Q4 2022 USANA Health Sciences Inc Earnings Call

Speaker 1: Mo.

Speaker 2: Thank you.

Speaker 3: We'll solve it now.

Speaker 4: Good day and welcome to today's Usanaheal Sciences 4th Water Earnings Conference School. This meeting is being recorded. At this time, I'd like to hand the call over to Andrew Masuda. Please go ahead, sir.

Speaker 5: Thank you and good morning everyone. We appreciate you joining us to review our fourth quarter and year end results. Today's conference 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.

Speaker 6: 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 2023, as well as uncertainty related to 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.

Speaker 7: I'm joined by our CEO and chairman of the board, Kevin Guest, our president Jim Brown, our chief financial officer Doug Hecking as well as other executives. Yesterday after the market closed, we announced our fourth quarter and fiscal 2022 results.

Speaker 8: and posted our management commentary document on the company's website. We'll now hear brief remarks from Kevin and Jim before opening the call for questions. Thank you Andrew and good morning everyone. We appreciate you joining us.

Speaker 9: You saw them reported fourth quarter and fiscal 2022 results that were largely in line with our preliminary results announced on January 5th.

Speaker 10: Fiscal 2022 presented a challenging operating environment for Usona. As with many companies, global and flight-scinary pressure continued to negatively impact our materials and supply chain costs as well as our consumers purchasing behavior across several key markets.

Speaker 11: In particular, the operating environment in mainland China continues to be difficult to navigate.

Speaker 12: During the final two weeks of fiscal 2022, we saw an increase in demand for certain of our products following the Chinese government's unexpected easing of its COVID-19 policy.

Speaker 13: While we are encouraged by this increase in demand, it is still too early to forecast long-term consumer demand in this critical market.

Speaker 14: particularly given the seasonality we experienced during the Chinese New Year holiday which recently ended.

Speaker 15: That said, we anticipate that we will begin to see more normalized and more normalized operating environment in China during 2023 and remain confident in our long-term growth opportunity in this key market.

Speaker 16: Notwithstanding the challenges we have seen in China and many of our other markets, USANA's business has remained financially and operationally strong and is strategically positioned for future growth. Importantly, the company's focus on health and wellness has never been more than a year.

Speaker 17: been more relevant as consumers around the world are more focused on their well-being, now more than ever. We may progress throughout the year on several strategic initiatives, including various digital commerce initiatives to support our business.

Speaker 18: new market expansion, the launch of our affiliate program in select markets, and the completion of two acquisitions.

Speaker 19: As we begin 2023, our top priority remains generating long-term sustainable growth in active customers.

Speaker 20: While our associates did well in adjusting to a virtual selling environment,

Speaker 21: It's become more and more evident that in-person meetings and events are an invaluable catalyst to building relationships and generating excitement and positive momentum in our business.

Speaker 22: Consequently, one of our key priorities this year is to return to live sales meetings and events where possible.

Speaker 23: We have planned events in South Korea and Macau, China in the first half of the year, with attendance at each event expected to be very strong.

Speaker 24: particularly given the absence of these events over the last several years.

Speaker 25: Additionally, additional strategies for this year include offering new incentive opportunities for our sales force. The Cr lovers' request for free services is on the Californiasofterops.ca sides and

Speaker 26: increasing our readiness for new market expansion.

Speaker 27: growing the two companies we acquired in 2022, and evaluating additional acquisition opportunities.

Speaker 28: I'd like to now turn the call over to USANIS President Jim Brown for his comments on our key 2023 operational strategies.

Speaker 29: Thank you Kevin and good morning everyone.

Speaker 30: Although generating customer engagement and growth is our top priority in 2023, we are also focused on costs and margin management. In particular, we will concentrate on strategically managing inventory, adjusting our sales promotion strategy to emphasize more local and regional offerings and fewer global offerings.

Speaker 31: Implementing price adjustments to mitigate our increased cost structure and the current operating environment, and capturing other operational efficiencies throughout our worldwide business. As a reminder, we made a strategic decision two years ago to build inventory levels to mitigate supply chain and stock out risks.

Speaker 32: As the supply chain has become more stabilized, the risk in this regard is lower and we have meaningfully reduced inventory. We will, however, continue to closely manage and monitor our inventory to ensure we're able to deliver the best possible customer experience in a cost-efficient manner. In closing,

We're optimistic that the successful execution of all of our strategies will allow us to build sequentially on our fourth quarter results in 2023 and position USANA to return to year-over-year growth in 2024.

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

Thank you, sir. Ladies and gentlemen, if you wish to ask a question at this time, please signal by pressing star 1. The reason you should be functioning your phone is to switch to a loud signal to reach your equipment. Again, please press star 1 to ask a question. We will pose for just a moment to assemble the queue.

The first question comes from Linda Bolton-Waster from GA-Devinson. Please go ahead.

Yes, hello, good morning. So I was wondering if, you know, so the obviously the China sales in the fourth quarter performance was a lot better than we have projected originally. And you talked about the pickup in the last couple weeks. Can you talk about what you're seeing more recently? Like how's the pickup?

continued and specifically can you say anything about like how January was in terms of the performance there in China?

Yeah, Linda, this is Doug. And so obviously, you know, with what we saw at the end of the year, it was really kind of in response to the complete change in really a COVID policy in the market.

And so we saw those two weeks pick up. We saw a little bit of that trickle. But, you know, we're just coming out of Chinese New Year and it's kind of what we had in our remarks there. We just were waiting to go back and see how this normalize and kind of what that level is. We're obviously optimistic with the market and we think them shifting for the opening the market's positive, but it does create some transitionary.

adjustments that we'll have to make and our consumers will have to make in the market. So we're still trying to evaluate what that looks like.

And Brent, you know, we have Brent in here who oversees our China market. Any other color or perspective there Brent?

You said a great, just December was very strong with the change in the COVID policy and we saw that demand go into January , but as Doug mentioned, Chinese New Year hit at the end of January and every year there's always a slowing that's associated with that and we similarly saw that same slowing.

So time will tell as we come out of Chinese New Year and into February and Mars to see what demand is going to normalize at.

Okay. And then I guess when I just look at the results, again, versus what I was expecting, I guess it's the Southeast Asian piece that was quite a bit worse there. Can you just kind of talk about, I mean,

Are there both COVID impacts still going on, coupled with just macroness, or is it just specific stuff with your business that's going on in Malaysia and Philippines? I'd be interested in, thanks.

Yeah, let me start that off. Jim and Kevin maybe coming on top is, you know, within that area, obviously in in in Southeast Asia, COVID has hit us particularly hard playing Philippines, Malaysia are kind of key examples of that. The other the other issue playing into the performance, both sequentially and year over year in the fourth quarter in that region is that we didn't we were not promotion heavy. We was an eight.

really traveling again in the third and fourth quarters of last year and you know the leadership in the markets from the events that we went at are excited and planning on really starting off the new year you know growing and that's why we're so positive on this year but just like Doug said usually in the fourth quarter it's a little slower

and we didn't have as many promotions planned by us. We were very promotional heavy the first part of the year because of COVID and we kind of wanted to bring that down to a more normalized run rate.

Okay.

Uh

When you talked about in the growth margin performance in the corridor, you mentioned an inventory valuation negative impact in the corridor. Is that kind of a one time thing in nature or do you think that will continue or just can you give a little more color on that?

Yeah, and it was both a quarter in the year. I mean I think the year just from carrying more inventory it creates some exposure some risk.

and just making those decisions. And so we dealt with that some of that risk as far as, you know, making adjustments to inventory were necessary. But we think, you know, you heard in Jim's Prepared Remarks that a lot of the instability is supply chain and how we're having to react has definitely stabilized and it both well going for it. The operations team under Walter Nose Direct.

Let's see, I guess in my model I had...

that actually you made good progress. I think the inventory was 67 million in third quarter. What was the inventory at the end of the year?

It was about flat and I would remind you that we made a small accounting change in the third quarter. We have a small piece, about 3 million that we have in long term. And so you'd probably have to layer that up, have it be comparable to past years. I think with the change in strategy during the COVID period, we've looked at that a little bit different and kind of worked with our accounts to be on the same page there. But there's about 3 million in long term.

there and so you're about flat, so you're really, the number is about that 70-71 range and you know we're peaking out about pretty close to 100 million in inventory so we think this is meaningful progress.

And the group has done a great job adapting a relatively short period of time. Okay, thank you. And then, um.

So you've talked about this affiliate program. Oh, well before I go on to that, can I just ask in terms of the outlook for 2023?

I mean, do you have any projection as to like, if the working capital line will be a positive or negative influence on cash flow?

Just because of some of the spin up and some of the timing of the payments, we definitely saw a bolster operating cash flows in the fourth quarter. You'll see that drag just as a kind of correspondence. A lot of that because a lot of the inventory came and sales really...

pretty robust at the end of the year. And so you had some time where we generated revenue, but hadn't actually paid commission. There's a little bit of a delay between when we generate the sale and pay the commission. So we have accrued liabilities there. But I think it'll be a little bit of a drag, but that really is kind of the isolated event that would cause that.

Okay. And then – Okay.

Just in terms of the outlook for 2023, I mean you're still kind of figuring in some inflationary cost pressures. Is there any way of quantifying like those pressures like in millions of dollars that you're that you're figuring in for 2023? Yeah I mean I think we've just seen overall you know

framework of our P&L. China obviously has a little bit different because they're doing all their sourcing locally and their production locally. The rest of the world we've probably seen in that 5-8% pressure on change in material costs and like I said as we get a little bit more stable.

Okay, and just along those lines, can you remind us what your what your price, excuse me, excuse me, what your pricing strategy has that has been and what you took in 2022. And then maybe what you might plan for 2023 on the pricing front. Yeah, we're still rolling out 2023. So I probably hold off now.

you know, we want to do as little as possible just in the environment. And this direction from Kevin and Jim is just really being thoughtful and we're working with the local sales leadership in each of the markets to arrive at that. But it'll be probably a clip above and we've been in that.

2% range last couple years and it'll probably be a little bit above there

Okay. Thank you. Finally, um.

You have talked about this affiliate program. Can you just talk about kind of how you're approaching that rollout and what the pace is, and is it just a matter of going country by country and rolling it out or region by region? Like kind of what's the general plan with that?

Yeah, sure. We actually rolled out the affiliate program for the Americas in November . It was considered a soft launch and then we had a full launch just a few weeks ago in January . We were going to look at that over the next few months to make a determination of where we're going to roll it out. We have plans to do it. It's mostly going to be country by country, not regions.

And it's going to be the countries that we also, we see affiliate programs and we know we're getting feedback from the field that they want a simpler way to earn with a faster way to earn. And that's how we'll approach it. And we will, you know, it'll go through 2023, some in the second half, and then into 2024. We're ready for it, but again, we want to see how it's working and then

You see if we need to make any adjustments to the program itself before we roll it out completely.

Okay, thank you. That makes sense. I guess I'll leave it there and then take the rest offline. Thank you.

Thanks, Linda. Well, now take our next question from Susan Anderson from Kenna Quart, Jane, Jr.D. Please go ahead. Hi, thanks for taking my question. Just a couple questions here, I guess. On the Americas and Europe , I'm curious just your thoughts on the Active Customer account where you see that going this year and any driver you have to.

Thank you, Susan. Just to talk about the Americas and Europe , one of the key strategies behind our affiliate launch is to attract a different demographic, meaning a younger demographic, who is navigating themselves very openly to a direct sales model.

but maybe not so much a traditional model. And so as we become more relevant in that space, we expect to support and expect to see our active customer counts increase.

in these markets. And so one of the key strategies behind the affiliate program and launching it here in the US especially is precisely that. The attraction of a different demographic that may be more open to receiving.

as Jim said, pay quicker in a simple and easy way to receive a commission in a new marketplace. And so we're optimistic as it relates to the United States. We have a very, very strong base in the U.S. and we have a very strong customer base.

that many of whom have been with us for many, many years. And so we're going to build upon that base, but also really focus on some new customers and approaching them in a new way. And so as it relates to our promotional activities, we're definitely...

as compared to Q4 especially, going to increase that. And we have later in the year an event that is specifically for the US, Canada, Mexico, and Europe event that we will hold targeted specifically at these groups, where we will again launch some...

new opportunities and again communicate with them face to face versus being virtual. And then there was one last part of the question Doug. Susan I did there was one other part of the question I can't remember.

Yeah, no, I think it was just on the active customers and the promotional activity, which was very helpful. But also, I wanted to ask about just capital allocation. Curious what your thoughts are for this year in terms of the puts and takes between share repurchases and then I think you mentioned your remarks M&A potential.

acquisitions that you guys still potentially are looking to seek out there. And then along those lines, how are you thinking about something that would be complementary to the business? Thanks.

Yeah, so let me go reverse just a little bit and just kind of put a little bit more color on your prior question that Kevin responded to. You know, one of the things we did during this last year, I think particularly in the markets that have launched.

Now with affiliate, we ran a test program during the year and the way we ran that program kind of created a pretty heavy lift in our PCs for the short period of time. And so as that program expired and stuff, you've definitely seen that reflect our customer accounts. So we're really looking to build sequentially from the base that we reported the fourth core on that region as we run these programs.

and just to kind of put a little bit of context and color there. And then as far as capo allocation, you know, it's very similar to what we've done in the past, but there is definitely a heightened focus.

on business development and looking at some inorganic opportunities. And so we'll continue to do that. I think with the two acquisitions we made last year, we're pleased, we're making progress. We have some very high hopes and expectations of these companies. And it's a good time right now to deploy some of our capital in this area and be pretty assertive there with things that make sense. You know, some of your questions, what type of...

Outstanding and so we haven't really commented on specifics there, but you know just as a note. That's what's currently authorized with the board

Great. And are you guys seeing valuations become more attractive in things that you've been looking at? The conversations and the gap between buyer and seller have definitely been more palatable than they were a year ago or two years ago. But it's still always an argument making sure that we see value in how we see the future of that organization. It's always a bit of a struggle, but it's definitely more palatable.

Can you give me a little bit of color on some of the products that are really selling well? Where do you see opportunity? For example, during the winter, are you doing exceptionally well in the immune boost products? Also what, going forward, new key growth areas are you targeting?

Yeah, I mean, when you mentioned it, right, the last couple of weeks of China, we said it before we're a little bit higher in volume and demand and then expecting and that goes back to the COVID environment where they opened up. So products that are immunity or overall health, we saw a pickup on that and we saw multiple times the normal amount. So, you know, that's backed off a little bit when we look at.

You know, it's China New Year and we're going to decide and see where it's going after that. So we're excited about it, but you know, kind of hesitant to see what it's going to do throughout the year. And then on new products, and we've talked before, you know, one of the big things that we do is we launch new products and usually around one of our big events and we've talked about them. We have two in Asia Pacific.

one in Asia Pacific, one in China, beginning of this year, and then we have another event in August for the Americas. And that's where we'd roll out more new products at that point in time. And, you know, for us, we're looking at innovation, we're looking at delivery methods, you know, and the science that's out there to make us, or help us make those decisions. And then, Ivan, real quick, you had asked about some of these other areas, and hopefully you picked up in our research.

the last year and a half to get prepared. You know, when we do this, you have to go in and register, find the right people to run the market. And we've been very successful, excited about the talent that we brought on for that market. So, you know, we'll see it. It won't have a huge impact on this year, and we'll look at a bigger impact in 24. But that creates excitement through the field. They like that.

opportunity throughout the company to move forward. And we're excited about the announcement. We're just not ready to announce it right now. And then what products are your associate sellers saying they're seeing the strongest demand for?

And also, what are they feedback from their customers that they're getting that things they're looking for? I think at least with us, it's a fairly common theme. I think, obviously, in the heightened COVID period, it's Jim Kaminon, we've seen really...

high demand for products that are designed to support immune function. We saw that as we first entered COVID and saw the spike in volume. And we think, and you've commented several times in conversations we've had that people are more engaged and interested in their health. But in general, overall health and well-being, they're exercising more. They're taking a more holistic approach to their health and supplementation is a big part of that.

And so we've seen stuff has been fairly consistent. We're always getting different feedback on new product offerings and we're trying to continue to go back and formulate that and really respond, but're definitely got ear to the pament and listen to what the sum are tellingus. Yes, another area of focus for us is the affiliate program. We talked about that. That's a new way to earn as well as to introduce products, So we're looking at products that fit that model really well.

where an influencer or an affiliate could talk about them and show them and their price in that realm to be affected with that program. So you'll see some products this year come out that are specifically designed for that affiliate program. Then one last question. I mean, sadly, if we weren't in the pandemic of COVID, we'd be focusing on the pandemic.

Looks obvious?

In that area, there seems to be a lot of demand, and that all comes together with sleep and wellness, as well as being managed by diet. The same thing, diabetes can also, diet is a key part of managing that. Can you give some thought or comment on that?

Yeah, Ivan, this is Kevin. I couldn't agree with you more on the epidemic from a diabetes perspective and other health challenges, which underscores the relevance of our company and what we're talking about and offering. We've spoken for many years about the glycemic index.

and about how maintaining a more consistent glycemic score, meaning not spiking or allowing large dips to happen in your blood sugar levels, will help in many ways with symptoms and or onset diabetes.

and other things related to that. And so as you look at many of our products and our foods related products, we do take into account and look at the glycemic index and try and maintain through our nutritional drinks as well as our foods a healthy glucose level throughout the day.

And we, our Nutramil drink is especially good for that on top of all the nutrients that it's supplying. Very, very consistent in helping us maintain a glow, a low index on the glycemic index. We do have some other.

foods type products that are in development that I think will further help.

In that category, again, holistic health is really a focus of ours. And diabetes is one of those that is at the top of the list. And then I can't emphasize and you're aware of this as well, but a couple things that are most important as it relates to diabetes are exercise.

outside of what we're putting in our mouth, exercise, and then you bring up sleep. Sleep is so critical to the health of our bodies and we have a great sleep product that we actually just a couple days ago talked about how we can enhance and reformulate and be involved in sleep. We also have a calming product.

to help people calm down in the evening so that they are in a state of rest and sleep. And then again, we're encouraging the mental side of things for people to do those things, which will help. One of the things I encourage every time I speak is the notion of meditation, and the notion of mentally being...

calm so that our bodies will be willing to accept the rest of the sleep we have at night. And so that's a fairly long answer to your question, but I think your question is so critical to the health of our country in the world that it can't be understated.

And I've made, I have a little bit more color that we've seen this in the healthy China 2030 initiative and the government's really thinking companies should be far more proactive here. And what Jim has really pushed us towards is we've made some pretty meaningful investments in our foods facility. And we're really have a good base that we can go back and build off as we introduce some of these new products and really build out that line.

I appreciate the time from my questions and wishing you and your associates a big 2023. Thanks Ivan, take care. Thank you. As a final reminder to ask a question, please signal by pressing star one. We'll pose for just a moment to allow you to signal.

Is there no further questions in the phone queue? That concludes today's Q&A session and now I'd like to hand the call back over to Andrew Masuda for any additional or quorum remarks. Remarks over to you, sir.

Thank you everyone 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 9547210. Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect.