perspective, as we've stated in our our documents going forward and so.
Again, we're kind of switching up.
Our mode of business activity on purpose because of the changing environment.
As we look at the long term health of the company.
Okay that makes sense.
Yes.
I get what you're doing there.
And again sticking with.
Thinking through the impact.
<unk> environment today, and particularly with Covid.
Maybe like others I expected a lot worse results in China and <unk>.
Maybe not as bad result in Southeast Asia Pacific, which continues to be quite weak. So am I reading this right that the actually the impact from Covid is more disruptive to your southeast Asia Pacific business than it really was to China at the end of the day, meaning that if we ever do come out of this pandemic.
That the bigger balance will be in South East Asia Pacific versus China.
Yeah.
I would say that China has been a market that's been impacted just because of the strict lockdowns I think China has the better ability infrastructure really to go back and handle some of the stuff going on in the Philippines, which has been an incredible market for us.
It has had a tough time with density of population availability of services and stuff to what Kevin said they were so accustomed to doing business in an <unk> environment. It's a really dramatic change for that market and if we do get freed up there I think that is additive to that market as well, Kevin Yes, and just one thing and Brent you might want to talk to this.
It's a credit to our team in China, being creative and getting our products in a very very locked down difficult environment and finding different ways to get our products out to our people.
Which we didn't even have that opportunity in some markets, but in China are on the ground team really really performed I don't know, Brian If you want to just give some color to that situation to help Doug kind of understand the dynamics a little bit sure.
Yes in China, I think Doug mentioned already the infrastructure was slightly different than what we see in the Philippines or southeast Asia.
Theres been a higher preference of people being willing to switch to a virtual environment and just logistically, it's easier for us to distribute our products throughout the country.
Then some of those other markets, but the lockdowns that we experienced throughout China in the second quarter and first quarter specifically.
Really disrupted that ability to deliver that product and so we had to get very creative through our distribution network to switch three pls to switch.
<unk> final mile distributors in order to get that product to our customers.
And our ability to adjust quickly on the fly the way that we did allowed us to continue to recognize revenue throughout the quarter I would also add on the brands sorry also add on that brand has made some investments in the market and studios to allow us to manage content and reach that audience.
And kind of a higher velocity way and more responsive even before COVID-19 kind of came into play for everybody around the world China had really high percentage of their sales that were already happening in a non in person environment and so they were set up and people are accustomed to doing business like that but yes. There is a few key markets in southeast Asia that yet.
We've note add to it.
A couple of tough quarters here, but I think we see the individuals' there and we have confidence and I think from a build standpoint going forward back to your original question, Doug I think theres, an opportunity to go back and see that.
If we can go back and get a little bit more of a stable environment start tracking in a good way and we're really confident with the staff there and also Doug Walter Our Chief operations Officer, who is here today.
Just in the Philippines, it might be I will give you kind of some color on what you experienced there Walter.
Just being on the ground recently in the Philippines, and what Youre seeing there and what youre seeing for the future.
In the Philippines, they've had because of really locked down and because of that.
Still wearing masks and you still got to have basically you have to have vaccination passports again any building in and so people haven't been having a lot of in person meetings. In fact, when I was there. They were some of the first in person meetings that they were starting to have.
With our distributors with teens out there.
And the other part was the pickup center that we have the we have several pickup centers and they've been empty.
Our volume has gone down.
Over the last during the Covid period at the volume and the pickup centers went down almost nothing where nobody was showing up and that's why they spent a lot of their time interacting and meeting with each other and so that's starting to open back up again, but it is a cultural change that people will have to go through they have to be feel comfortable getting out they have to feel comfortable meeting in person again and.
Things are gradual changes that they're going through right now.
Just like you said, Doug I think you.
You mentioned that there should be some growth there and I believe that that's going to happen in those markets youre going to see more interaction personal interaction.
In the near future I think we're going to start seeing some.
Some better activity there.
Okay. That's good color. Thank you.
And once again to ask a question that is star one on your telephone keypad.
We will go next to Linda Bolton Weiser with D. A davidson.
Hi.
So.
The U S market was a little bit weaker than I had modeled can you give us a little bit of color about what's going on in the U S.
Some of it for the quarter is a little bit of timing on the comparisons.
We kind of transitioned out from one campaign that we're running the first part that we see some real potential from from a structural some structural opportunity there going forward I think sequentially that was kind of the biggest narrative that we saw with the U S. The U S did not run the sales program in the second quarter.
And so they have a really tough comp year over year with that and we just generally saw more success last year in the program that we ran.
Do you plan a promotional program in the second half.
On a local market basis, absolutely, we will have things that engage our consumers and products and experiences any other stuff, but if you're just not going to be the magnitude of what we've done historically and I think that was kevin's narrative really here focusing on the long term and making sure that we're doing something that's additive on a sustainable basis.
And we've learned quite a bit through doing some of these sales programs and we'll adjust accordingly, but youll see local market activity for sure you will probably not see something of magnitude for the company as a whole thats meaningful.
From from a big thing, we do have our 30 year convention coming off and there'll be some activities and events and promotional campaign surrounding that to build the excitement, but thats really kind of the the biggest stuff we have in the back half of year from a promotional standpoint that reaches across all markets.
And can you remind me like.
In the U S.
Percentage of your sales are kind of done like on a subscription basis, where the customer is there something product kind of every month.
What percentage.
The mid to high 50%.
Off top my head I don't I don't have the number in front of me, but I think we're probably high 50% of our sales are happening on subscription business.
Okay, and then how recession resistant do you think your business will be.
If we do see.
This consumer weakening going on.
Yes, I think we will see I mean, I think this is a new environment for all of US the story than historically when you see a little bit of pressure on the economy, maybe you feel a bit more activity in our channel I think this is just a totally different environment than what we've experienced and we're actively reaching out we're actively soliciting the opinions and feedback of them.
Customers and were taking these things will react in a pretty short period of time and so so time will tell there I think I think people are more health aware of more health conscious.
Than they've ever been and I think we have products that can go back and help them go back and take a little bit better charges.
Kind of their well being going forward. So I think that's a big opportunity that we have and we have to continue to go back and work to go back and communicate and really be front of mind for consumers out there.
Okay and then.
I noticed there was it was good to your inventory did come down.
Down year over year and down sequentially, which is good to see do you expect that.
Increase to continue in the second half when you think third quarter inventory will be down again sequentially.
I think we'll see a little bit of and Walter you can jump in here, but I would expect to see it go down a little bit not at the same change you saw from Q1 to Q2.
I think we made a very intentional choice to make sure that we had inventory to go back and market and sell to our customers and as we've seen demand trying to do this other stuff same thing with our expense management that team has been actively trying to go back in our line of inventory levels with the performance that we have now and things that we have on the horizon, Yes that was very intentional what we did.
Middle of last year, we started building up inventory intentionally because we saw shipping and we saw COVID-19 related issues coming up worldwide. So we built up more finished goods out in our markets. We doubled the amount of raw materials. We had because we were concerned about supply chain and actually saved us during that whole period, and then we slowly been.
Building, bringing back that back down we're going to keep bringing that down throughout the year a little bit.
We start seeing more disruptions in supply chain and then we're going to build it back up again.
I would say, it's worth having inventory yeah. The other aspect that we do from an operational standpoint, we have a real core competence, making our own products and I think thats been a huge benefit in this environment allows us to respond a little bit quicker were taken out one more player in that supply chain process and so we've seen that as a definitive advantages we've gone through this as well our biggest challenges.
Shipping is still transport across the ocean. So if we make it in salt Lake and that shifts to South East Asia or somewhere else, that's still a challenge for us and Thats. The reason inventories are still.
Generally a little bit higher that's been very intentional.
Okay and I was just curious do you have an operating cash flow number for the first half of the quarter.
Yes, we did.
Let me pull it up.
We did about 15 million of operating cash flow in Q2.
And I can pull you up year to date I think what we're generally expecting for the year is something that.
That $100 million to $105 million range.
Yeah.
Okay. Thank.
Thank you and then.
It didn't look to me like your SG&A expense it looks like a little lower than we had expected and.
You kind of alluded to taking some actions to adjust the business to the condition can you just talk about what cost reduction actions you're taking.
Yes, I think in the medium short term most of what we've seen or things that vary from a variable from a variable perspective or things that are more performance based that.
Related to our operational.
Execution and just the environment, how we're generating operating margin, we still have work to do in it and it usually takes several quarters I think we're just being very intentional and prioritizing the business really to what Kevin said, what's what we think is best for the long term.
Benefit and growth of the customers and the individuals and families consuming our products and thats whats going to get prioritized, but we do feel a need to go back and be more agile and have resource kind of put to those things that are going to be a catalyst to really kind of executing on that vision and mission of the company.
Okay. That's it for me thank you very much.
Thank you Linda.
And at this time there are no further questions.
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 zero.
This does conclude today's conference we thank you for your participation.
Yeah.
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