USANA Health Sciences, Inc. (NYSE:USNA) Q3 2023 Earnings Call Transcript

USANA Health Sciences, Inc. (NYSE:USNA) Q3 2023 Earnings Call Transcript October 25, 2023

Operator: Hello and welcome to USANA Health Sciences’ Third Quarter Earnings Call. My name is Valeria and I’ll be your coordinator for today’s event. Please note that for the duration of the call, your line will be on listen-only. However, you will have the opportunity to ask questions. [Operator Instructions] I will now hand you over to your host, Mr. Andrew Masuda to begin today’s conference. Thank you.

Andrew Masuda: Thanks, Valeria, and good morning everyone. We appreciate you joining us to review our third quarter results. Today’s conference call is being broadcast live via webcast and can be accessed directly from our website at ir.usana.com. Shortly following the call, a replay will be available on our website. 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 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.

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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’m joined by our President and CEO, Jim Brown; our Chief Financial Officer, Doug Hekking, as well as other executives. Yesterday, after the market closed, 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 opening the call for questions.

Jim Brown: Thank you, Andrew, and good morning everyone. We continue to face a challenging operating environment during the third quarter. The economic environment is having an impact on consumer behavior in many of our markets. Our sales force is finding it more challenging to engage and attract new customers and associates. The cadence of our promotional activity during the quarter was lower when compared to both the prior quarter and the third quarter of 2022. This decision was deliberate as part of our strategy to find the most appropriate balance of incentives, promotions, and in-person events for the full year. We continue to experience an unfavorable impact from the changes in foreign currency rates and the impact from these changes was greater than anticipated.

Collectively, these factors ultimately contributed to a softer than expected third quarter results. Notwithstanding these challenges, we remain confident in the strength of our underlying business and our growth potential going forward. We generated $22 million of operating cash flow during the quarter and our balance sheet remains strong with over $300 million of cash and no debt. Our key strategic initiatives include re-engagement of our associate leaders around the world, expansion of our business into India, new incentive opportunities for our sales force, pursuing additional acquisition opportunities, and expanding our digital commerce initiatives. I’ll briefly explain upon our progress on a few of these initiatives. During the quarter, we continued our efforts to re-engage with our associate leaders around the world on a personal level, which was highlighted by our in-person Americas in Europe Convention in Salt Lake City where we offered recognition and training to leaders and also launched several new products.

We believe these live events are a key component to generating momentum and have several planned over the next year. These events will continue to be tailored to specific regions and markets to have a significant impact on those areas and ultimately drive sales and customer growth. We continue to make progress towards officially commencing operations in India. We are targeting a launch date prior to year end and we remain excited about this market opportunity. Notably, this is an incredibly large and complicated market for our business. Our approach to opening, operating in, and growing India will continue to be intentional and will be centered on long-term sustainable growth. We anticipate that the initial sales contribution from India will be modest, but grow over time.

We have a high long-term expectation for this meaningful market and the opportunity it presents to further diversify our business, geographical footprint, and customer base. We look forward to providing future updates on this market once we officially launch operations. Our team will continue to focus on the factors we can control and execute on our strategies. Before opening the line for questions, I’d like to announce some recent adjustments to the structure of our management team. As I took on the role of President and CEO, I reorganized some responsibilities amongst our management team to ensure that they are unified in executing our top goal, which continues to be active customer growth, and working as efficiently as possible on capitalizing on many strengths of our talented organization.

First, Brent Neidig has assumed the role of Chief Commercial Officer. Brent has played a pivotal role in shaping and executing growth strategies as managing director of our largest market, China. With his experience and expertise in this area, he will now oversee sales and marketing teams globally with the responsibility of driving sales and customer growth. Second, we have expanded Walter Noot’s role as Chief Operating Officer to include our research and development department. Walter oversees our operational excellence globally and focuses on USANA’s efficiency, profitability, and quality across the business. Walter’s operational experience will complement Dr. Rob Sinnott’s scientific vision and long-term objectives for health and wellness, and will be a catalyst for future innovation and excellence here at USANA.

I’m confident in our entire management team and amazing employees and believe that these changes will better position the team to execute our key strategic initiatives and position USANA to return to sustainable long-term growth. With that, I’ll now ask the operator to please open the lines for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question is from Anthony Lebiedzinski from Sidoti. Please go ahead.

Anthony Lebiedzinski: Good morning and thank you for taking the questions. So first, I guess, when I look at the results in Malaysia, for example, you said that sales were up sequentially due to a local promotion. So with that in mind, how should we think about your outlook for promotional activity? I know you’re looking to step that up in 4Q, but kind of maybe high-level thoughts beyond 4Q, or do you find that given a current environment that maybe you will need to do more promotions to get customers to be able to buy your products? I am interested – we’d love to hear your thoughts on that first.

Jim Brown: Yes, I’d go back to talking a little bit about COVID and when the things that we did from a promotional side to kind of combat the situation at that point in time. We did a lot more promotions that were product and sales-based, and we want to get away from that. We’re looking more at promotions and incentives that grow the company and add to our active customers, not promotions specifically that make it easier to buy product and actually get a bigger wallet share. We’ll continue to do those to make it exciting, and the field expects those over time. We just felt over the last year or so that we had gotten a little heavy with promotions and we’ve backed away some. But we still want to do things to motivate the field to grow, and gaining more customers and consumers in the end is what we want to do to become, again, our – the healthiest family on earth and hit our 1 million customer and families that we’re expecting to get over the next few years.

Anthony Lebiedzinski: Got you. Thanks for that. And then you talked about re-engagement of your associates with more in-person meetings. So I guess in your conversations with the associate leaders, I mean, what are some of the main takeaways that they have shared with you? So how are you thinking about shaping your strategy for next year?

Jim Brown: Yes, again, we have major events. We talk about those. We have Asia Pacific Convention, we have a China Convention, as well as many other China events because the market is so large. And then we have an Americas and Euros event. And part of that is to share our strategy. A lot of times we also introduce new products, but it’s – to get that motivation out, we use those events as training opportunities. But just like you’re saying, a lot of it is listening to the field and trying to get an understanding from our associates, our sales force, what their challenges may be and how we can combat those or make it much better. We hear the normal stuff about competition out there and what can we do to make sure that we’re offering a great product line and competitive compensation plan and we’ll continue to use that information to make changes.

One of the things that we’ve concentrated on in the last year is what we call the USANA difference and it’s our story of what makes USANA the company that you want to join, both from products, compensation, philanthropy, everything that goes on to make us the company that someone wants to come into. And we felt over the years, that’s one of the messages that we had, that that has been a little bit harder to tell with COVID and the environment. So we really had a strategy over the last year and a half to get the message out, give training aids, make sure that our associates, affiliates, and even our customers through loyalty programs and sharing programs can share the story and build the family.

Doug Hekking: The other thing, Anthony, just adding to it, I mean, Jim and many of the members of management, the sales executives, Brent included here that Jim just talked about, have been traveling on a regular basis and they often get in these situations with smaller associate leader groups and it really gives them a great opportunity to build the relationship and really open the line to communication, so we can go back and be responsive and have them really feel an open environment to reach out and let us know what they’re seeing.

Jim Brown: Yes, we have literally an incentive trip that Brent and myself and some of the management team from China will be doing in Europe starting this week and a big part of that is training as well as meetings with each of those leaders to make sure that we understand what we could do better as a company to service them.

Anthony Lebiedzinski: Understood. Okay. And then you also talked a little bit about the new incentive opportunities. I know you have a fairly new affiliate program. Can you share some observations with that? Are you looking to perhaps expand that to other countries?

Doug Hekking: I think we’re still in the learning mode in the markets where we’ve launched it. I think we’re definitely open. I think we’ve heard a little bit of requests from the different markets and some of our larger markets about exploring different opportunities there. So it’s something that we’re going to continue to push on and really make sure that we’re aligning that that incentive to be a real reward and engage that associate base to go out and tell the story and introduce new customers and new associates down the road. So it’s something we’re still monitoring and we think it definitely is something that can go back and add to our success going forward, but there’s still some work to do.

Anthony Lebiedzinski: Got it. Okay. And my last question before I pass it on to others. So, obviously, you have a strong balance sheet with plenty of cash. So how should we think about your outlook for acquisitions? And I know you did buyback some shares as well in the quarter. So maybe if you could just talk about acquisitions, what’s you’re looking – are you still looking at that? And then whether we should assume additional share repurchases.

Doug Hekking: Yes, we continue to be really active in evaluating opportunities. It’s just tough to go back and find a good alignment there. So that’ll be really an ongoing part of our strategy is looking at some of these opportunities to kind of amp up that return to shareholders that were produced on a regular basis. As far as share buyback, typically we don’t give a whole lot of forward commentary on that. I think the reality in the short-term, I think we’ll be buying at a minimum shares to offset the dilutive impact of equity grants. And outside of there, I think we’ll just go back and it’s a discussion we’ll have with the board on a regular basis.

Anthony Lebiedzinski: Got it. Understood. Well, thank you very much and best of luck.

Jim Brown: Thank you. Thanks, Anthony.