Q4 2024 USANA Health Sciences Inc Earnings Call

Speaker Change: Greetings and welcome to the USANA Health Sciences fourth quarter conference call. At this time all participants are in a listen-only mode. A question and answer session will follow a formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.

Speaker Change: Please note, this conference is being recorded. I will now turn the conference over to your host, Andrew Masuda, Director of Investor Relations. Thank you.

Speaker Change: Shortly following the call, a replay will be available on our website.

Speaker Change: 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.

Speaker Change: Those statements involve risks and uncertainties that could cause actual results to differ, perhaps materially, from the results projected in such forward-looking statements.

Speaker Change: 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 Hecking, our Chief Operating Officer, Walter Note.

Speaker Change: Our Chief Commercial Officer, Brent Neidegg, as well as other executives.

Speaker Change: Yesterday, after the market closed, we announced our fourth quarter and fiscal year 2024 results and posted our management commentary document on the company's website.

Speaker Change: We will now hear brief remarks from Jim before opening the call for questions.

Thank you, Andrew, and good morning, everyone.

Jim Brown: I'd like to open today's call by saying that I'm excited about USANA's future.

Speaker Change: Our direct sales business just reported a solid quarter of results at the tail end of what I consider an investment year for USANA.

Jim Brown: In 2024, it became apparent that we needed to pivot in a few key areas to position USANA to return to growth that we've had historically.

Jim Brown: Many of our 2024 initiatives are long-term focused and meant to make USANA more attractive and relevant from a product, branding, and income opportunity standpoint.

Jim Brown: An example of this is the reorganization of both the R&D department and commercial team.

Jim Brown: During the year we put entirely new product teams in place and they are now working faster and more efficiently. We also reorganized our sales, marketing, communications departments into one comprehensive commercial team.

Jim Brown: We are now better positioned to bring innovation and relevant products to market faster with a focused brand message that differentiates our products in the marketplace.

Jim Brown: This new team structure also better positions us to execute our customer growth strategy in 2025.

Best in Class Products.

Jim Brown: A simple brand message that highlights the superiority, differentiation, and benefits of our products.

Jim Brown: With these foundational changes now firmly in place, I believe Isana is positioned to deliver long-term customer and sales growth.

Jim Brown: During the fourth quarter, we also acquired 78.8% ownership stake in Hyatt Health for $205 million.

Jim Brown: HIA is a fast-growing, cash-generating, direct-to-consumer company that is focused on children's health and wellness.

Jim Brown: This acquisition positions USANA as a leader in the expanding children's health and wellness market and strengthens our ability to reach and positively impact more health-conscious individuals and families, while simultaneously accelerating and magnifying our vision of creating the healthiest family on earth.

Jim Brown: HIA has an experienced management team that continues to lead the company, a compelling brand, a subscription business model that is positioned to continue delivering strong and sustainable sales growth over the next several years.

Jim Brown: The HIAA team is highly engaged and focused on expanding their leadership position in the children's health and wellness market.

Jim Brown: Notably, the acquisition of HIA came very late in the fourth quarter, so the contribution to USANA's consolidated 2024 results was minimal.

Jim Brown: Accordingly, most of today's remarks were focused on our core business.

Jim Brown: Turning now to the fourth quarter, USANA finished the year with a solid fourth quarter result that exceeded our expectations.

Jim Brown: Net sales grew 7% sequentially and adjusted diluted EPS increased 14%.

Jim Brown: Positive response to promotional activity was a key driver of the results, particularly in the United States where net sales grew 16% sequentially. We also saw notable strength in Australia and New Zealand with combined net sales in these two markets growing 9% year-over-year.

Jim Brown: We're now full speed ahead with accelerating, delivering, and executing upon our customer growth strategy.

Jim Brown: First, we're planning a higher cadence of new product launches in 2025. We have over 20 product launches and product reformulations planned to roll out globally throughout the year to both existing and new markets.

Jim Brown: We recently appointed Dr. Katherine Armstrong as our Chief Scientific Officer, and she will play a pivotal role in leading global research, development, and scientific ventures.

Jim Brown: We are also hosting our global convention in Salt Lake City this August and have an amazing event plan with several product launches.

Jim Brown: We haven't held a global convention in the U.S. for several years so we're excited to have a large group of our associates from around the world come together to celebrate their success, receive business training, and to learn about the many new products we're excited to launch.

Jim Brown: Second, we will be rolling out a strategic enhancement to our associated incentive offering in the back half of the year. These enhancements are designed to modernize our sales incentives and incent customer growth and improve pay for performance.

Jim Brown: Fourth, we will continue to accelerate associated engagement activities in our regions around the world.

Jim Brown: With our upcoming product launches and modifications to our associate incentive offerings, it is more important than ever to engage with our associates. We plan to hold many trainings and recognition events across key markets throughout the year with a marquee event of the Global Convention in Salt Lake City in August.

Jim Brown: Before opening the call for questions, I'd like to provide some additional thoughts on our strategic acquisition of HIAS. It's been just over two months since closing the deal, and we're very excited about HIAS growth plans for 2025 and beyond.

Jim Brown: Highest success since inception has been a culmination of new, better-for-you products that have resonated with parents and children across the country, an attractive subscription model, and an effective marketing strategy.

Jim Brown: These factors, combined with the financial discipline, have resulted in fast-growing, profitable and highly cash-generated business. In fiscal 2024, HIA generated $112 million in revenue with an adjusted EBITDA margin over 20%.

Jim Brown: Top-line growth in 2025 is projected to remain strong, with the HIA team expecting to derive strong growth year-over-year.

Jim Brown: Key strategic priorities this year include capitalizing on recent product launches to drive further growth in its direct-to-consumer model, expanding strategic partnerships, and laying the groundwork for channel expansion.

Jim Brown: We are also working closely with the HIA team to identify both short and long-term synergy opportunities.

Jim Brown: Overall we remain confident that the founder-led HIA team will deliver strong results this year.

Jim Brown: In closing, 2025 is proving to be an exciting year with much work ahead of us. I want to thank our employees, associates, and partners across the globe for their unwavering commitment to filling USANA's vision of creating the healthiest family on earth. With that, I'll now ask the operator to please open the line for questions.

Jim Brown: Thank you and at this time we will be conducting a question and answer session.

Speaker Change: If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue.

Jim Brown: You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions.

Thank you.

Speaker Change: Our first question comes from Anthony Lebedzinski with Sidoti and Company. Please state your question.

Anthony Lebedzinski: Good morning and thank you for taking the questions. So, it's certainly nice to see the year-over-year sales gains that you point out to in the U.S., Australia, New Zealand, so

Anthony Lebedzinski: Maybe we could start there. You know, what's driving that? Is that primarily the increased promotional activity or just maybe if you could give us some additional color as to, you know, the reason for the sales increases that you're seeing?

Anthony Lebedzinski: Yeah, maybe I'll let Brent chime in here. I can give my color as well, but I think maybe I'll start and then let Brent chime in, but I think in both cases you had leaders of those respective markets really

think outside the box and try something they haven't tried.

Anthony Lebedzinski: different and creative approach showed some ability to go back and give us some insights to what to try going forward. I think Australia and New Zealand, even though the program was a little bit different, it was much the same story about thinking outside the box and really listening to their field and catering something to that group.

Anthony Lebedzinski: We're trying to better empower our regions and our local markets to really create tailored offerings for our distributors and our customers in those locations.

Anthony Lebedzinski: So at the launch of our America's in Europe convention last August, our regional leadership for that region, they came up with a very creative

Anthony Lebedzinski: incentive and program offering. It was introduced at that event, so it touched Canada, Mexico, the U.S., ANZ.

Anthony Lebedzinski: And it was really well received by our customers in that region, and we really saw a tremendous

Anthony Lebedzinski: progression of new associated acquisition and retention from August through the end of the year and we're hopeful that that continues to persist throughout the first part of 2025.

Anthony Lebedzinski: but I think it was just a really great combination of leadership in that market, taking control, and providing a very tailored offering for those markets.

Speaker Change: That's great to hear. Is this something that you guys think you can replicate in other markets or is it easier said than done?

Speaker Change: Absolutely, that's the intention. We've talked a couple of times during this call about, or in Jim's remarks,

Speaker Change: about our need to pivot in terms of our product offering as well as our incentive structure.

Speaker Change: and that's something that's really going to come to fruition in the back half of the year.

Speaker Change: and part of the incentive structure that's going to be created or adjusted.

Speaker Change: is taking some of the framework that was introduced in August of last year at that Americas in Europe convention, with helping our associates when they come in the door, they quickly understand what are the key objectives and we help guide them through that journey in the early stages of their journey.

Speaker Change: So, that's something that we should see, and that will roll out globally in the back half of the year, so we're excited to see where that takes us.

Speaker Change: Gotcha, okay. All right, and then as we think about your revenue guidance for the core business, how should we think about expected sales performance by region this year? Can you give us some additional color as to how you're thinking about the different regions will perform as we progress through 2025?

Speaker Change: Yeah, I think kind of the recent trend that you've seen, I think, kind of moved forward a little bit. I think some of the areas where we see a little bit more challenge in this last year, we're expecting to see some progress.

Speaker Change: from some of those regions. But outside of there, you know, China is such a big part of the equation. We've got a fantastic team there.

Speaker Change: that the environment's a little bit tough, but they've done a fantastic job in running the market. And I think we'd expect some kind of more performance there and see them hold serve and maybe make up a little bit of ground moving forward. And I think same thing that you're seeing recently in the other markets is Brent.

Speaker Change: articulated, I think some of these more tailored offerings I think provide a lens to get some more momentum and enthusiasm in the markets and so we're looking forward to it.

Speaker Change: Gotcha. Okay. And then, you know, in terms of HIA, so,

Speaker Change: When you guys announced the deal in December, you initially talk about roughly 30% growth for that business this year, your guidance is higher than that. So

Speaker Change: you know can you just talk about you know what's changed since then and does the guidance also include any sales channel expansion or would that be additional revenue if you're successful with that?

Speaker Change: Yes, so as we're going through the acquisition look and going through the models and evaluating that.

Speaker Change: I think at the stage we're at when we announce the acquisition, I think we wanted to go back and be pretty thoughtful with what we communicated out. As we look at their forecast and their models, I think we're comfortable that we'll be within the range we communicated, which is $145 million to $160 million.

Speaker Change: which represents growth from 29% to 42% over the $112 million they did ending up 2024. And so we're pretty encouraged with that team, and I think they keep leaning into it. I think we'll see some different...

Speaker Change: and profitability due to the cost of acquiring those customers and they'll do that in a few pockets throughout the year and so we think that's good, it's part of the overall equation for this.

Speaker Change: exciting company with great leadership and so we look forward to it. Anthony remind me the second part of your questions. Channel. Channel yeah there's there's very little in there for channel there is a little bit but it's it's de minimis relative to the whole.

Speaker Change: Got you, okay. And my last question before I pass it on to others, can you just give us a quick update on how India is doing?

Jim Brown: Sure, Anthony. This is Jim. In my opinion, India is doing really well.

Speaker Change: You've got to remember that it's only been open, man, how long has it been open?

Speaker Change: Yeah, 13 months, yep. And we started from a base of zero. So we've seen good growth in the market, but again it's just not going to be that impactful until we have a few years of runway and it starts building on itself, compounding each year. So happy with the results, happy we have a great leadership team there. They're having events. I went there last year and was impressed by how the country itself is being managed and run and their plan and strategic plans to grow the business, but the base is just, you know, very small.

Got you. All right. Well, thanks and best of luck.

Thank you.

Speaker Change: Your next question comes from Christina Chouet with DA Davidson. Please state your question.

Christina Chouet: Hi, good morning. Congrats on the quarter. Just a follow-up to the previous question, like, do you expect U.S. and Canada to maintain the same level of promotional activity that you see in the fourth quarter?

Christina Chouet: Hi Christina, it's Brent. Yet we do anticipate that throughout all of our markets this year

We will continue with a somewhat aggressive promotional cadence.

Christina Chouet: The promotions, or the incentive structure that was implemented in that region last year, that has continued into the first part of this year. We have made a couple of adjustments to that program.

Christina Chouet: for the 2025 year, but that will continue and we do anticipate other promotions coming forward leading up to the implementation of the new incentive offering at the back half of the year.

Christina Chouet: So we anticipate it continuing there as well as other markets adopting those programs too.

Speaker Change: So with the new incentive program is that going to drive the Associates incentives year-over-year for each of the quarter for 25?

Yeah, you'll probably see a little bit there.

Mm-hmm.

Speaker Change: impact a little bit how you see those line items shape out but yeah I think they they have an impact that's layered in it's not I mean

Speaker Change: You know, it's the case and scenario that we see every year, and it just depends on the magnitude. If we think there's something notable in the material, we'll call that out, so you make sure you have a proper perspective and insight to what's happening.

Speaker Change: Okay and then the last question, I noticed SGNA as a percentage of cells came in kind of higher than expected this quarter. I know it's like due to the impact of the commercial team reorganization, so looking ahead to next year, do you kind of expect this ratio to like continue to trend higher or are there like opportunities for leverage and efficiency improvements?

Speaker Change: Yeah, I think there's obviously opportunity for some leverage benefit there. I think a few of the things you have to note as you look at what you saw in our press release is there is some numbers in there for HIA.

Speaker Change: There's roughly 1.2 million in there in SG&A for HIA even in that little stub period.

Speaker Change: different than ours. They have a different spin pattern. They don't have incentives so a lot of their sales activity is layered into that line.

Speaker Change: and so you'll see just because the mix between the two, between the USANA business and the HIA business, you'll see some dynamic there.

Speaker Change: Just some translation impact from currencies moving against us. You'll see that impact how that gets reported as well from relative to net sales

Speaker Change: Yeah I mean for HIA that's part of the SG&A was included in the quarter but that for 25 HIA is gonna be in there as well so or are you saying that's kind of like a one-time expense that's recognized in the quarter?

Speaker Change: Well, I think what you have to look at is HIA was in there for six days, where it will be in there for 100% of the next year, and so that mix and that dynamic changes quite a bit. And so you'll definitely see more of an influence from HIA on the overall results, more so in 2025.

Okay, thank you. All right, thanks Christina.

Speaker Change: And your next question comes from Ivan Fineseth with Tigris Financial Partners. Please state your question.

Speaker Change: compared to your expectations and do you think that over time you can integrate their manufacturing onto your platform and there could be some margin expansion there?

Speaker Change: Yeah, Ivan, this is Walter. Yes, it's going really well. We love the HIA team. They've got great management and they've run their business really well.

Speaker Change: that definitely that the advantages operational advantage and IT advantage so there's some things that we know how to do really well that we're helping them with as far as

Speaker Change: supply chain, last mile, manufacturing, those are all things that we're considering with them. Right now, we're working on those things. So we're taking them one piece at a time rather than trying to overload them because they've got great business that we don't want to mess up. But it's.

Speaker Change: But yeah, those are all things that will help us with margin down the road.

Hi, this is Jim.

Speaker Change: Just to add a little bit on it, and Walter said that, but we have to be extremely careful on what we put on the team. We don't want to overwhelm them and push them off their strategic plans for 2025. So we see a lot of opportunities, but it's going to be rolled out at a slower pace to make sure that we don't disrupt their business plan.

Speaker Change: Yeah, and and I have an I'll chime in there a little bit just for some optics. We'll have some short-term primarily captured in 25 some integration transition costs

Speaker Change: and we also have just a byproduct of the acquisition process, a step up in inventory you'll see written off really over the first six months of the year. And so all those things will affect their P&L in the upcoming year.

Speaker Change: Sounds good. Also, what kind of new product categories or areas can we expect to roll out in 2025? And then also, what what products do you see have been strong or and also surprisingly strong?

Speaker Change: and able to adjust and formulate products a lot quicker so we're excited about that you know but getting specifics I just don't want to let the cat out of the bag

Yeah, I would say...

Speaker Change: One of the things that we've talked about, Ivan, a little bit is I think on the skin care side you see that group maybe being a few steps ahead of kind of the other key product teams as far as

Speaker Change: getting a jump start in this and so I think you'll see a little bit more in that area and you You see a real attention kind of our flagship products and nutritional supplements, and so that'll be a heavy focus as well

Very good. Wishing you a big 2025.

Thanks Ivan. Thanks Evan.

Speaker Change: And your next question comes from Doug Lane with Water Tower Research. Please state your question.

I guess so. Good morning, everybody.

Speaker Change: Doug, you know, you just made a large acquisition that, you know, disrupted your balance sheet a little bit, no stock buybacks and you have a little bit of debt coming out of the year and maybe your cash balances are lower than they normally would be. So what's the outlook for 2025 and where do you think we'll see the balance sheet by the end of the year?

Speaker Change: And so I think we're moving in a great direction. We'll continue to invest heavily in the business as we move forward. And so.

Speaker Change: I think it looks good. You'll see, you know, obviously kind of with the year-end balance sheet, you'll see some some changes in inventory with how high it's carrying their inventory as well. So the competition will change a little bit.

Speaker Change: I think it's pretty easy to talk to. We carried over, as part of the transaction, $23 million in debt. Plans are right now, we'll probably have that retired mid-year, would be the kind of plan and estimate at this point.

Speaker Change: and should we put some share repurchase in the models for this year?

Speaker Change: Yeah, I think generally what we've communicated as a standard is that we'd go in and be active in the market at a level to at least take out the effect of the equity comp program and manage dilution there. Outside of there, it's an ongoing conversation with the board.

Speaker Change: As far as capital allocation, where that's best spent, and so as we have more visibility there, we'll make sure we kind of give a heads up on that.

Speaker Change: No, that makes sense. And then capital needs for hire, anything unusual there?

Speaker Change: No, like I said, there's some short term as we go back and integrate, we still have several moving pieces going on, but I think they've proven the fact they're a competent team, they have a lot of great things in place, so we want to be very intentional to go back and do things that are additive.

Speaker Change: and things that make sense collectively for the long term. And so we're still in the process of prioritizing that. Some things, as Walter indicated, we've already got a jumpstart on and moving forward on. And other things we're in the process of evaluating. So there's not a whole lot.

Speaker Change: If you look at their model, they're pretty cash generative, and they don't have much capital intensity to what they do, so it's a pretty intuitive relationship between the business and what it generates.

Speaker Change: and I don't see an outlook for capital spending specifically for this year but should we assume it'll be in line with you know levels in the past at least as a percent of sales yeah one one and a half percent in that range

Okay, that makes sense. Thank you.

Speaker Change: You're doing a lot with the, you know, you've got product.

Associate Incentives

brand messaging

Speaker Change: Is there any bigger picture changes going on with your model? You know, you read all the time about the affiliate model. A lot of people in direct selling are going to be an affiliate model. I don't see the word affiliate in here, but is this sort of what you're doing, trying to get that?

Speaker Change: you know, the social media seller that wants the media payout, maybe lower priced products, just what's the thinking behind all these modifications that you're making to your model? Not major modifications, but just tweaks to the model going into 2025.

Speaker Change: Yeah, definitely tweaks to the model is a good way to describe it and we're committed to the direct selling channel where, you know, there have been some large companies.

Speaker Change: that have been in the news that have moved away from that. That's not our intent at all. We're just trying to make our model more appealing to people coming into the business.

are the

Speaker Change: Our direct sales model and our incentive program has been very long term over the years, so we want to get some enhancements and bonuses up front.

Speaker Change: to just drive more people into the business and stay longer with the business. But just to reiterate, we're not looking at going away from the model that's kept us in business for 32 and a half years. Yeah, and I would say, you know, at Jim's direction and with Brent's leadership on the sales side, these are things that we've been testing.

Speaker Change: and various degrees in the different markets for several years now and so I think we've used that to get informed and understand kind of what what we'd expect from

Speaker Change: kind of behavior and influence in the business as a whole. And so it's, I think, a fairly intentional process in how we've approached it as well.

Okay, that's good power. Thank you.

Speaker Change: Thank you and there are no further questions at this time. I'll hand the floor back to management for closing remarks.

Speaker Change: Thanks for your questions and participation on today's conference call. If you have any remaining questions, please feel free to contact Investor Relations at 801-954-7210.

Speaker Change: Thank you, and with that we conclude today's call. All parties may disconnect. Have a good day.