Q3 2024 USANA Health Sciences Inc Earnings Call
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Good day and welcome to todays you sign a health Sciences third quarter earnings conference call throughout today's recorded presentation. All participants will be in a listen only mode. Later, we will conduct a question and answer session. You made were just a few questions at any time by pressing star one on your telephone keypad.
Speaker Change: Now I'd like to hand, the call over to Andrew Masuda. Please go ahead Sir.
Andrew Masuda: Thank you Sergey and good morning, everyone. We appreciate you joining us to review our third quarter 2024 results. Today's conference call is being broadcast live via webcast and can be accessed directly from our website at IR Dot Usama dotcom.
Andrew Masuda: Shortly following the call a replay will be available on our website.
Andrew Masuda: 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 rigs.
Andrew Masuda: Our strategies and outlook for fiscal year, 2024, as well as uncertainty related to the economic and operating environment around the world.
Andrew Masuda: 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.
Speaker Change: I'm joined by our President and CEO, Jim Brown, our Chief Financial Officer, Doug Hacking, our Chief commercial officer, Brett <unk> as well as the other executives yesterday after the market close we announced our third quarter results and posted our management commentary document on the company's website, we'll now hear brief remarks from Jim before.
Speaker Change: Opening the call for questions.
Jim Brown: Thank you Andrew and good morning, everyone third quarter net sales fell modestly short of our internal expectations as the operating environment in many of our key markets remained challenging, notably our China market experience, a more challenging environment in the third quarter and what we experienced during the first six months of the year.
Jim Brown: We increased active customer accounts by 7% year over year in this important market. Our net sales declined by 4% due to a decrease in average spend.
Jim Brown: We anticipate a continued challenging operating environment through the remainder of the year. We are planning to increase promotional activity in the fourth quarter to support and build momentum in our business. Our updated fiscal 2024 guidance incorporates these elements.
Jim Brown: We continued to focus and execute on the strategic initiatives previously communicated although these initiatives have not yet meaningfully manifested themselves in our operating results. We believe they are instrumental to laying the foundation for future growth and are confident that they will drive long term customer and revenue growth.
Jim Brown: Let me share with you a few items first we continue to prioritize engaging with our associate sales leaders, who are vital to bringing in new customers that you saw in our family.
Jim Brown: During the third quarter, we hosted a successful America and Europe Convention in Las Vegas, and this was one of the best conventions. We have had in terms of feedback from our associates.
Jim Brown: Training development and recognition of our key focus areas at this event with an emphasis on actionable initiatives to help ourselves leaders grow their business feedback has been positive and leaders are actively adopting these new initiatives.
Jim Brown: Second thanks to the collaborative efforts of our sales marketing and research and development teams. We launched our first set of products under our new commercial team structure celebrated resurfacing, Sara and whey protein isolate.
Jim Brown: Both products were launched in the U S and Canada and will be available in other markets over the next couple of quarters. These product launches are illustrative of the early stages of our product innovation strategy, which includes increasing the cadence of new and upgraded high quality relevant and premium products. Additionally, I'm encouraged by the increased agility that is.
Jim Brown: Loud us to bring these products to market.
Jim Brown: We have our we have an.
Jim Brown: <unk> pipeline of additional products across our product categories. Currently in development with plans to be introduced throughout next year.
Jim Brown: I'll close by saying that I am.
Jim Brown: <unk> confident in our team to execute our strategy to return you sign it to longer term growth with that I'll now ask the operator to please open the lines for questions.
Speaker Change: Thank you Sir as a reminder to ask a question. Please singled by pressing star one.
Speaker Change: Question comes from Anthony <unk> from Fidelity Sidoti. Please go ahead.
Good morning, Thank you for taking the questions. So.
Speaker Change: I guess first.
You guys talked about the positive feedback coming out of the Las Vegas Convention Center.
Speaker Change: Touched on a couple of those but maybe if you could just maybe share more details as to and also as far as the feedback that you're getting I mean.
Speaker Change: How quickly can some of those inputs b.
Speaker Change: But in what you can start to see tangible benefits from that.
Speaker Change: Thanks, Anthony this is Brian I'll take that question.
Brian: As you know momentum in this business is very important.
Brian: And our momentum derived from trust between the company and our sales leaders and I think Thats one of the most important things that we did in this convention.
Brian: And that an initiative we've tried to.
Brian: Go forward with in 2024 is rebuilding that trust with our sales leaders.
Brian: So.
Brian: The positive feedback that we received is that they feel the company is on the right direction.
Brian: They feel that we have taken their feedback and input into account when we create new products that.
Brian: The tools and the systems that we presented at the convention were also in line with what it is that they were hoping for.
Brian: So through that feedback mechanism, we've heard that they are extremely excited for the future.
Brian: And like I said, it takes time for momentum to grow but we expect this is the first part of that momentum phase and over the course of Q4 excuse me Q4 and into Q1 of next year, we expect that to continue to grow.
Speaker Change: Thank you for that Brent.
Speaker Change: In terms of the faster new product development process that you guys talked about.
Speaker Change: I guess it wont be the main reasons for that that you've been able to do this.
Speaker Change: Do you think youll need to hire or perhaps more people to help ensure this continues.
Speaker Change: I don't think more people are needed I think that we primarily did internally as we restructured the way that that product development process works. We've created cross functional teams that sit together and that they are able to solve problems more quickly than they used to.
Speaker Change: There is a tighter collaboration now between our research and development team and the product team. So theres increased communication thats going on were taking feedback more quickly from our markets.
Speaker Change: And we're just able to implement that much more rapidly than we ever have before.
Speaker Change: So as Jim mentioned in his opening comments, we've got a very robust product pipeline prepared for 2025 and Thats really a result of all of this improvement that's been made within this product development process.
Speaker Change: And Anthony this is Doug what Brent, saying is right on point I think the other thing is both from Brents leadership in Jim's leadership, if we see a need to go back and invest more in those areas is something we're committed to do right. Now we think we're resource and looking to gain some efficiency from this new structure, the commercial team, but I think pretty optimistic but.
Speaker Change: Definitely willing to invest for things that we think generate a return.
Speaker Change: Understood.
Speaker Change: As far as the just just to follow up on the.
Speaker Change: Pipeline of new products can you share any more details as far as timing as well.
Speaker Change: <unk>.
Is it.
Speaker Change: More skus than what you typically have done in the past as far as those are concerned then it will those be in all markets or are you just just looking to introduce those new products and all these some of your markets. Maybe if you could just speak to that.
Sure.
Speaker Change: A way that we're approaching new product development as we have to ensure that our existing product lineup is still very compelling and competitive in the marketplace. So that's why we're replacing the majority of our effort initially is to ensure that the existing products are.
Speaker Change: Very compelling so that would be the first part of the rollout for next year are some significant upgrades to our existing products Youll expect to see that very slowly in Q1, and then start to pick up speed in Q2 and Q3 as the year goes by.
Speaker Change: In terms of a rollout process, it's always easiest to launch a product in the United States first given the regulatory environment.
Speaker Change: And our.
Speaker Change: Just the process that it takes to ticket to bring a product to market.
Speaker Change: But our intention is that as the quarters go by each of those products will begin to rollout throughout the globe.
Speaker Change: <unk> has its own product development process that it goes through so it may slightly differ from the rest of the markets.
Jim Brown: But for now the intention is that we when necessary, we'll start to roll those products out globally and this is Jim just just a little bit more we will see the SKU count increased a little bit at the beginning but with the product teams theyre looking at the whole product lifecycle. So over time, we will be evaluating some of the skus that aren't performed.
Speaker Change: As well and probably discontinuing some.
Speaker Change: And I would say the engagement that Brent has done with our field leaders and his team across the globe has more regional and local opportunities for different product offerings, as well and so thats something thats taken into consideration.
Speaker Change: That makes sense, Okay, and then I guess my last question.
Speaker Change: Before I pass it on so there is so I guess part of your lower SG&A was reduced advertising expenses.
Speaker Change: So first I guess do you think that.
Speaker Change: Perhaps reduced advertising had any sort of impact on your <unk> sales and I guess secondly, how do you how should we think about advertising for <unk>.
Speaker Change: Beyond that.
Speaker Change: Yes, I think the primary catalyst here is just moving away from certain activities that just weren't demonstrated much of a return I think we are constantly looking to repurpose things to go back and stimulate whether that's in the form of promotions incentives AD spend those things will continue to look at it I think what you saw in particular, we're just moving away from a few things that just.
Speaker Change: Have shown not to be that effective.
Speaker Change: That makes a lot of sense all right well. Thank you very much and the best of luck.
Speaker Change: Thanks Anthony.
Speaker Change: As a reminder to ask a question please signal by pressing star one and.
Speaker Change: And our next question comes from Linda Bolton Weiser from Davidson. Please go ahead.
Speaker Change: Yes, hi.
Speaker Change:
Speaker Change: So I was wondering as you pick up the promotional activity.
Speaker Change: Does that affect more of the associate incentive expense line or does that affect the gross margin more or maybe both.
Speaker Change: Yes.
Speaker Change: And Brian can chime in here too, but we run different types of promotions incentives. Some are designed specifically more towards short term value initiative to drive behavior getting people exposed to the products others are more towards rewarding people on sales to generated by new customers. They introduced and so you see a little bit of both.
Speaker Change: Yeah.
Speaker Change: I would say I think in the short term, we'll probably have more of trying to go back and really continue to go back and follow up on the engagement, we have with the field and support new sales generated new customers will be probably a heavier piece of that and I think youll see some increase in payout at least that's what we've modeled.
Speaker Change: <unk>.
Speaker Change: Okay and then.
Speaker Change: The revised guidance for the year in terms of the EPS for the fourth quarter that's implied.
Speaker Change: I mean.
Speaker Change: Had to reduce my estimate quite a bit.
Speaker Change: It's more so it seemed like on the margins so.
Speaker Change: What what would be the particular things impacting margins in the in the fourth quarter or is that just that increased promotional spending or is there something else going on in the cost structure and maybe you can explain that about the margin expectations for the fourth day I'll give you I'll give you a little bit of color with our third quarter results EPS was actually higher than what.
Speaker Change: We anticipated there are some things that we just didn't get in motion during the third quarter than we would've expected a little bit lower margin profile in Q3 on EPS, but it's what you said and kind of what we just talked about I would expect a higher spend on the incentives line as we step into this and support the field and continue to work on really creating some high levels of engagement.
Speaker Change: <unk>.
Okay, and then just on your new products.
Speaker Change: The whey protein is that specifically designed for customers that are taking DLP one drugs I'm just curious about that.
Brent: Hey, Ryan it's Brent.
Isn't the main intention for that particular product.
Brent: Could be used in that capacity just because many people that are on GOP one jugs.
Brent: Get it sufficient.
Brent: Protein profile in their diet.
Brent: But it's in general just a very premium whey protein isolate that's very clean and it's there is a large market for that out there, especially amongst our existing distributor base. So that's primarily the reason why we brought that to market.
Okay, and then I'm curious.
Speaker Change: The other product is a beauty <unk> I guess, it's a beauty product right serum is that correct. So I'm I'm kind of curious like.
Speaker Change: Why not a new product in nutritional supplements, which is more traditionally your line your area more of strengthen and scale.
Speaker Change: Why necessarily these two products that are in kind of a little bit different areas.
Speaker Change: Well, one product that did actually come to market at our Americas and Europe Convention is called breast complete and that is in the Nutritionals category and that's specifically asleep product.
Speaker Change: We didn't call that out per se, but that is a product that did come to market you're exactly right. We've got three categories Nutritionals is by far and away our largest end.
Speaker Change: Most popular category.
Speaker Change: When you look at 2025, the brunt of our product introductions and upgrades are going to be focused on the nutritionals category.
Speaker Change: To ensure that we continue to maintain our premium position in that space.
Speaker Change: But we also have many new products in store for our.
Speaker Change: <unk> line, which our skincare line. This just happened to be one of the products that was ready at the time to bring to market.
Speaker Change: Okay and then.
Speaker Change: I'm curious about your capital allocation.
Speaker Change: <unk>.
Speaker Change: I know you discussed frequently with the board but.
Speaker Change: Your account your free cash flow has come down, but it's still fairly strong it's at least $50 million a year.
Speaker Change: And so as you intend to just kind of let your cash balance build up.
Speaker Change: What's the trigger I guess, what what do you need to see in order to.
Speaker Change: Maybe go back to share repurchase or something like that.
Speaker Change: Yeah, Linda you alluded to I mean literally the first half hour of the meetings. This board meeting we talked about this this is an every quarter issue and so the board along with Jim's direction is reviewing the totality of different things that we have in the works doing this other stuff and trying to make sure that we're not being too short term thinking.
Speaker Change: There I'm looking down the road and figuring out what the best use of that cash is the direction from the board and Jim as we need to find a way to put that to work to generate a return.
Speaker Change: And so we all get that I would still say fundamentally our orders of priority of investing in the organic business. We've been very active in looking at different opportunities in the business development side that would be the second one and then when we don't have things that we see as potential there. Some of this other stuff and we look at excess cash redistributing that what.
Speaker Change: We've done it through share repurchase so those remain.
Speaker Change: Our areas of focus and priority.
Speaker Change: Okay and then my last question just has to do with China.
You said I guess in the in the.
Speaker Change: Press release or something that you didn't think the stimulus active.
Speaker Change: Activities, there would really affect your business all that much but.
Speaker Change: I don't know I mean, the Chinese government's doing these things because they want to try to stimulate consumer activity and in the economy. So.
Speaker Change: I mean are you just saying you feel like it's hope.
Speaker Change: There's such a secular issue in China structural issue.
Speaker Change:
Speaker Change: If it's government stimulus won't help them, what will I guess and how are you planning for that in the future as it being your largest market like.
Speaker Change: Yeah. This is Brian here I think it's extremely optimistic that were seeing the government take a stimulus approach or stimulus measures to incentivize.
Speaker Change: Economic development and growth within China, that's something that we certainly want to see and that's something that our distributors and customers in China want to see as well I think what was mentioned in the opening remarks is that we believe the current stimulus that's been done its primarily been directed towards shoring up the stock market shoring up provincial and <unk>.
Speaker Change: Local branches.
Speaker Change: Thanks and governments.
Speaker Change: So that.
Speaker Change: That particular stimulus that came out and we don't see a direct impact to consumers' willingness to spend in the short term.
Speaker Change: But in my comments to Anthony previously when I talk about momentum.
Speaker Change: Yeah.
Speaker Change: The anecdotes that we've been hearing from our customers and from our team over in China is that this is a positive sign and then it starts to change the psyche of the people over in China, knowing that the government is there thats going to help shore up and support their economic efforts. So we're optimistic that that will continue and.
Speaker Change: As it does we believe that that will change the sentiment of our consumers in China, and we should see that average spend per customer continue to go up.
Speaker Change: From where it's currently at our customer acquisition throughout the year. So far has been greater than in 2020.
Speaker Change: Three our active customer count has increased as well. So those are all very positive indicators. We just now believes that as soon as that.
Speaker Change: Economic phase starts to pick up then spend should match the customer count and that'll be a positive thing for us.
Speaker Change: And I would say Linda the consumers respond a little I mean, we talked Brent talks with a group over there all the time, we hear feedback in them.
Speaker Change: Helping us to view it from their eyes, and better understand and I think the Chinese consumers are little bit different than what you would see here in the states and they behave different so I think what Brent said is spot on is that I think there is a positive response to the government starting to do things none of those things right now are directly related to individual consumer spend and they could go.
Speaker Change: And I think the Chinese governments.
Speaker Change: But at least with what we've heard communicator has some intent to go back and continue to support.
Speaker Change: The economy and support the growth in China. So I think we're optimistic there, but the initial measures. The response with guys that just that in of itself doesn't go back and trigger.
Speaker Change: Is it as a catalyst for the business.
Speaker Change: Okay, well, thanks for that and good luck with everything.
Speaker Change: Thanks Linda.
Thank you as a final reminder to ask a question. Please signal by pressing star one or will pull suggest a moment to allow you to signal.
Speaker Change: It appears there are currently no further questions at this time with this I'd like to hand, the call back over to Andrew Masuda for any additional or closing remarks.
Speaker Change: Sir.
Andrew Masuda: Thank you for your questions and for your participation on today's conference call do you have any remaining questions. Please feel free to contact Investor Relations at 801, 954, seven to one zero.
Speaker Change: Thank you. This concludes today's conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.
Speaker Change: Uh huh.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Okay.