USANA Health Sciences, Inc.

Good day and welcome to the USANA Health Sciences Third Quarter Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Patrick Richards, Executive Director of Investor Relations and Business Development. Please go ahead, sir.

Thank you and good morning. 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 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 regarding our strategies and outlook for fiscal year 2021, as well as uncertainty related to the magnitude, scope, and duration of the impact of the COVID-19 pandemic on our business, 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'm joined this morning with our by our CEO and Chairman of the Board, Kevin Guest, our President, Jim Brown, our Chief Financial Officer, Doug Hecking, 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 Kevin before opening the call for questions.

Kevin Guest Thank you, Pat, and good morning, everyone. We appreciate you joining us to review our third quarter results. As we reported in our mid-September press release, disruptions and lockdowns due to the ongoing COVID-19 pandemic affected our performance in several of our key markets during the quarter. Yesterday, we reported that our final third quarter results were modestly better than our preliminary projections, and we reiterated our fiscal 2021 net sales and earnings per share outlook. So the takeaway is, is that although the back half of the year has presented unanticipated challenges, we expect 2021 to be a record revenue year for USANA. As we enter the fourth quarter, the operating environment in many of our markets around the world remains unpredictable, so it's difficult to project when sales activity and momentum in our business will completely rebound. Notwithstanding the current environment, we continue to execute our growth strategy and are optimistic about our prospects for continued growth in 2022, and more importantly, in the long run. We will also continue to place a high priority on strategically investing in the business today in order to drive growth tomorrow. Our overall growth strategy continues to be centered on generating sustainable customer growth and engagement, curating micro entrepreneurs, and enhancing the overall experience our customers have when doing business with USANA. In this regard, we continue to be focused on one, improving our technology and providing our associates and customers with a seamless shopping experience. Two, launching new products and product lines. Three, identifying and executing growth opportunities in existing markets. Four, pursuing international expansion opportunities. And five, capitalizing on business development opportunities, including strategic investments and acquisitions. I'll close by saying that we remain confident in the strategies we are pursuing for the long-term health of our business and in our overall long-term growth potential in our markets globally. With that, I'll now ask the operator to please open the lines for questions.

Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question will pause for just a few moments to allow everyone an opportunity to signal for questions. We'll take our first question from Stephanie Wissink with Jefferies.

Hey, team. It's actually Chris Neiman. It's on for Steph. Thank you for the questions. I wanted to touch on the fourth quarter, if I might. The midpoint of your guide really implies a flat or slightly negative sales number. But just given the outside drop in customers reported at the end of this past quarter, how do you gain confidence in generating that level of revenue on a smaller overall starting base? Are you seeing anything October to date that would imply this sort of attrition has kind of stabilized?

Yeah, Chris, this is Doug. I probably hold off on giving too much color on what we're seeing so far in the quarter. But, you know, one of the nice aspects of how we report our customer accounts is it gives a true measure of who purchased during the quarter. And what you saw in the third quarter represented, you know, I think as you indicated in some of the notes, a fall off from where we were in the prior quarter and the year ago quarter and a great deal of that fall off had to do with the absence of a short-term sales program during the quarter and we were quite optimistic about many of the aspects that we're kind of pushing on and a little disappointed that we didn't see some of those customer accounts cascade forward. We saw a similar pattern last year after we ran this program. We definitely made increased effort but I think the environment made it a little bit more challenging to kind of execute on many of the things that we wanted to execute on. We're still working on it. We still recognize it as a critical part about touching those customers early in their journey with the company. As far as the fourth quarter goes, listen, I think the measures that you saw in the third quarter and what we're expecting in the fourth quarter would go back and lead you to believe that we'd see something roughly similar in customer accounts that we saw in the third quarter. Based upon the guidance we put out there, I think That's roughly our expectations at this point.

Got it. That's great, Culler. And then for my second one, I just wanted to ask if it's your sense that maybe the drop in customers, do you think that's a reflection that some may have moved away to maybe alternative solutions? And then maybe as a follow-up to that, how do you really think about kind of reactivating and reengaging some of those lost customers and associates? Any color there would be great.

Yeah, and once again, I think when we have a pretty prominent short-term program like we had in the third quarter of last year and the second quarter of this year, we have seen some dips in customer accounts following that. We believe that we changed a little bit of the structure and we put some programs in place to offset that. And that's obviously not what we saw, and we're definitely not totally pleased with the results. And I think the environment definitely had something to do with it. But I think it's less to do with kind of the overall thing, and I think it's more to do with the customers that we brought on during that period of time and how we engaged them early on. Kevin?

Yeah, this is Kevin. An additional thought is we continue to focus our strategy on growing our active customer count, which is an opportunity for us to look at retention and and how to retain people. And our long-term strategy over the last several years that we've talked about on these calls is our advance in technology and advancing our technology base. And so we're starting to see some of those things roll out, which we believe will help us in the future as it relates to our active customer count.

And then the second part of your question, Chris, was really re-engaging some of those customers. We always have Some program going on, the marketing team always has an outreach going on. Oftentimes that's met with somewhat limited success as far as reaching out to someone after they're not buying anymore. But it's something we continue to do, and I think we're finding new things that do work as we move forward.

That's great. Thanks a lot, guys.

And again, to ask a question, please press star 1. That's star 1 if you would like to ask a question. We'll take our next question from Doug Lane with Lane Research.

Hi. Good morning, everybody. You mentioned the delay of certain new products given the COVID-19 resurgence and the disruptions there to your business. Be a little bit more specific on what the change in plans was there. Has it basically just been pulled back from a 2021 event and will be included in 2022? Or exactly how did that timeline change?

Yeah, I think that's pretty much it. Either they got pushed to the fourth quarter or you'll see them kind of roll into the first part of next year. And I think a lot of it has to do, and I think it's well reported out there, Doug, that you're just seeing – some disruption just even in transit times and doing some of this other stuff, and whether that market is really able to fully roll that out in the current environment. And it really is market-specific on how it's impacted us.

And what were the key products that were delayed?

You know, we've had some additional work with our active nutrition and some, I guess, some products that had some pretty close ties to that. and just kind of our standard, some product introductions that we had scheduled that had been kind of pushed out. But primarily active nutrition was a big focal point.

Does that change your outlook for 2022? Will that crowd out some product activity you had slated for 2022, or will that just be added to what was already on the docket for 2022?

Yeah, I don't think, you know, provided that we don't have any more unforeseen changes kind of challenges, I don't think it should disrupt other plans that we had for 2022.

Okay, that's fair enough. And then same question really with live events. If I remember right, you were talking about a live event for the fourth quarter, and I assume that that's been scrubbed. But can you update us on when you expect to be hosting, you know, major live events again?

Yeah, so go ahead, Jim. I'll let you take on it. So right now in China, they're having a national meeting that's scheduled for the beginning of December, so right around the corner, that is scheduled now to be live. Of course, that could always change according to the market. In market, there are large events that are happening there. In our second quarter at our AP convention, that's going to be a virtual event like we've been doing recently. and then August of next year at our international 30th anniversary event, that's planned to be live. Again, those could change according to requirements or what happens with the pandemic, but right now that's the schedule.

And, Doug, maybe to add on there, I think once again it really relates to what the activity level is in market and really what makes sense in the market given the current environment. So it's nice to see, and I think the China team is eager to go back and have some in-person meetings opportunity to go back and engage and do this other stuff, and so hopefully that comes to pass like we're planning. I think you've seen Korea be able to go back and have a few small in-person events as well, and so we see that as a very encouraging sign going forward as well.

Okay, that's helpful, and the global events in Salt Lake City, and that's next August or July, I believe, and you mentioned it's the 30th anniversary, so I would expect maybe bigger news than usual. How should we think about what kind of promotional and product events are going to happen around here for the anniversary convention?

Yeah, it's interesting times because under normal circumstances, it would be a huge event. The thing that we're going to do is we're going to continue to have that live. And we know that there's certain markets, for example, China that gets 1,000 to 1,500 people that come may not be open to come into the event. Of course, we want to look at potentially having some products to be announced at the convention and entertainment at a different level than we have in the past because of the 30th anniversary. But when we come to attendance and what we're planning, we're planning kind of flat to down from previous years when we've had that event, only because we're just not sure of what markets will be open at that time.

No, that makes total sense. And just lastly, can you talk about China, just what's going on with that market? I mean, other than just sort of the pandemic-related openings and closings that we read about in the paper, what about the nutritional supplement market in general in your business there, specifically following that 100-day review period, which really doesn't seem that anybody's really recovered from that? Can you talk about the market for supplements and USANA's products specifically in China?

Yeah, I think some of the broader market indicators we see is we see some support for those types of products. I think, obviously, the pandemic has brought a lot of this stuff to the forefront or top of mind type discussions. But without a doubt, Doug, I think some of the things you're saying is true. It's just that that was a pretty disruptive event that definitely had a disruption in consumer confidence. But I think the recognition of playing a role in your own health and taking products that are additive there, I think, is definitely on the mind. So I I think we're optimistic. I think what we're hearing from the team there is optimistic with some of the plans they have rolling out next year, but it's been a longer process than what we had anticipated.

Okay. Thank you.

Thanks, Doug.

That concludes today's question and answer session. Speakers, at this time, I will turn the conference back over to you for any additional or closing remarks.

Thank you 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 801-954-7210. Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.