USANA Health Sciences, Inc.

Ladies and gentlemen, and welcome to USANA Health Sciences' fourth quarter conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Patrick Richards, Executive Director of Investor Relations and Business Development. Please go ahead. Thank you. Good morning.

We appreciate you joining us to review our fourth quarter and full year 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 2022. as well as uncertainty related to the magnitude, scope, and duration of the impact of the COVID-19 pandemic to 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 by our CEO and Chairman of the Board, Kevin Guest, our president, Jim Brown, our chief financial officer, Doug Hacking, as well as the other members of our executive team. Yesterday, after the market closed, we announced our fourth 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.

Thank you, Pat, and good morning, everyone. We appreciate you joining us to review our fourth quarter and full year results, as well as our initial outlook for 2022. 2021 marked a year of solid performance in what remains a dynamic operating environment. For the full year, we grew net sales by 5%. However, as the COVID-19 pandemic has evolved over the last two plus years, we've learned that its impact to our business is not linear. This was evident in our fourth quarter results, where lockdowns and disruptions to our operating environment pressured our financial performance. We continue to manage the business with sustainable long-term growth in mind, and in 2021 we made meaningful progress on several strategic initiatives. Technology investment remains a focal point, and last year we made several improvements and enhancements to our digital tool offerings, including rollout of a product recommendation tool, introducing customized and branded website creation tools, and releasing the first version of our native shopping app in China. These enhancements provide our customers with an excellent shopping experience, and we believe this will help drive customer acquisition. Additionally, we maintain an unwavering focus on product innovation, and our scientists and product specialists made progress on our long-term product development roadmap. We've also transitioned more manufacturing to our foods facility in Salt Lake City and we expect to see product and financial benefits in the coming years as we focus on leveraging our investment in this facility. As we embark on USANA's 30th anniversary this year, we will continue to strategically invest in the business with investments focused on our digital transformation initiatives, product innovation, growing our business in China, and pursuing business development opportunities all with the objective of growing our active customer counts. We are excited to resume hosting in-person events this year in markets where it is safe and where we are permitted to do so. We are currently planning to celebrate USANA's 30th anniversary by hosting a hybrid virtual in-person event in Salt Lake City, and we are also planning to host an in-person event in China in the back half of the year. We continue to believe that in-person events are both important and additive to driving excitement and momentum within our sales force. Additionally, we plan to run short-term sales programs across several of our markets throughout the year to suit the needs of individual markets. Before turning the call over for questions, I'd like to briefly discuss our fiscal 2022 outlook. We are cautiously optimistic on a return to normalcy as some of our markets currently remain severely impacted by COVID-related lockdowns, while other markets are seeing signs of reopening. As such, our net sales and diluted earnings per share guidance carry a wider than normal range. We anticipate that net sales will accelerate throughout the year. We also expect some pressure on our operating margin relative to historical performance, which reflects inflationary pressures on key areas of our business, strategic investments in our digital infrastructure, and increased travel and event related costs. In closing, we are confident our strategies will enable us to become even more positioned to drive future growth. With that, I'll now ask the operator to please open the line for questions.

Thank you. Ladies and gentlemen, if you'd like to ask a question, you may do so by pressing star 1 on your telephone keypad. Please make sure the mute function on your phone is turned off so the signal can be read by our equipment. Star 1 for questions. We'll pause a moment to assemble the phone queue. We'll take our first question from Steph Westnick with Jefferies. Please go ahead.

Thank you. Good day, everyone. We have a few questions if we could. The first is just on your remarks on the call today regarding the sales acceleration through the year. So it's a two part question. One, if you can just give us some sense of magnitude, kind of a starting point to the ending point as you've contemplated in your guidance, and then just remind us if there are any unusual comparison effects to the prior year, just recognizing 2021 was a somewhat unusual year as the year played out.

Yeah, Stephanie, this is Doug. And so I appreciate your question. So the ramp up during the year has to do with some of the kind of the holiday period you see right now we're in Chinese New Year. It's tough to get a whole lot done during that period of time. And then the timing of some of these test programs and promotional activity that we have planned throughout the year. And so I'm sure you're aware what we did in 2020 was in the third quarter, pretty heavy promotion period with every market happening at the same time. That happened in the second quarter of 2021. that'll be a little bit more spread out and kind of ramp with expected significance throughout the year, really kind of culminate in the third quarter. And so that is, you know, kind of hopefully kind of captures both those things is that we'll see a build and I'd imagine we'll see the first quarter, you know, at or modestly above sequentially and then kind of build from there.

Okay, that's really helpful, Doug. And then my second question is related to your comments on cost inputs. If you can just give us a sense of your cost basket, what's the most heavily densified in the basket, where you're seeing the most pressure, and if you have or do you plan to take price and at what magnitude to offset some of the pressure?

Yeah, I mean, relative to the product itself, you really have all the inputs that are flowing in there. You have materials far and away are the biggest cost pressure right now, and there's a little bit of a risk profile there as we've got bids from our our suppliers, but we don't even have a secured price throughout the year. So there's a little bit of unknown. And I think they're just kind of dealing with their uncertainty as well. And so we're seeing some definitive pressure there. In markets outside mainland China, we're seeing somewhere in that 5% to 7% range is pressure on material costs. Wages, I think definitively we've seen wages across the board, not only in the production environment, but throughout the organization, just with this environment we've kind of come into. And it's not just domestic. We're seeing it in the other markets as well. And then some of the overhead and some of the transportation costs continue to go back and get pressured. We're hoping to start seeing some of the transportation costs and just the magnitude that we've been paying above historic levels start abating in the back half of the year. I think some of these other things we see is a little bit more persistent throughout the year.

Okay. And have you taken price yet, or do you intend to? And if you can give us a sense of Is 5% to 7% kind of a blended average cost increase, or are you seeing costing higher than that and you're going to price into that higher level of cost?

Yeah, and so we've spent a lot of time with this. We've talked with our sales leadership, our markets, kind of direction from Kevin and Jim, and really trying to take a pretty thoughtful, pragmatic approach. So, yes, we will have a price adjustment, but it's modest. And as we expect some of these things to start abating, then we'll adjust accordingly. And that'll typically happen end of first quarter, first of second quarter. And it really varies by market, but it should be relatively modest in price adjustment. And I think we're trying to balance a bunch of things there.

Okay, last question is just on some of the tests that you've been running to activate your associate network. And I think you mentioned too, to drive customer count. Can you give us just some sense of early learnings from those tests, anything that you've found to be successful that you expect to deploy more widely in 2022. Thank you.

Yeah. And so Stephanie, we're fortunate to have David Moem who heads up our sales around the world with exception, mainland China, and then Brent Knight again here. And so maybe I'll let those gentlemen talk on that since they're present today. It's probably, you can hear it right from the horse's mouth.

Good morning. Yeah, so we've run a number of tests in the back end of 21, and I think what we've seen as a result of that is a higher level of engagement, not just through the rewards process, but certainly from the experiences and solutions that we've been able to deliver through those programs. So definitely a stickier process with our customers. and a longer tail in terms of their purchasing over a series of cycles.

Grant, from a China perspective, anything else?

Yeah, I'll just speak briefly to the short-term sales incentives that we've ran over the last couple of years. We've certainly had several learnings from both of those events. We've really heavily analyzed the types of individuals that are being attracted by those incentives and what their tail looks like once they come into the business. So we have made some adjustments for forward-looking promotions to accommodate the types of individuals that those incentives are attracting. And so we hope to have, you know, continual improvements to those results as we move forward.

Yeah, and I think, Stephanie, from our perspective, and we've been pretty open about this, I think you saw that in the program we ran in 2020. We had a little bit of catalysts. to the business, I think particularly just kind of given the fact we're just getting into the COVID environment there. And, you know, what we probably didn't fully appreciate at the time is we had some companion efforts going on at the same time that were pretty additive to that. Those were not present in what we did in 2021. And so the sales team have designed and architected what we're going to be doing this year to have more similarities to 2020 and a few more enhancements from what we've learned.

Okay, that's really helpful. If I could toss one more in, just noticing that China sales on a quarter-to-quarter basis or sequential basis actually did show some improvement. Do you attribute that to some of these companion-driven, coincident-driving promotions, or is that something that maybe is more structural and fundamental, and we've kind of seen the bottom of that market in terms of performance?

Yes, Stephanie, this is Brent. It's an interesting observation. We're very optimistic about the signs that we're seeing coming out of China. I'm very optimistic for 2022. I think to your question, though, it's difficult to know. I think that there are some structural improvements that we've made over the last couple of years, and we're starting to see the fruits of those labors. Our digital enhancements and improvements that we're making to the shopping experience have certainly improved things. And we're also very excited about new leadership that's come on board in with new ideas, and they have the ability to really help turn around momentum that's been somewhat lackluster over the last several years. So I think all of those things compiled together, quite optimistic about the direction we're going to be going in China.

Yeah, Stephanie, this is Doug. I'd probably add on. In our fourth quarter results, we had a little softer than what we expected just because we had to push some of these events out that we had planned in the market. Our national sales meeting, which we had deferred, is now canceled. We had to cancel it for the period. Other product-related promotions, you know, in reference to that event, got pushed down and had limited impact because of that. So I think Brent's comments are appropriate. But I think even with the light of, you know, that we had to go back and push some things out and had to go back and postpone it, just kind of adapting to the environment.

That's very helpful. Thank you. And encouraging as well. I'll jump back in queue. Thanks, everyone.

Thank you, Stephanie.

As a reminder, star one for questions. We'll go next to Doug Lane with Lane Research. Please go ahead.

Yes, hi. Good morning, everybody. On the cost front, I get the cost inflation and shipping and materials and what have you, but can you talk a little bit more about the associated incentives? They're up 110 basis points in the quarter. Is that going to be a pressure point next year or this year as well?

No, I think it's in check. And I think, Doug, you know, honestly, I think the comparison, yes, on a year-over-year basis, that's the math. I think the fourth quarter of last year was lower than what we typically see. I think the level that we had, you know, as far as what we're reporting here is, I think, roughly in line kind of with what you'll see for the year in 2021, you'll see in 2022. So I think it just happened that last year we were just a little bit lighter as We scrambled a bunch of the events and travel and some of this other stuff got postponed. We had a little bit of pickup in the fourth quarter last year that we didn't have this year.

Okay, fair enough. Can we talk a little bit more about your convention this year? It's the 30th anniversary. It sounds like it's going to be perhaps a little bit more of an event than typically in the past. I know you mentioned it's a hybrid event, but that'll include an in-person component, obviously. Okay. Is there going to be any kind of special promotions run during or ahead of that, any kind of special new product activity we should look for, just any kind of more color on what you think the impact of the convention will be this year?

Well, Doug, this is Kevin. You know, we rely heavily on our events as it relates to momentum in the business, and We're excited at the prospect of being able to get together. Being our 30th anniversary also is an opportunity for us to generate excitement around the world. We are going to plan for the worst and hope for the best, meaning we're going to do a simultaneous virtual event while we're doing a live event. We've never really seen anything like this before. We're excited about the technology we're going to use in the interaction to make it as personal of an event globally. We expect, you know, we're going to have several thousand people here in Salt Lake City in attendance, but we expect tens of thousands of people globally to participate virtually in this event. As a relationship to your question about promotions, we will have some promotions that are tied to our 30th anniversary, tied to some new products that we've been wanting and hoping and waiting to launch that are in the queue. But it's not going to be, as it relates to the convention directly, it's not going to be an overwhelming product launch and or sales promotion period because we are trying to have that happen throughout the year, not just in one event, and also thinking about the fact that there is a possibility that the event could be limited just because of unexpected COVID issues. So we're not relying on that event for certain product launches and or promotions.

Okay, that makes sense. Thanks, Kevin. Just one last thing with all these lockdowns and what have you, you know, you mentioned in your commentary that the Philippines was down 52% in local currency, which is a big number. Does that imply that there could be some significant bounce backs as we come out of this COVID? Or do you think that's kind of a permanent reset of the sales level there?

I think it's, we're going to have to build from there. It's not, it's, I don't think it's going to go back and bounce back overnight. You have a market that's very densely populated, and in many cases, this market was doing a great deal of in-person transaction. I mean, probably one of the higher of all our markets of doing things in office, and that shut off essentially overnight, and that environment has really gone through a great deal. So, yeah, I think we'll make progress. The team, I can tell you, is working hard day and night, as committed as ever, but it's going to take some time. And I think they're anticipating to make some progress this year, but it's not jumping right back to where it was in 2020.

Okay, fair enough. Thank you.

Thanks, Doug.

Star 1 for questions. We'll pause a moment to assemble the queue. It appears we have no further questions at this time. I'd like to turn it back to your presenters 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.

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.