USANA Health Sciences, Inc.

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

Thanks Diego 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.esana.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 2025, uncertainty related to the economic and operating environment around the world, and 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. I'm joined by our President and CEO, Jim Brown, our Chief Financial Officer, Doug Hecking, our Chief Commercial Officer, Brent Neidig, our Chief Operating Officer, Walter Note, 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.

Thank you, Andrew, and good morning, everyone. We continue to execute our comprehensive commercial strategy in the third quarter, which was highlighted by the global rollout of our enhanced compensation plan. While third quarter results were impacted by softer sales and brand partner productivity leading up to the global convention in August, we are in the initial stages of the full rollout, and I'd like to be clear in saying that I'm encouraged by recent activity we are seeing in the business. If you recall, we enhanced our compensation plan to ensure USANA is at the forefront of today's evolving and competitive landscape for entrepreneurs. Our commercial strategy includes an enhanced compensation plan, product innovation, updated and refreshed brand story, and improved tools to assist with building a business. The enhanced compensation plan focuses on three key elements, share, grow, and lead. This new framework is designed to help our brand partners to have greater success in building their sales organization with new brand partners and customers in a simple and explainable way. This is particularly relevant today as the desire to earn part-time supplementary income or to earn income on one's own terms is as high as it has ever been. Our recent changes have systematically addressed the most important features of a competitive compensation plan in this market. Simplicity, early earnings potential, and competitive pay for performance. We have simplified the plan, made it easier for new people to understand, act, and share. improved the earnings capability of our new brand partners so that they have the potential to see success faster. And we've enhanced our pay for performance criteria, which will more greatly reward those who are doing more of the work. Simplicity and early success are key requirements of a younger demographic. And early indications are that this offering is resonating with that audience. We are encouraged by our brand partners' response to the enhancements and the recent lift we have seen in sales activity and leader productivity. We are seeing improvement across several key metrics, including engagement as indicated by meeting attendance, brand partner attraction and customer acquisition, speed to earnings, their first commission, and general stickiness of brand partners and customers. Qualitatively, brand partners across the world are sharing how these new changes have brought renewed excitement, energy, and success to their businesses. Our vision of brand partners being a focal point continues to resonate and build trust with these entrepreneurs as they have expressed improved confidence in sharing the opportunity. During the quarter, we reported an increase in inventories that can be attributed to, in great part, new product introductions to support our growth strategy, increased investments and location of our inventory to support tariff mitigation efforts, and working capital investments in our venture companies, Haya and Risebar. We have also begun the process of targeted in-house production for our venture companies. We believe our in-house manufacturing capabilities contribute to better margins, improve control of inventory levels, and help to mitigate supply chain risks while providing a meaningful contribution to delivering the highest quality nutritional products. Moving on to our other businesses. If you recall, these businesses provide USANA the ability to reach a broader demographic of health and wellness market while providing diversification and strengthening USANA's financial profile. Overall, we're encouraged by the year-to-date sales growth of these entities. I'll start by sharing an update on our direct-to-consumer business, Haya. Although Haya experienced some challenges in top-line growth in the third quarter, the company has delivered 26% year-to-date sales growth, putting them on track to deliver another year of record sales. Notably, we have made significant progress on several integration initiatives. In the first half of the year, a large focus was placed on the implementation of a new ERP system and related controls to ensure that HIA is fully operating as a subsidiary of a public company. There has been significant progress made that we believe will support the HIA team moving forward. We have also been working on other areas that provide operational synergies. For example, during the quarter, we assisted the team in the transition to a new logistics partner. which is anticipated to drive operational efficiency in the coming year. We also continue to leverage core competencies at USANA, including research and development activities, manufacturing and general operational expertise to support HIA in the new product formulation, international expansion, and cost savings opportunities. Another example, we anticipate to begin the manufacturing of HIA products in-house over the next several months, which we anticipate will continue to improve margins in the late second quarter and back half of 2026. Altogether, we're pleased with the progress we've made on all these fronts and continue to expect Hyatt to generate double-digit sales growth for the full 2025. The team has several exciting growth initiatives planned for next year, which we will address next quarter when we provide our initial outlook for fiscal 2026. Rise Bar, which was acquired in 2022, reported record third quarter net sales, and year-to-date net sales have increased by 169%. Although Rise Bar is still relatively small as a percentage of our sales portfolio, we're very pleased with the progress, including channel expansion and new product offerings that we believe will contribute to strong future sales heading into 2026. We are investing additional resources and working capital as well as leveraging USANA's operational expertise to capitalize on current momentum and to drive long-term growth and efficiencies. We believe there is meaningful growth opportunities in the health and food space over the next several years. As included in our third quarter earnings release, we reported that we have initiated and are executing a global cost reduction process, including a right-sizing of our workforce. This process will focus on prioritizing top strategic priorities while also targeting efficiencies that support a more agile and adaptable organization moving forward. We expect to incur an estimated one-time charge of $4.7 million in the fourth quarter, which has been reflected in our updated outlook. In closing, we remain confident that our comprehensive commercial team strategy will position USANA to drive long-term growth in our direct selling business. and deliver long-term value for our customers and brand partners. Additionally, we are succeeding in our diversification strategy with the growth of Paya in the children's health and wellness market and the growth of Rise in the healthy foods market. Together, these elements reinforce our positive outlook for the future and our commitment to create lasting value across our portfolio. With that, I'll now ask the operator to please open the line for questions.