Q1 2023 USANA Health Sciences Inc. Earnings Call
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Good day and welcome to todays you sign of Health Science first quarter earnings call. These meeting is being recorded at this time I'd like to hand, the call over to Andrew but Sundar. Please go ahead Sir.
Thank you and good morning, everyone. 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 Nissan of 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 of these state.
<unk> include those regarding our strategies and outlook for fiscal year 2023, as well as uncertainty related to the economic and operating environment around the world.
Our 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 am 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 first quarter results and posted our management commentary document to 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 we're.
We're pleased to report solid first quarter results, which were modestly ahead of our expectations.
The team did an excellent job of executing market specific initiatives, which included various in person events promotions and the launch of our new affiliate program in certain markets.
As a result, we continue to see stabilization and active customer counts and sequential quarter net sales growth. Accordingly, we have raised the lower end of our net sales and earnings per share guidance for the full year.
The global operating environment for our business remains dynamic as ongoing inflationary pressures worldwide continue to meaningfully impact the purchasing decisions of our customers. Despite these challenges demand for health and wellness products continues to proliferate and we remain well positioned to execute our growth strategy.
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As we mentioned in our previous call we saw a meaningful increase in demand for our health products in China during the fourth quarter following the government's shift in Covid policy.
This demand carried over to the first few weeks of the first quarter and that added approximately $12 million to net sales.
Note that this is temporary a temporary lift in net sales and had a comparable lift in our active customer counts as well.
Towards the end of the first quarter, we announced annual price increases in many of our markets and customer purchasing increased by an estimated $13 million ahead of these increases.
While we have historically seen a trend of increased purchasing ahead of price increases the amount was higher than anticipated.
Separate from these events our business continued to show signs of further stabilization in the first quarter.
As we discussed with you in February we are making a strategic effort to return to live meetings around the world where possible and are off to a great start we held several meetings and events in the first quarter and following the end of the quarter, we held our China National sales meeting in Macau.
This is our first large scale event in this region and three years and we are pleased to host nearly 10000 associates in attendance.
The associate engagement the associate engagement, we have seen and the feedback that we've received from these meetings and events has been excellent gathering and collaborating in person is critical to our business as it generates excitement momentum and renewed trust with our sales force.
We have events planned for each of our regions throughout the remainder of the year and we remain optimistic that these will generate future growth.
Notably we continue to make progress on preparing to open a new market. Later this year, we plan to announce this new market at our Asia Pacific Convention in South Korea next week, although this market will not open until later this year, we are optimistic about the long term growth opportunities it will present an.
Most importantly, the opportunity it brings to introduce Usama is world class health products to a new country culture and demographic.
While we can't discuss the specifics of this market today, we look forward to making this announcement live in South Korea next week stay tuned and watch for a press release with this announcement.
Before turning the call over to you <unk>, Jim President, Jim Brown, I'd like to comment on our plans for succession in the CEO role in early February we announced my plans to transition to the role of executive Chairman effective July one with this transition Jim will be named CEO of the company.
I speak for myself and the entire board when I say that you saw and I have full confidence in Jim and his leadership and ability to curate active customers and.
It has been my great privilege to be part of you saw for over 30 years and has served as CEO for the last eight years and chairman of the board since 2020.
It's been extremely satisfying to play a part in advancing <unk> position as one of the foremost leaders in health and wellness I look forward to continually to be deeply involved and usama strategy and mission in this new role I want to express that I am not retiring I'm just shifting.
<unk> roles.
I also want to express my sincere appreciation for and confidence in Jim as you sign as CEO as well as you saw his extraordinary management team employees and associates with that I'll turn the time over to Jim you saw it in the future CEO .
Thank you Kevin I too want to thank Kevin for his devotion to Usama and for his Mentorship I look forward to working alongside him in his new role as executive Chairman and I'm appreciative of his continued guidance and involvement in our overall strategy and mission.
Turning back to the quarter generating customer engagement and growth is our top priority in 2023, and we're off to a solid start as we saw stabilization and sequential growth in both active customers and net sales during the first quarter.
In the second quarter, we plan to focus on more localized and smaller scale promotions as compared to the single large promotion held in the last several over the last several years.
As such year over year comparisons in the first half of 2023 will be a challenge. We believe however that these smaller more focused promotions coupled with a return to live events will generate growth for the company in the long term the.
The management team is looking forward to re engaging with our associates and customers on a personal level and have already have a full calendar of events scheduled throughout this year.
As Kevin previously mentioned global inflationary pressures continue to impact the size of operations historically, we've been fairly modest with our annual price adjustments to the magnitude of 1% to 2%. This.
This year. However, we are implementing a slightly higher price adjustments to help manage the elevated materials and supply chain cost we are facing.
These price adjustments were implemented across most markets near the end of the first quarter and will be implemented across all of the remaining markets in the second quarter.
We believe these adjustments are necessary to mitigate our increased cost structure and the current operating environment.
Inventory management remains a focal point for <unk> and our inventories ended the first quarter at $68 million, which is $2 million down from the fourth quarter and down $29 million year over year.
We continue to work with key material suppliers to mitigate our overall risk profile and optimize costs.
Additionally, we will continue to align our inventory levels with the current and expected sales performance, while focusing on delivering the best possible customer experience in a cost effective manner.
In closing we are pleased with our first quarter results and we remain confident that these that the successful execution of our strategies will deliver sustainable long term growth.
With that I'll now ask the operator to please open the lines for questions.
Thank you that is in gentlemen, if you wish to ask a question at this time. Please signal by pressing star one on your telephone keypad. Please make sure. They meet function on your phone is switched off that obviously signal too rich of equipment again. Please press star one to ask a question.
So the first question comes from Linda <unk> from D. A Davidson. Please go ahead.
Yes Hello.
So I was just.
I'm curious just on the cost side.
<unk> talked about that a little bit you did mention that gross margin had some benefit from year over year transportation costs decline. So I was curious if you could give a little more detail on that.
Yeah.
Do you kind of foresee in the next quarter or two the other costs will start to be down year over year or is that still quite a ways away that other costs will also be down year over year. Thank you.
Yes, Linda Thanks for your question this is Doug.
The primary decline in transportation costs were just the absence, primarily of air shipping stuff that we had to really be creative during some of the high pressure and just disruption in kind of the service of the of the supply chain and that's the primary thing we have seen cost stabilize there and just basic ocean cargo, which is kind of the preferred way to ship stuff in.
And plan ahead of time, but the primary pickup is not air shipping as much stuff as we had in the past.
And as it relates to other cost as it relates to other costs.
The raw materials out of our U S plant and the sourcing there were probably up.
7% to 9% and raw material costs, we've definitely seen that stabilize and not continue to get worse, the procurement team and the operations team led by Walter have done a great job kind of mitigating that branching out to additional suppliers to help as Jim indicated really kind of manage our risk there and so we hope to see some progress right now, we're just not getting as long term commitment.
Some of these players and prices what we've seen historically Jim Yes. This is Jim another area, we talked about with inventory and Thats down.
Pretty substantially from last year's quarter and a lot of that is just with Doug talked about the stabilization of the shipping lanes and we can count on shipping at this point in time, So we're able to reduce our work in process.
Over the next few months and it's real.
Because of that <unk>.
Improvement in the shipping lanes.
We have Walter note in here as well maybe as a few comments on yes.
The other thing that's going to drive Cogs up and I think we'll still continue to drive it up a little bit as labor costs, because we manufacture our own products.
So that's always going to be an issue and then as far as inventories I think we've driven inventory is pretty low at this point, we're going to start driving it up so you will see inventories going up between 2% and $5 million by end of the year I am sure from where it's at.
And part of that's related to the new market and part of it is really to emphasize what Jim talked about what the customer experience we don't want.
Our policy in holding inventory to go back and disrupt the customer experience, we tried to do more products or land based for sourcing for raw materials and packaging things like that but there is still a transition we're making on that.
Okay. Thank you and.
So with regard to the.
The price increases that you mentioned.
I mean, there was quite a bit of pre buying it seems like ahead of those anticipated price increases so.
I'm surprised to hear that there is still more to come in the second quarter on the price increases in which case, we'll second quarter benefit as well from pre buying or it was just all that pre buying like a first quarter phenomenon.
We think the vast majority has happened with the market that have touch we saw the main influence in China, and Korea, and Malaysia. Some of the other markets will rollout on the in the second quarter are smaller in nature, and we wouldn't anticipate the same level of pick up there when we typically see a little bit of this behavior.
And so it is not atypical to see it I think it was there was a little larger than we anticipated and definitely a little bit additive to the quarter as a result of that.
Okay.
And then.
I just wanted to ask about.
<unk>.
Well, so just back on the pricing sorry.
Sorry, if you said this but did you say that the quantification of the price increases this year.
Yes.
Yes.
Yes, we did but just under 4% on a weighted average basis globally.
Okay.
Okay.
And then.
I was curious about China because despite.
Despite the pre buying phenomenon.
<unk>.
The I guess stocking up people on the immunity type products I guess, that's what you're explaining right.
I was surprised that it didnt meet our expectation even with that boost in buying those products. So.
I'm kind of thinking that China is still not coming around or maybe you could just give some more color on how you feel that market is progressing now that its reopening.
Yes, let me give you some high level for metrics, we have Brent <unk>, who oversees the market in here and he'll do a far better job kind of articulating kind of what he sees in markets and he has been over there a few times this year already.
You got to make sure when Youre comparable period. So the fourth quarter also had that boost from the last two weeks of those immunity products and the comparable year, we started running a.
These large promotions we've done in each of 19, 2020 one.
Or excuse me 2021, and 'twenty, two and that comp made it a little bit difficult on a year over year basis, as well and so those two things factored in I think I think what we're hearing is very positive maybe Brent kind of what youre seeing in the market sure. Thanks, Doug Hi, Linda.
I think that the comparable issue what Doug touched on that was the biggest impact in my opinion to the first quarter for China.
But I was just over there I've been there in February and as well in back in April for our convention.
And there are a lot of positive signs coming from the market, we haven't been able to meet back in person for three years, and we were finally able to do that with nearly 10000.
People at our event in Macau, there was a lot of optimism. There people are very excited to be back together and re engaged so I'm very optimistic for what the future holds and I.
I think this momentum that will create out of this event should bode well for us for the back half of the year.
Sure.
Okay.
And.
Just.
Well since you mentioned the comparisons on topline growth.
Yes.
When you look at the or.
Or like the constant currency revenue growth in 2022.
To be honest with you the comparisons in the third and fourth quarter.
A lot easier than than the comparisons in the first and second quarter.
I guess I'm still trying to understand from a comparison perspective, why why is that such a benefit in the second half I'm not understanding that.
Yes, it was really to do with that large promotion that we ran into last three years was the tail end of the first quarter and a good portion in the second quarter.
And so I think it does get a little bit easier and you are right.
Still adjusting and we're really similar to what we've talked about in the past we're building from the base we're out in the fourth quarter and we're confident in that sequential progress we spoken about and Thats really kind of the primary metric. We are building from now and that's how the sales team is functioning how they are building it and you can't go back and reverse the cost we're really building from that level in Q4.
Forward.
So would you say that in second half 'twenty three the promotional activity will be more than in the second half of 2022 is that a fair statement.
No because the bulk of the 1% and 22 was really tail end of the first quarter in the second quarter I think what we're doing this year is repurposing some of that effort to be more at the local and regional level and were still formulating plans from some of the stuff that's happening right now and seeing how this goes and how theyre going to go back and pivot in the back half of the year. So youll.
Still have some activity, where we're still a sales organization, we want to go back to support our associates and our field leaders and we'll still be active there, but we just want to do things that we think as sustainable growth in both revenue and customer counts and not do anything as a short term blips.
Okay.
And then I'm sort of curious about the acquisitions that you did several months ago and the plans for those are you just kind of going to let them run. The way. They are are you going to introduce those products and offerings into the <unk>.
Broader salesforce or what are the plans for those acquisitions.
Our strategy for acquisition is to keep the companies.
Separate and let them run their businesses when we acquire a company we look for good management, which we've.
With both companies we've acquired so far we've got that.
And they're operating really well, we do have synergies, where we work together as an example, with rise bar, we now manufacture all of their bars here at you saw instead of them doing it themselves.
We feel like that's a great cost savings for them and it gives us a lot more ability to ramp things up very quickly because as an example, we've been selling through Costco they've had big orders and we can fulfill those out of our facilities here in salt Lake but.
But there is still running that business and where they're advising them and helping them at the same thing with ila.
A company that has really great management, we trust those people.
And we're really helping them buy.
Developing products for them. So at <unk>, we've actually formulated developed products, we're helping them manufacture products. So there are synergies between both companies.
But our our strategy with with M&A is to acquire companies that have products have expertise have management.
And we will keep doing that.
Just to comment this is Kevin on that.
So.
Diversification is a huge part of our long term strategy here.
Even though some of these acquisitions are these acquisitions are small in comparison to you saw as a company there are great.
Place for us to gain core competencies and diversify our competency level, while leveraging our manufacturing.
And expertise that we have here as a company.
Also looking for areas, where we could integrate.
Some of those learnings and or some of their core competencies.
To that you saw in a world in which would help gross sales and active customer accounts here out you saw them as they continue to run their own like Walter said, but.
There is also we're looking for areas, where we can have some sort of.
Growth in these but also we don't want we're not losing sight on usama and growing the core business.
And these companies really really are.
Additionally, positive to what we're trying to accomplish and growing our active customer accounts.
Okay that sounds good.
And then.
In terms of your new market launch that you'll be announcing I guess pretty soon in may.
Are there particular expenses that will show up maybe in SG&A related to that launch later in the year.
Yes, I mean, we've been incurring those for some time now and it will start ramping up as we get closer to market opening and then you'll obviously see some sales to help buffer that a little bit, but yes, it will be a year of expense.
Investing for that market, which is which is very important to the success of Jim maybe anything else. There, yes, we've done a really good job of finding great individuals for that management team and just like Doug said you have to start early to build up and be ready for the market to launch in the third or fourth quarter. So I'm excited about it it's going to be a great launch and we actually.
We have David <unk> here, who is our.
Chief sales officer, overseeing our new market launch.
Obviously, we can't say too much but you've been in and out working with people and working hard.
Couple of just a comment on the new market since you brought it up yes, good morning Linda.
Yes, I think following on Jim's comment we've got a.
We've got the best.
His leadership team that we've been developing over recent months.
Ready to go with.
Keith what I said.
The office is being established and we've got a good product grouping all of the all of the pieces are in place and of course, when we launch.
Next week, we expect.
The positive response from not just from our existing leadership group.
From around distributors around the world.
And is this new markets something that could add a couple percentage points to growth in 2024 is that the scale of it.
Yes, I think we're hopeful that the market can be something that.
Registers on the radar that helped kind of boost growth youll, probably see not a whole lot. This year as we kind of get acclimated and kind of build from that base. When we give more color as we kind of proceed down the year. After we open the market.
Okay.
And then finally.
I guess what are you seeing in.
The U S markets I guess.
If I'm recalling it was still kind of a decline year over year.
How do you think the market is we will adapt to the price increases in the U S.
Well on any of these price increases we are working with the sales team and the sales teams were making the ultimate call Theres still some just commercial responsibility there they have to take but theyre, making the call they're gauging kind of the appetite of their customers were being pretty thoughtful and we've we definitely trailed kind of our cost increases with what we've done.
And Thats something I think we've done intentionally we've taken a little bit of a.
Overall operating margin hit as a result of that I still think it's the right strategy as we kind of step into it.
David and his team have been working on several initiatives, which would include the affiliate launch in some of his markets ill, let David comment on that yes, Linda So the affiliates being got running just on 12 weeks in soft launch and so it's early days, but the indications.
Really positive response to it in terms of.
To simply it's a simple simple way for us to acquire and simple way to sell.
It's really a new channel opportunity for us and.
So.
In the U S, Canada, and Mexico, and we have.
<unk> got some other markets that we're looking at towards sometime next year, but wanted to get it right, particularly in the U S. We're seeing a lot of traction with it.
Yes.
Very positive response to date.
Yeah.
Okay.
Finally.
Your cash flow free cash flow I mean, I'm projecting it will be positive in 2023, and you do still have a lot of cash on your balance sheet I'm, just surprised that you're not engaging in share repurchase even though you would like to make acquisitions can you comment on that.
Yes, what I can tell you is this something we take up at the board meetings, each and every quarter and kind of all kind of restate kind of our priorities on on kind of use of cash first and foremost is investing for continued organic growth in our direct selling business.
Where we see these opportunities and we've been looking at far more opportunities than we really have in the company's history about different.
Development, primarily through M&A and what that can go back and bring two core competencies and potential synergies down the road and when those things are done and there is excess cash we will look to go back and address some of that excess through what we've done historically is primarily that share repurchase program, we have about $83 million outstanding and it is.
The discussion point every quarter and the board, it's top of mind on our on our our capital allocation efforts.
Okay. Thank you that's all for me.
Thank you Linda.
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I'd like to hand, the call back over to Andrew for any additional or closing remarks over to you Andrew.
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