Q3 2022 USANA Health Sciences Inc Earnings Call

Hello, and welcome to Santa Health Sciences third quarter earnings call. My name is Sarah and I will be your coordinator for today's event. Please note. This conference is being recorded and for the duration of the call. Your lines will be on listen only however, you will have the opportunity to us.

Question. This can be done by pressing star one on your telephone keypad to register your question. If you require assistance at any point. Please press star Zero and you will be connected to an operator I will now hand, you over to your host Andrew Masuda to begin today's conference. Thank you.

Thank you and good morning, everyone. We appreciate you joining us to review our third quarter results. Today's conference call is being broadcast live via webcast and can be accessed directly from our website at IR Dot you saw that 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 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 conjunction with disclosures, including specific risk factors.

<unk> 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 market close we announced our third quarter results and posted our management commentary document on the company's website.

Now hear brief remarks from Kevin before opening the call for questions.

Thank you Andrew and good morning, everyone. We appreciate you joining us.

We reported yesterday that our third quarter operating results were.

LNG than anticipated operating environment.

Covid related disruptions and increasing inflationary pressure on consumers were the primary factors that negatively affected our sales momentum in active customer accounts and many of our markets.

As we look ahead, we anticipate continued COVID-19 related inflationary and economic challenges in many of our markets, which is reflected in our adjusted fiscal 2022 outlook.

Despite the challenging environment you saw it remains a very healthy business, we generated $29 million U S of operating cash flow in the third quarter. We held a successful 30 <unk> anniversary convention in Salt Lake City, and made meaningful progress to enhance our customer online shopping experience.

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We have the means ability and determination to put you sort of back on growth trajectory towards the full Monty we are taking action to implement several short term initiatives to generate momentum in our business. These.

These initiatives include new and modified incentives in various markets and regions and increase in targeted and relevant communications between our management team and associate leaders and accelerating our return to in person meetings and events and markets where possible we must always remember.

<unk> that we are in the people business and the opportunity to build connectivity with our customers. After several years of disruption will be invaluable to creating engagement and excitement in our business.

Although we are committed to addressing the short term challenges. We're currently facing the long term health and growth of Usama remains our primary focus and I remain confident that successful execution of our strategic initiatives will position <unk> to return to sustainable long term growth.

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

As a reminder, if you would like to ask a question or make a contribution on todays call. Please press star one on your telephone keypad.

Australia a question please press star two.

When you show your lines are on mute locally as you will be advised when to ask your question.

The first question comes from the line of Linda Bolton Weiser from D. A Davidson. Please go ahead.

Yes, Hi, how are you.

Yes.

We're doing great. Thank you.

Well first of all.

I guess.

Actually mainland China, the performance was actually a little better than what we had projected and it was like the other parts of China I'm sorry, the other parts of Asia that we're kind of very weak versus our projection can you kind of just touch aloe and give us a little more color on the other parts of Asia.

Southeast Asia et cetera, and what's going on there.

Yes, Linda this is Doug.

We had a few things going on I think probably the largest thing is in specific or southeast Asia region has relied much more on in person type activity than what we've seen in the other markets and so kind of this prolonged environment with COVID-19 and the economics and inflationary pressures impacted that region.

We also had comps really sequentially from what we did in the second quarter, we had a pretty large promotion. We ran in the second quarter that we did not do in the third and we had some bleed on kind of momentum in the third quarter last year that we didn't have this year from a promotion they ran in the second quarter and Thats, probably the leading things that we've seen in the southeast.

As a market and some of the challenges were really highlighted by Malaysia, and Philippines, which are are both great markets, but.

His depth within a challenging environment, we're starting to see some stabilization in those regions as well.

Okay.

Just as a follow on just to go back to China.

Again, it wasn't as bad as kind of what we had projected.

Hmm.

I know, it's hard to kind of foresee, but do you actually think in China.

Constant currency sales growth can be up possibly in the fourth quarter or still down do you think in China.

And Kevin you jump in here I think we're still fighting a pretty tough battle I think the environment in China right now is.

And I think <unk> seen in the number of some of the peer companies out there.

Been very tough and I think we fared fairly well, even though China is a much bigger part of our sales portfolio than what we see with our peer companies but.

Zero Covid policy and just the limitations with the able to go back and do in person activities, we can do them, but it's limited and sometimes <unk>.

Just on what's happened in a locale we have to abandon some of the plans that we have and so we're definitely adapting and we're seeing a lot of new things and investments, we're making in the China market that will go back and give us some longer term traction, but I think short term I think youll continue to see us.

Continue to battle and fight, but I think youll.

Youll see probably similar numbers in the short term.

Okay.

And then.

Just can you comment on like what Youre seeing on the cost side.

Various input costs or are things sort of getting a little bit better or stabilizing or kind of what what are you seeing on that side.

Yeah. When you look at it I would characterize it as stabilizing at this point in time, we haven't seen costs come down when I'm and I'm talking about raw materials.

Definitely in the Salt Lake City, where we produce the majority of our products, we do produce in China as well, but some of the challenges that we have in logistics are getting better but the cost of that is still relatively high and our expectation is that it will remain high through the probably through the midway through 2023 and <unk>.

<unk> itself the costs haven't been as high as they have for the U S. So that's a good thing as well, but we really haven't seen anything come down at this point in time, and we're really not expecting it to yes, Linda maybe another element to go back and just consider.

The group has done a good job in the environment, but exchange rates right now we produce out of the U S. For every market with exception of mainland China and when you do that you'll see the strength of the dollar that create some gross margin compression as well and we also see that our SG&A line from an operating leverage perspective.

Okay.

Thanks.

And then.

Sorry, if I didn't see it in the financials, but did you what was the inventory at the end of the quarter I wasn't down again sequentially.

Yes, it was.

We're at $73 million total we had a reclassification.

We're making a third quarter to put part of that and long term, but that includes both the short term and long term inventory.

Continues to be managed we were we were obviously pretty aggressive Jim's direction to go back and make sure that we're not disrupting the customer experience and making sure we had inventory to sell and for a while there it was pretty uncertain. So we made some strategic place to go back and build up inventory and we're at a point now where we've we've tried to locate more inventory in markets as a buffer.

And we're at the point now where we're starting to go back and really kind of rightsize that to our current run rate in revenue.

Okay, and then just one final one for me.

I know, it's really hard to gauge this but I think that.

Those are kind of seeking a.

Some visibility on when you might return to organic or constant currency sales growth. Because you are posting declines against double digit decline. So it's a little bit hard even when comparisons are easy.

Hard to gauge when you might start growing do you think.

Second quarter 'twenty, three or do you think not until the second half of 2023, we see that constant currency growth.

Yes, Linda we're right in our planning cycle right now I think we are seeing some stabilization I think particularly in customer counts.

I would I would expect that we'll comment on that a little bit more detail at the February call, we're still kind of sorting that out and kind of getting.

Information from the markets and kind of pressure testing as we go and so I think I'd, probably defer until February we'll give you some visibility at that point.

Okay. Thank you so much.

Thanks, Thank you.

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There are no further questions I will now hand, you back to your host.

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, 94, seven to one zero.

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