USANA Health Sciences, Inc.

Stand by, we're about to begin. Good day and welcome to the USANA Health Sciences first quarter conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Andrew Masuda, Director of Investor Relations. Please go ahead, sir.

Good morning. We appreciate you joining us to review our first 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 our 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 am joined 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 first quarter results and posted our management commentary document on the company's website. We'll now hear a brief remark from Kevin before opening up the call for questions.

Thank you, Andrew, and good morning everyone. We appreciate you joining us to review our first quarter results. USANA delivered solid first quarter results in the face of continued challenges across several key markets. Despite these challenges, both net sales and diluted EPS grew sequentially during the quarter. Our operating results for the first quarter varied across several key regions and markets. For example, The U.S. market generated year-over-year sales growth and performed modestly above our expectations. Conversely, some key markets in Southeast Asia Pacific generated softer-than-expected results during and after the Lunar New Year holiday, despite our efforts to offset the seasonality through promotional offerings. Nonetheless, worldwide sales and operating results were in the range of internal expectations. During the quarter, we made progress on several of our 2022 strategic initiatives. We resumed the rollout of our active nutrition line across certain markets, and we continued to make enhancements to the overall customer experience through strategic digital investments. As we all have seen, the operating environment in China has become more challenging and unpredictable due to the escalation of COVID-19 and the accompanying lockdowns. restrictions and other disruptions to individuals and businesses. Shanghai has experienced citywide lockdowns and the Chinese government recently began implementing restrictions in parts of Beijing. At this point, we do not have transparency into whether these restrictions will continue to increase in the coming weeks in Beijing and other areas of China that are important to our business. Nevertheless, given the current circumstances, we anticipate some negative impact on our results in China, and we've lowered our fiscal 2022 outlook to reflect this uncertain environment. Regardless, we remain committed to supporting our associates, customers, and employees in this key market and will continue to adapt to these ever-changing conditions to generate momentum in the business. In closing, we remain confident that the successful execution of our global strategies will position USANA to deliver long-term sustainable growth in the future. With that, I'll now ask the operator to please open the lines for questions.

Thank you. Ladies and gentlemen, if you have a question or comment, it is star 1 on your touch-tone telephone. Again, that is star 1 for any questions. We'll go first to Chris Neamontis at Jefferies. Your line is open. Please go ahead, sir.

Great, thanks everyone for the questions. I wanted to ask about China and Asia Pacific. So maybe starting with China, still sequential improvement despite the new year and some of the more extreme restrictions, right? So can you talk about how maybe that market progressed within the quarter, maybe month by month? Are you seeing more digital uptake offsetting some of those external pressures? Or maybe just help us think about how you're able to support customers in that market.

Hey, this is Brent. We started a little sluggish in January, and we did see an uptake in February and March, and I think that was primarily due to a lot of the initiatives that we rolled out in the latter half of the quarter. So I was very optimistic to see that, especially given the challenging circumstances that are there throughout the country. We're very pleased with the effort that we made and for the results that we were able to deliver despite the challenging circumstances.

Great. And then maybe on Asia Pacific, could you unpack for us the macro trends you're seeing, specifically in Malaysia and the Philippines? I know you mentioned COVID fatigue, but customer accounts could be hanging in there. So what are you hearing or seeing as it relates to productivity in those markets? And is there any sort of kind of clearing event you would be able to point to as we move through the year?

Yeah, and I think you have two different stories, really. I think the Philippines is coming off a really challenging year and they've been working you know I think similar to what in China they've been working very diligently to go back and get the momentum turned and moved in a good direction and I think we saw some some flattening on a sequential basis and and a little bit better performance sequentially but we got some work to do there in Malaysia which has really been one of our top performing markets year on year you had a little bit of dynamic of year-over-year comps on the timing of promotions and kind of the cadence of promotions between the two quarters and And it really is the first time in Malaysia's – we're starting to see this in a few markets. It's the first time that many of these folks were able to go out and see their families during the Lunar New Year, and we saw a little bit more of that than I think what we had banked in. So we saw a little bit deeper dip during the Chinese New Year, and we saw some of these promotional packs that we typically surround with that period of time, maybe not resonating quite as strong as what they did last year. And I think – So a host of factors, but I think that's a market that we're still incredibly high on and expect to go back and see some progress as the year goes on.

Got it. And then this last one for me, just on input cost trends. I think last quarter you flagged about 5% to 7% of pressure on materials, but the new guidance implies maybe that's maybe stepped up since a couple of months ago. So is that how you should be thinking about it? And maybe if you could help us think about how that trend evolves through the year. Are you seeing any sort of relative stability in those baskets?

Well, because the last time we've updated, there hasn't been that much time that's passed. I think we're still oriented in that same range that we have, but it's definitely something with our operations group we're watching as kind of we're bringing the raws and finish it. We'll go back and market and sell and And so we'll definitely report on that as the year progresses. But right now, just because it's so recent to when we reported the year, there's not that much more to add there at this time.

Got it. Thanks, everyone.

Thank you.

We'll go next to Doug Lane at Lane Research. Your line is open. Please go ahead.

Yes, hi. Good morning, everybody. Morning, Doug. Good morning. On the inflation front, Have you enacted any price increases, or what's your plan for price increases for the reign of the year?

Yeah, we have, and we've spent a great deal of time with each of the individual markets. We've met as an executive team, and we've tried to go back and take kind of a moderate approach and not being too forward-leaning on that. So towards the end of the quarter, mid to late first quarter, most of these price changes were enacted. But they were relatively small in comparison to some of the inflation pressures we're seeing. And kind of given our gross margin, we felt that was kind of the appropriate tack to go back and take. So you're somewhere in that, you know, two, two and a half percent range on a weighted basis on some of that. But that definitely wasn't reflected for the full quarter.

Got it. And in looking at your operating margin assumption, I think you took 50 basis points out of your range. And your cost of goods and your associate incentives have been pretty stable. Really, the pressure's been the deleveraging on the SG&A. Is most of that 50 basis point reduction just further deleveraging on the SG&A because of your sales reduction, or do you anticipate a little bit more gross margin pressure than you've been seeing the last couple of quarters?

Yeah, I think we've definitely seen an elevated pressure on kind of the cost materials that we're producing. But a lot of what you're seeing in at least the first quarter relative expectation I think really was a little bit deleveraging on the sales line. And you can go back and clearly see that just on the year-on-year comparison there. That's where the bulk of the operating margin was lost year-on-year in kind of that loss of leverage on the sales performance in Q1.

Okay. Yeah, definitely. And on your sales reduction, because, again, the sales number in the first quarter it looks like it beat what people were expecting. And so that means, obviously, the reduction is second, third, and fourth quarter. And you mentioned that the second half is still anticipating growth, but not as much as before. But is really the bulk of the revenue reduction going to hit the second quarter because of the lockdowns in China?

Yeah, and I wouldn't say that. There's some timing of the events. You know, when you look at the second quarter of last year, we had this short-term reduction program around every market did it in the second quarter last year. And we spaced that program out so you see more of the distributed offering this year through markets. And so China, one of our bigger markets, performed well in this. You know, really, we're kind of wrapping that up and having a big part of that in second quarter. I think it's been a little bit more challenging environment, I think, as the government has kind of elevated kind of how they've handled the COVID environment. And it's not an opportune time to go back and run something like this, but it was already underway. But I think as a whole, I think we saw some reasonably good performance there and maybe a little bit different than what we've seen in past years. So I think you'll go back and see a little bit of progress sequentially in the second quarter. And we're hoping to go back and get a little bit more visibility, Doug, as far as what that situation is in China. What we saw this time, it wasn't the same response from the government that we saw the first time we kind of went through the initial COVID. Um, and so we're, we're adapting, responding to Brent's point. I think the team's done a great job. I think we have new, some new digital assets in the studio and house that really allows us to, to, you know, kind of be pretty active in that environment. But, uh, you know, I, I think the main reason you've seen some of the, uh, the softening in our guidance is just from some of the unknowns we're seeing in that environment.

And is it more impacting your ability to sell products or your ability to get products out to your customers?

Well, I think for a period of time, really towards the end of the first quarter, we had a small bump in deferred revenue, I think particularly in trying to go back and get products delivered to Shanghai because of some of the lockdowns and shutdowns there. And so we've been able to date get products, manufacture products, but there has been some disruption in delivery relative to some of the positions the government had. We've been trying to find compliant, productive ways to try to get product out, but we're definitely going back and staying in touch with the government as we do this just to stay in good standing.

Okay, that's helpful. And just lastly, you mentioned on your previous call that you were planning to have an in-person event in China in the second half. Have you made a call on that yet, or are you still waiting to see on that?

Yeah, Doug, just given the uncertainty, we decided to change the event that we had. We initially planned it for Nanjing in September, and we've decided to go to a hybrid event. So as Doug already mentioned, we have an in-house media studio, so we're going to leverage that asset and produce some high-quality content from the studio and plan on more small in-person gatherings throughout our branches and distributor workshops throughout the country. Just I think given the current environment, I think it would be really unreasonable if we were able to actually pull an event off in person at that magnitude.

That makes sense. All right. Thank you.

Thanks, Doug.

Once again, ladies and gentlemen, it was Star 1. If you had a question, we will go next to Linda Bolton-Weiser at DA Davidson. Linda, your line is open. Please go ahead.

Yes, hi, thank you. So I was just curious about the Americas and Europe region, which I think it was down about 3% in constant currency, and yet the U.S. I think was up 5%. So I'm just kind of wondering, was the decline so big in the other parts of the region that that offset the growth in the U.S.? Or can you just give a little more color on that region? Thanks.

Yeah, thanks, Linda. Yeah, the primary catalyst there is we saw modest softening in Canada, which is a great market for us. But I think the bigger challenge we had is in our Mexico market. And Mexico has had some competitive issues and some, you know, kind of going through some stuff. And so we've been actively supporting them, and I think we're optimistic. But, yeah, year over year, Mexico was a tougher performance for them.

Okay. And then I know when you had reported and talked about the fourth quarter results, you gave a little bit of sequential guidance for revenue. Thinking in the same way now, I mean, I'm kind of seeing that revenue has to be down sequentially in the second quarter from the first quarter. Am I thinking of that correctly?

What we have, and we typically don't do a great deal of talking on a quarter-to-quarter basis, but we're expecting to see you know, some incremental progress. I don't think it's going to be dramatic, but we are expecting to go back and take some steps forward on kind of revenue performance in Q2.

So you mean sequential revenue level in dollars?

Correct.

Okay. Okay. And then I saw that you added like a small amount of debt to the balance sheet. Is that just related to your... cash repatriation or like what was the reason for that?

Yeah, it's just timing. I think from time to time we'll go on the line just as different things in our operations dictate. You know, we did do a little bit of buyback activity in the first quarter, roughly 25 million. And so it really is a matter of timing. And some of that comes with capital or inventory buying or paying of annual bonuses. And so You know, we'll float on that periodically, and sometimes it's in and out before the quarter's over, and sometimes there's a small residual layover, but that was really the nature of that.

Okay. Thank you very much. I appreciate it.

All right. Thank you, Linda.

And with no other questions holding, I'll turn the conference back for any additional or closing comments.

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. And ladies and gentlemen, that will conclude today's call.

We thank you for your participation. You may disconnect at this time.