Q2 2023USANA Health Sciences Inc Earnings Call
Okay.
[music].
Mhm.
[music].
That's all.
Yeah.
Please standby we're about to begin.
Good day, everyone and welcome to you saw that Health Sciences second quarter earnings call. Today's call is being recorded and now at this time I'd like to turn the call over to Andrew Masuda. Please go ahead.
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 you saw on the dot com shortly.
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.
These statements 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 in <unk>.
<unk> data contained in our most recent filings with the SEC.
I'm joined by our President and CEO , Jim Brown, our Chief Financial Officer, Doug Hacking, our executive Chairman, Kevin guest 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 Jim before opening the call for questions.
Thank you Andrew and good morning, everyone. We appreciate you joining us we're pleased to report second quarter operating results that were better than our expectations. During the quarter. We saw further stabilization of our active customer accounts stronger than anticipated net sales in mainland China and continued progress on several of our long term.
<unk> initiatives as.
As we mentioned in our first quarter call first quarter net sales included approximately $12 million related to purchasing in mainland China for our immunity products. Following the lifting of COVID-19 restrictions and approximately $13 million related to buy up ahead of announced price increases in several markets.
Both of these first quarter events created a tough sequential quarter comparison for the second quarter. We also had a challenging year over year comparison due to a large global promotion in the second quarter of 2022, which did not reoccur in 2023.
Given the challenging comparable periods, we were pleased with the performance of the business during the quarter.
Before opening the call up for questions I'd like to spend a few minutes reviewing some of the progress we made during the quarter.
If you recall at the beginning of the year, we made the strategic decision to move away from the large global incentives that we offered throughout different quarters in each of the previous three years.
While these promotions resulted in a strong sales activity during the quarter in which the promotion was offered we realized that it was difficult to retain these customers at desired levels in subsequent periods and it ultimately create variability and fatigue with many of our leaders.
Our 2023 strategic excuse me strategy entails offering smaller market specific incentives at various times throughout the year to generate sustainable sales and active customer growth.
As I commented a few minutes ago. This change in approach has created difficult year over year comparisons in the first half of 2023.
Although we remain in a fluid operating environment that is being influenced by inflationary pressures. We are generally pleased with our net sales in active customer count and recognize that there is far more work to do to generate growth.
Moving on our team in China did an excellent job of executing the strategy in this key market during the second quarter local currency sales in the market grew 10% sequentially and exceeded our expectations driven by strong demand from our small market specific promotion offered during the quarter.
We are pleased with our performance in this market, particularly given the macro economic environment.
The country continues to reopen allowing us to hold more in person meetings and reengage with our customers and our single largest market. We are however, continuing to see an impact on consumer spending from a broader inflationary pressures, which are affecting customer purchasing decisions. Nevertheless, our team remains optimistic that will continue.
To see improvements in the market as China continues to operate more freely and we will execute our strategies in this market that's still presents an enormous opportunity for growth.
In May we announced our plan to expand into India and officially launch operations in late 2023. This new market expansion is several years in the making and wouldn't be possible without the diligent work and effort that our team has spent preparing for the launch.
India is an exciting and compelling market opportunity and we believe that our world class health and wellness products and our business model are ideally suited for this market that said I have the utmost confidence in our local leadership team and would like to stress that our approach to expanding and growing this market will be intentional and will focus on long term sustained.
<unk> growth, we anticipate anticipate sales contribution to be modest on the onset and look forward to providing future updates on this market once we officially launch operations.
In closing our year to date performance and our current visibility into the remainder of the year is allowing us to raise the low end of our fiscal 2023 guidance range. We remain confident in our abilities to execute our strategies, which we believe will position you sign and deliver sustainable long term growth.
With that I'll now ask April our operator to please open the lines for questions.
Thank you if you would like to ask a question simply press the Starkey followed by the digit one on your telephone keypad also if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. Once again press star one at this time, we will pause for just a moment.
And we'll first hear from Linda Bolton Weiser of D. A Davidson.
Okay.
Yes, Hello, Hi.
So I had Joe.
Asked a question about.
The North Asia region.
I guess Korea.
It looks like to me that the.
The performance got sort of worse.
<unk>, but then again I know, there's some noise because of the pull forward of things in the first quarter.
Do you view that and can you just maybe talk about Korea, and how that market is doing is getting sort of better or worse in Europe Union.
Yes.
Linda This is Doug I'll comment and I'll, let Jim jump in and add any comments on top of it. So I think some of the sequential progress or a sequential headwind that you saw with Korea was primarily related to the run up in due to the price increase and kind of buy in advance of that but three has been an incredibly strong market for us for the last number of <unk>.
Years, and we have seen that flattening out a little bit.
The team is working hard they are engaged they are really working on customer engagement, but we have seen that market flattening out a little bit relative to what we've seen as far as year over year growth.
Jim anything to add on top of that yes, just to add we had our Asia Pacific Convention and it wasn't in Korea during the quarter, even though we have seen like Doug talked about a little flattening out where we see excitement in the field. We had the biggest group was the Korean group in that with thousands of people.
And then you just had excitement and commitment from the from that group of associates.
Okay.
And.
The gross margin in the quarter it was <unk>.
Italy.
Very good indeed, our expectation and it showed some good improvement in both I think it was both sequentially and year over year, if im remembering.
Do you envision that level kind of carrying forward and is it the pricing will help so much but what kind of debt level that we saw in the second quarter, how does that pan out kind of going going forward.
As we talked about we have some kind of unique nuances in the first half of the year to just make sure. We put things in context, one is what Jim talked about in his opening remarks in the first quarter in the second quarter as we mentioned in some of our publicly provided material we had a promotion in China that.
That we are expecting maybe to generate.
$10 million from during the period, and we probably were upwards of $15 million to $16 million of incremental sales generated from that promotion in China, and you see a little bit of lift even from our internal expectations, because it outperformed a little bit it.
It's been on the calendar, but some of those things in China.
Britain IDEXX, who oversees the market has a lot of incredible strategies and efforts going on to build really long term sustainable growth in the market, but we don't have the same cadence promotional activity or one off events in the back half of the year and so thats, just a little bit of context and gives a little bit of color on what we provided.
So youre, saying that the gross margin was helped by that incremental revenue and that is that high gross margin revenue.
No I think we see a little bit of a switch when we have a greater proportion of the revenue coming from China and kind of the mix of the line items in their income statement.
Typically have a modestly better gross margin.
Little bit higher incentive rate overall, the margins were strong, but it's a little bit.
Different structure in China, and what we see in other markets.
So I'm not sure I am understanding.
China promotion that was better than it occurred in the second quarter almost high gross margin business. So that helps the gross margin is that what you're trying to say.
Yes, that's what I'm, saying.
Oh, Okay. So that may be going forward, we should be a little more.
A little lower in our expectation may be for gross margin. Yes, Yes, I think you saw something is probably a little bit better than what wed expect in the back half of the year and I think just mixed by market as the primary catalyst there.
Okay I gotcha.
And then.
<unk>.
I was just examining your cash flow a little bit.
You'll see your operating cash flow I mean, it was down year over year HP, Inc.
Your line in the cash flow statement called other liabilities or something like that.
The culprit in affecting your cash flow is what it is that line item and is that something we should be concerned about or what why is that such a negative element of the cash flow statement.
Yeah, I mean typically in the front half of the year when youre looking at that kind of six months stub and doing the other stuff you see a lot of stuff that had been accrued throughout two.
22, they get settled up in 'twenty. Three for example, some employee bonuses some different tax payments that would be in that other liability. Some of those types of things that you typically get flushed out and when you look year on year, just kind of depends on how those things influenced it but.
Obviously, the operating margin has been a little bit softer than what we've seen historically, just because a little bit of top line pressure, but.
I think we're committed to continue investing and so we're still generating robust cash flow and solid cash flow, but I think comparison is going to somewhat mirror over some reasonable period of time, our operating margins as well.
Okay.
And then just one more question on the.
Cash flow.
You have a lot of cash on your balance sheet.
Can you kind of paused share repurchase is that payoffs kind of stranded overseas and do you need to repatriate. Thank you I'm. Just wondering why you feel like you can access that cash on your balance sheet to do share repurchases is it inaccessible for some reason.
Theres, obviously at some point in time, because we're running international business not all of that's readily available here, but we can always go back and draw on our credit facilities. If we wanted to so that that really isn't kind of prudent in the short term I think every quarter, we visit with the board and we talk about capital allocation, what some of the different purposes are we're considering.
And kind of just where we're at kind of the priorities of the business and that's the primary factor in that we've as we've talked about we've looked at more kind of outside business opportunity is probably at a greater level than we ever had in the company's history.
And as we get into some discussions going those are things that we have in mind as we look at it. In addition to other priorities, we have as a company but.
No I think the way, it's managed theres, a little bit of a timing issue with some of the markets, but no that doesn't handle this and we really haven't given too much clarity exactly what we're going to do on the share repurchase.
Mhm.
And then switching back to.
To China, I mean, your comments sounded pretty positive and you pointed out the sequential improvement there.
Okay.
I know you don't want to get into specific guidance, but I'm thinking that maybe China in local currency revenue could be flat or up in the third quarter for you flat or up year over year.
Am I thinking correctly Youre, my weight kind of off on that.
Yes, we've been thinking more sequentially in how we've talked about at year on year I'm trying to go back and process in my mind, a little bit Linda we obviously had the promotion we just talked about in the second quarter.
And we're not going to comp sequentially.
In a favorable manner not because we're not running something similar in the third quarter.
Year on year I'll go back and look I don't have that right in front of me now but.
I am confident as we hear Brent and leadership team in China, and some of the conversations <unk> had in some of the traction I think they're getting a lot of these things, but some of these things are more structural and long term oriented that we think are going to be very additive. It's just not going to have the effect as you would with a very short term promotion.
Do you find that the China customers are oriented toward annuity and health and wellness because of the COVID-19 aftermath.
Yes, Brent Brent in the room here, maybe I'll, let him. He is he's probably definitely more inside of China consumer or an idea hi, Linda.
We saw very strong buy up of our immune products in the fourth quarter and in the first quarter of this year when the zero Covid policy lifted.
And after that we started to see more of a tapering of sales from those products. So I think it's kind of returning back to a normal level of what we would expect to see.
But long term absolutely the Chinese consumer is very health conscious health focus and immune focus so I think that those products will continue to be strong sellers for us into the future.
Okay.
Yes.
Let me just if I could please just ask one other question on the SG&A expense. It was a little higher than we expected in the quarter I guess, it was something like $68 million or so if I'm remembering.
Is that because of the conventions and meetings that you had and kind of going forward is that the amount I should think about or is it maybe going to tick down a little bit in the third and fourth quarter on a quarterly basis.
Yes, you are correct Linda I mean, that's something just because of the whole environments around covered we haven't had a great deal of those in person engagements is definitely a priority from the sales structure. So we've we had a good chunk of change in SG&A expense and that was the primary that was the driver of having modest increases in SG&A year on year and.
And right now even though we have some plans in the third quarter for example, in our Americas and Europe , it's not the same magnitude of dollars.
You would've seen there so you probably should not see it at that absolute rate.
And then circling back around real quick one I look at year over year, I think we would see some progress year on year with China that that'd be the expectation even after kind of taken out.
Kind of the sequential change was not having the same promotion.
Okay.
Oh, Okay I guess, that's all from me. Thank you so much I appreciate it thanks Linda.
Next we'll hear from Anthony Liberty, James <unk> of Sidoti.
Good morning, and thank you for taking the questions. So.
Nice to see a sequential sales improvement in China.
No that was driven partly because of a local market promotion there.
Just wondering if you could comment on anything as far as you can share with us as far as how your trends.
Then so far in July .
Yes, I mean, I think it's the same thing as you come out promotions I think we are still with kind of the activity. We've had trying to see kind of what that level set area is that's in kind of an unintended or not having a sales event or something right surrounding it.
So I think we're seeing it.
Absent the promotion click and a good cadence I think.
We're pleased with it I think we obviously want to do better and its something were pushing towards but.
As Jim talked about in his comments I think we've seen more of a stabilized customer base and really what we need to do to get that inflection point and start getting that momentum and that tracks start building going forward and Thats, obviously, the intent of our long term strategies and some of the things we augment on a short term basis as well but.
Like I said I think we're generally pleased but we understand we have work to do as well.
Understood and then your management commentary you talked about new incentive opportunities for your sales force. So are you referring to your affiliate program.
In North America or is that something else, maybe you could just expand on that please.
Yes, that's primarily the reference but we're looking in several markets and I think it would be good for maybe Jim to comment on this from a strategic standpoint.
Things that we think are going to really be relevant and be additive to what we're doing and engage the customer base at a higher level.
Yes, I mean, when you look at.
A couple of comments right. We talked through SG&A was just mentioned few minutes ago, but one of the things that we did in the first and second quarter at a much higher rate was travel and go to and have in person meetings, the big conventions as well as smaller meetings within each of the countries out there to reconnect with the field.
And then youre going to see like we talked about the affiliate program as a new way to make money.
North America, and we're going to look at those opportunities to expand that in 2024 to the markets that are interested in it.
We're open to making.
Tweaks to our business model by market.
And we talked about it as well, but we're not going to have the large promotions like we did last year, but we do have a lot our plan specific local market promotions throughout the second half of the year.
Understood. Okay. Thank you for that and then you also talked about expanded digital commerce capabilities.
So if.
If you could maybe just also share with us maybe some examples of what's your plan to do and which markets do you think have the most opportunity.
Benefits from that initiative.
Yes.
Talk about our digital footprint, what we're mainly trying to do is make our business easier for our associates affiliates and just anyone who wants to order products in consumer products and there are some hotspots, where they're working a lot in China you got to week chat platform that basically is how commerce is done in China. So we're working to make.
Sure that we stay relevant in that market, we're pushing stuff out in the Americas.
A lot of it has to do with the affiliate program to make sure that the digital assets are enough to have that be successful and then we look at it from market to market some of our bigger markets are.
<unk> always wanting some digital platform or something new and we have to as a company sit back and see which ones will make an impact but that mobile first.
For our it systems is kind of where we're at throughout our 25 markets.
I would say also Anthony as we've talked about a lot of the shareable content that makes it easier for our sales force to do stuff really across the board and engage the customers and that's really the main catalyst here is finding ways to interact with it.
It enhanced and more relevant kind of level to go back and kind of get more and more traction going forward and I think feedback. We've had has been positive because you've got to get more users of some of that technology and there is definitely more work to be done on the horizon.
Got it Okay and then.
So given the timing of when Youre entering India later this year.
So you do have some upfront costs. There have you guys talked about how much of a drag you think this will be on the EPS this year.
Yes from an operating margin standpoint, you're probably in that two $5 million to $3 million range is kind of what we're expecting as far as kind of a net.
Net expense just from from what's happening in that the opening or not opening and timing of that really doesn't factor in there. It was really trying to go back and get the best talent, we can get everything done in appropriate way and there's just there's a kind of a period expense aspect to that that we think is a worthwhile investment.
Yes, we started we started hiring the management team almost this time last year, but.
In the second half of the year, we really did so we're just going to have some of those costs in the year that we won't see revenue coming around until again later and later.
Later in 2023.
Got it okay.
Lastly, it was just a follow up on Linda's question about the cash position is obviously, a very strong balance sheet that you guys have maybe if you could just rank if you could just kind of go over your priorities for your capital allocation between.
The different usage of that cash in.
I know you talked about acquisition opportunities maybe if you can also touch on as far as what you are looking for to do as far as acquisitions. If you could share any details about your strategy that'd be very helpful.
Yeah, I'll give you the kind of the high level way that we go back and approach and Walter who heads up our business development things in the room I'll, let him maybe talk a little bit of some of the aspects, but first priority is really investing in things that are going to stimulate and grow the organic business.
As we go back and have things that we think we're going to get traction and build either short term or long term. Those are some areas of investment that we think we have and then also second would really be looking at things that arent.
Finally, our business some of these inorganic type of opportunities that Walter will touch on a little bit and then following that when we don't have some immediate use in evaluating the environment. What we've done historically is really seek to go back and return that value through a share repurchase program.
And.
Those are kind of big picture the levels, we have we're debt free so debt repayment really isn't on that the capital allocation, but that's high level and then maybe I'll have Walter give a little bit of color on the biz Dev and some of the focal areas yes.
We invested if you look at last year, we invested in a company called built bar or I'm sorry.
<unk> Bar is an example and rises.
A small company, we let them run independently.
We have really good synergies because we can we can make their products. So we were making their products, which reduces their cogs.
But we're letting them run independent and we're looking at brands that have different sales channels. So if they sell DTC Amazon they sell retail those are great opportunities for us and so we are.
The market looking for businesses looking for companies that we think have a good return.
And.
I think the opportunities are out there we've got a lot on the table right now.
And I think the sweet spot is typically accompanies a little bit smaller size, where we think we can go back and provide a great service or vice versa, and really kind of building. Some core competencies that maybe arent currently in our sweet spot seems to be a.
A pretty big area of focus for us.
Understood Okay, well, thank you and best of luck going forward.
Thanks Anthony.
Our next question comes from Susan Anderson of Canaccord Genuity.
Hi, Thanks for taking my question.
Just really quick I think you mentioned that.
You saw consumer spending starting to feel a little bit pinched, because inflation I guess, when you're talking specifically in the U S or was that globally.
Yes, I think across the board, we took a little even though it wasn't dramatic relative to what we see in the marketplace. We definitely took a little bit more step for this year, a little bit higher price adjustment then.
And then what we've seen we've definitely been soft hand in that last couple of years and being very mindful of the impact on consumers out there was kind of these different pressures on them.
And I don't know of a company out there that adjust prices that are received with with open arms. So we're navigating that we've been very open the communication, but.
I think consumers in many markets are starting to feel the pinch a little bit.
Okay, Great and then I guess, maybe I just wanted to ask about India I know it's early.
You're still kind of putting together plans, there, but I don't know if theres any.
Thanks.
John into other markets.
How quickly sales ramp up or how you expect it to perform relative to those other markets.
Yes, I mean, our expectation is not going to have a we have we haven't in our comments, it's not going to have a big impact on revenue for 2023, and we're more excited about what will happen in 2024, we've seen as a company we announces at our AP convention in the second quarter, we saw excitement from the field, we had meetings to talk about India and hundreds of people showed up.
So to start the market, we would love some outside leadership to come in and help.
<unk> as well as leaders within the market too.
Get it get it going but again 23 impact will be minimal in 'twenty four from my expectations.
It's a huge opportunity like China is as an opportunity, but we expect it just to modestly contribute next year.
Okay, Great and then I guess, just lastly on potential acquisition.
You talked about you've been looking at a number of different distribution channels and brands I guess I'm curious is there a particular segment that youre more focused on such as wellness over beauty and then I'm also curious kind of what type of valuations you're seeing out there lately if anything has come down.
So, yes, I would say definitely wellness over beauty beauty, we've seen some of the companies that we've been somewhat interested in but mostly it's in well as sports nutrition hydration products like that a lot of times products that don't really overlap as much. So there are probably a little bit different and segment and the way they are.
When you look at valuations were looking anywhere.
They are going down you know that so it's been favorable for us.
From six to 12 axon EBITDA, depending on the size of the company and the performance of the company and then you just never know where they're at and how they're doing but sometimes people have really high expectations kind of based on what they've seen last year and we've had to either minimize those expectations are just stopped talking to him because.
People are I think theres still kind of us thought that appetite of what happen in 'twenty, one and maybe even in 'twenty two.
Okay.
Yeah, Okay, great. Thanks, so much for all the details good luck the rest of the year.
Susan.
As a reminder, its star one if you would like to ask a question or make a comment we will pause for a moment.
Yeah.
Again, its star one to ask a question or make a comment.
And it appears there are no further questions at this time I will turn the call back over to our presenters for any additional or closing comments.
Thanks April and 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, 954, seven to one zero.
That does conclude today's call. Thank you all for your participation you may now disconnect.