Q4 2023 USANA Health Sciences Inc Earnings Call

Participants

Andrew Masuda; Investor Relations; USANA Health Sciences Inc

Jim Brown; President & Chief Executive Officer; USANA Health Sciences Inc

Doug Hekking; Chief Financial Officer; USANA Health Sciences Inc

Brent Neidig; Chief Officer and Managing Director of China; USANA Health Sciences Inc

Anthony Lebiedzinski; Analyst; Sidoti & Company

Linda Bolton-Weiser; Analyst; D.A. Davidson & Company

Susan Anderson; Analyst; Canaccord Genuity

Ivan Feinseth; Analyst; Tigress Financial Partners LLC

Doug Lane; Analyst; Water Tower Research LLC

Presentation

Operator

Hello, and welcome to the Cerner Health Sciences Fourth Quarter and Fiscal Year 2023 earnings call. My name is Melissa, and I will be your coordinator for today's event. Please note this conference is being recorded and for the duration of the call, your lines will be in a listen only mode However, you will have the opportunity to ask questions at the end of the presentation as can be done by pressing star one on your telephone keypad to register your questions. If you require assistance. At any point, please press star zero and you will be connected to an operator. I'll now turn the call over to Andrew soon. Please go ahead.

Andrew Masuda

Thank you, Melissa, and good morning, everyone. We appreciate you joining us to review our fourth quarter and fiscal year 2023 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 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 2024, as well as uncertainty related to the economic and operating environment around the world, 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 hacking, as well as other executives yesterday after the market closed, we announced our fourth quarter and fiscal year results and posted our management commentary document to 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. You saw that delivered fourth quarter operating results that exceeded our expectations as our sales force responded positively to an incentive offering in several of our key markets. Notably, our Greater China region delivered double digit sequential growth in active customers. We are pleased with our year end results and the adoption of this incentive, particularly because the operating environment in many of our markets in 2023 was challenging as inflation and other economic factors adversely impacted customers' consumer behavior and our ability to generate top line momentum. Despite this environment, we delivered fourth quarter net sales and diluted EPS above expectations. We ended the year with $330 million in cash and essentially debt-free as we continue to generate strong free cash flow. We officially launched operations in India, the Company's 25th global market at the end of fiscal 2023 which is a significant milestone for you saw the following years of preparation. And we continue to make meaningful progress on several strategic initiatives that are foundational for use on its future growth. We began fiscal 2024 with renewed focus on executing our global growth strategy, which is generating consistent active customer growth. The initiatives that drive this strategy include increasing engagement with our associate leaders to accelerate associate and customer growth, enhancing our incentive opportunities for our sales leaders that are actively generating customer and sales growth, building expanding our operations in India, for product innovation and development and pursuing additional acquisition opportunities.
I'll briefly provide additional details on our initiative to increase engagement with our associate leaders. While 2023 was a year of reengaging with our associate leaders in a live setting. In 2024, we'll be doubling down on engaging training and educating our associates with a focus on growing active associates globally. While overall customer growth is always our goal, we recognize that our business model relies upon our independent distributors to market and sell our products. For this reason, we are renewing our focus on associate growth in 2024, you saw offers best in class nutritional supplements. And this year, we'll be collaborating with our associates to help them effectively communicate this product differentiation message. Additionally, we plan to roll out more updates to our existing digital two tools, which will help our associates with the necessary onboarding, training, communication and marketing resources, essential for growing and managing their business.
In closing, you Sana remains well positioned for long-term success in the global health and wellness market. I'm confident that our successful execution of our strategies will expand our business and drive sustainable long-term growth in net sales and earnings.
With that, I'll now ask the operator to please open the lines for questions.

Question and Answer Session

Operator

And here as a reminder, if you'd like to ask a question on today's call, you may press star one on your telephone keypad. To withdraw your question. For any reason, you may press star two you will be advised went.
And our first question is from Anthony Lebiedzinski with Sidoti & Company. Please go ahead.

Anthony Lebiedzinski

Good morning and thank you for taking the questions. So certainly than on the nice job with the Q4 results. Good to see China doing better. So just curious, I guess, kind of big picture, maybe first of all, as you start 2020 for now on your a little bit more than a month into the current fiscal year. I'm just wondering if you could just give us a sense as to like which countries you think other than China are doing better? And maybe conversely, where do you see the weakest, the pressure points?

Doug Hekking

Yes, Anthony, this is Doug. I think it's pretty early in the game. I think I think the pattern that you see is has been fairly consistent. I think we put a little color in our Management Commentary document talking about kind of the initial response, we saw to promotion offset the Lunar New Year holiday. And so we're pretty encouraged by what we saw there and we report in the first quarter. But outside of there. I think we're still kind of watching and evaluating kind of the impact through the Lunar New Year. So it's a little bit early, but we'll definitely look to give some color on that after the first quarter.

Anthony Lebiedzinski

Understood. Okay. And then also as far as through pricing, so last year, you guys had some customers buying ahead of price increases, which impacted your first quarter '23. So what can we expect as far as pricing this year? And could we perhaps see a repeat of that or just not looking to do anything like you did last year as far as pricing?

Doug Hekking

Yes, I would not expect that and that's why we've called out, I think the adjustment we did last year on pricing and we've been pretty tepid in the several years before as far as how we've approached that, we probably had on a on an average basis somewhere in that 4% to 5% on a global basis last year, you definitely won't see that this year. And the response last year was was above and beyond what we typically see just because of the but having a little bit bigger adjustment. And we definitely not moving as fast as we've seen others. And so we've been very conscientious in working with our sales leadership and how we approach that, but you won't you won't see the same magnitude. And I think that's why it's appropriate to call both that out and the response to the immunity boost that we saw at the end of the fourth quarter and the first quarter of '23.

Anthony Lebiedzinski

Understood. Okay. And then on also, can you just talk about the other spending that you planned for India and one of your acquisitions raised bar as far as how should we think about as far as the sale of I don't know if you want to put a dollar amount on that or maybe just help us understand as far as what the return on that additional spending will be and kind of the expectation as far as the timing of that?

Doug Hekking

Yes. I'll start here and I'll have Jim jump in. But we definitely planned this year will be an investment year. I think we've wanted with right bar to kind of get everything Safeway to kind of get kind of level set with integration, some things we're doing there and we think there's some great opportunity there with the group has compiled commercial plans. And so this upcoming year will be a year of investment where we won't be profitable and then any. But we do expect some pretty good traction in sales in India is much the same. I think we opened India really towards the very end of the year, and I think we're anticipating doing that earlier and some of those cost with opening events and celebrations and some other stuff have really been pushed to '24. But we understand the significance of this market long term, and we want to make sure that we get off to a good start and engage those leaders and really kind of put our best foot forward there. And so I think you'll probably see collectively between those between four and $5 million and net negative operating margin between the sales in those two categories. But we think that's money well invested and we'll generate future long-term benefits.

Jim Brown

Jim, any additional color that does call me out, but quite honestly, I don't know exactly what else to put out there. I mean, this is an investment time for both businesses and we expect it to basically be flat or down from a profit standpoint this year. And we're looking forward to what they do in the future. But again, we just want to get the momentum moving in 2024.

Anthony Lebiedzinski

That's very helpful color. And then lastly, before I pass it onto others. So your balance sheet obviously continues to be strong. Looks like you have more cash than you need to run the business. So how should we think about the capital allocation priorities for you guys?

Doug Hekking

So I think it remained very similar to what we've done in the past, I think we always look to go back and invest in really organically into our direct selling business and really lean into that. After that, I think we've been talking for several quarters now about activity in M&A, and we always have several opportunities in kind of the hopper that we've evaluated, moved down the path. And then in the past, we've been pretty heavily invested in share repurchase program, but those things are balanced. It's a quarterly discussion with the Board of Directors, and it's a very open discussion. So trying to go back and evaluate the opportunities, the stage that they're at and invest accordingly. And I would say just for context that our current level of business, I would say to operate in an environment of without debt. And I'm not even saying that's the goal. We probably need roughly $100 million given some of the liquidity dynamics and where the cash is held ballpark and then you can kind of gauge from there. And that's a it always becomes a little bit of a waiting game with repatriating cash back from China and it's just a process you go through in that market. That's unique to China.

Anthony Lebiedzinski

Understood or Well, thank you very much and best of luck.

Doug Hekking

Thank you, Alex.

Operator

Thank you. Our next question is from Linda Bolton-Weiser with D.A. Davidson. Please go ahead.
Yes, yes.

Linda Bolton-Weiser

Hello, Tom. So I was wondering just on the cost side for us, I guess you had mentioned that free cash were down year over year in the quarter. Is that a sustainable comparison now going forward for the next few quarters?

Jim Brown

Can we expect for that freight costs will continue to be down year over year yard, very sustainable and it will be down year over year. We haven't really gone out and got better freight cost or any of that but it's just the stabilization of everything after COVID. And we can depend on the rates as well as the lead times and transit times. And we're not we're not expediting shipments like we had to do to make sure that we didn't go on backorder through the ups and downs of COVID.

Doug Hekking

And right after that, I would also say one thing that will help out is, is the ops team has done a really good job locating inventory end market to help us have a little bit more of a shock absorber with any change in demand doing this other stuff. So we can respond in a more timely manner. And so I think I think the strategic efforts, the procurement and supply chain teams, I think along with really just the stability of the supply chain in general, I think both contribute pretty positively there.

Jim Brown

And it really is, like Jim said, as the absence of airfreight, which is the big delta there and you can see it to Linda and our level of inventory right now, that $65 million-ish amount where back a few years ago, we were at $100 million just because we couldn't depend on stuff, and we had to stock up. So I think that will remain around that same amount. And that just again, is hats off to our operational teams, managing the business better and having the dependability of the logistics companies now.

Linda Bolton-Weiser

Okay, great. And then I was just curious about Malaysia and the Philippines, because you mentioned that the promotional initiative helped Malaysia and Malaysia was up 7% local currency, that's good, but then Philippines was still so weak. Did you trade the same promotion in the Philippines and it just didn't work? Or what is the difference here between the Malaysia and the Philippines performance?

Doug Hekking

Yes, the markets are very unique. Brent, Brent, nine rigs in here, and I'll let him chime in. I think you can go back and give a pretty articulate response. But the Philippines is a great market where people are very entrepreneurial minded. I think the COVID environment has hit that market particularly hard. And the real the the operating environment is what it is at this point. We're obviously optimistic there but there's still work to be done.

Brent Neidig

Brent at Highland, Doug, Doug mentioned that the parameters that promotion were quite similar across markets, but each market responded differently. And I think that depends on several factors. One is the socioeconomic environment. I think the Philippines has been hit harder than Malaysia has, which is one of the primary indicators of why they they didn't respond as effectively as Malaysia did.

Linda Bolton-Weiser

Okay, Al and in Mainland China, so that was, you know, better performance there, but I guess I'm curious about the active customers being up 5% year over year, but local currency sales were still down slightly. Is that just like kind of like an average ticket per customer is sort of lower? Or how do I interpret that that information.

Doug Hekking

Yes, I would say, you know, I think currencies played a little bit of a roll year over year, and that's been a pretty hefty impact year on year. When you look at the full year, remember, our customer count is primarily a quarterly metric. So as you look at the full year, you have to just take that into consideration. But I think we've been pretty pleased with the resilience of China. And I know Brent, with the team that we have there is as optimistic, and we've done things quite a few things different that we see as pretty encouraging opportunities for us to look at in our other businesses as well.

Brent Neidig

Yes, I'd say it's also a function of the promotions that we run the different incentives that we've had that perhaps the spend per customer has slightly been down. We are okay with that, we our ultimate goal is to attract and retain consumers and customers. And so we see that active customer number increased and to us, that's a good long term indicator that we want to continue to build on that momentum I'll take advantage of.

Linda Bolton-Weiser

So I will let me just ask one more thing in terms of the cadence of promotions in 2024. So I guess you mentioned doing something here in Q1. But beyond that, what would be the plan is unusual kind of pullback on these big promotional events are still do them periodically? What's the plan there?

Doug Hekking

Real high level. I think 2023 were a little bit lighter than we had been historically. But we are coming off really three years of a heavy promotional cadence during the COVID years, and it is dependent on where the the individual markets were at. So I think I think you'll see us tick up from where we were in '23. This is we're in a sales culture, you're always going to have incentives and promotions and to Brent's point, really looking to go back and do those things that I'll go back and get us traction and sustainable growth going forward.

Brent Neidig

Sprint, the direction we're moving for 2024 is to really look market by market and ensure that we have the right incentive structure and package for each individualized market in the past. Some of these larger promotions have been global in nature and they've been effective to a degree, but sometimes they don't resonate as well in certain markets. So the intention going forward is to really identify what's going to motivate and incentivize our local sales leaders and ensure that we're supporting them the best way that we can.

Linda Bolton-Weiser

Okay. That's it for me. Thank you very much.

Doug Hekking

Thanks, Lynn.

Operator

And thank you. Our next question is from Susan Anderson with Canaccord Genuity. Please go ahead.

Susan Anderson

Hey, good morning. Thanks for taking my questions. And just really quick, it sounds like on the transportation costs, you don't really expect any increases. I'm just curious about the Suez Canal and how you're navigating things there for maybe some slight increases and transportation providers are trying to pass through.

Jim Brown

Yes, this is Walter. I we if you look at our transportation cost, the biggest extensive cost in the past has been airfreight. And so because of those challenges we've had, I think those costs have gone up a slight amount, but most of our routes are not around the Suez Canal.

Doug Hekking

So we really haven't had those issues and recognize that your point that is something that we've watched. We've seen port strikes in the past and some of these things definitely have an effect. So it is something that we're monitoring and we'll update as we if we start seeing that have an impact on our business.

Susan Anderson

Okay, great. And then I guess So back to Linda's question on China, it sounds like it's just more fluctuations in currency or I guess are you seeing that consumer there fill a little bit, why are pressured from a macro perspective and pulling back on your products at all?

Brent Neidig

Yes, hi. It's Brent. From the Chinese consumer. I mean, you look at the larger macroeconomic data and you're going to how seeing and other factors that are weighing into that. The consumer definitely is suppressed. And in many categories they have drawn back. I think the wellness space is quite resilient. The Chinese consumer is still very focused on wellness. And so speaking specifically for you Santa, we haven't really seen much fluctuation in that regard, which has been optimistic who knows what the future will hold, but we still are quite optimistic in the wellness space. And regardless what happens from a socioeconomic factor, we think it's still pretty resilient Okay, great.

Susan Anderson

And then I guess just really quick on pricing for 2024, it looks like there was a slight benefit this quarter. Should we expect that to continue in 2024.

Doug Hekking

So I think what you hear narrated in the fourth quarter is just the year-over-year comp from the adjustments that we made towards the end of the first quarter, beginning of second quarter and '23. The adjustments that we would have planned this year are going to be meaningfully less than what we did in '23. And so I don't think you'll see much inflection point relative to our P&L from from adjustments in prices I think will be pretty targeted and looking at specific products that have certain attributes that we have to address. But as a whole, I definitely won't be making the same lean into it that we did in '23.

Susan Anderson

Okay, great. And then last question just on M&A, I guess is there any color you can give on kind of either products or categories that you're thinking about or holes in the portfolio that you would like to fill?

Jim Brown

Yes, this is Jim. I we're going to always do M&A looking at the wellness injury industry, excuse me, and that's kind of our focus that we get from product lines and everything that match within that I was just talking this morning to Walter, and they have a COO of six or seven companies that are interesting. Again, they're all in the wellness area. We always look for companies that are healthy and we want to help them continue to grow.
M&a is an interesting thing where no matter how eager you are to get and you got to find the right deals and the deals that resonate with the Company and make a smart decision. And it just takes time to evaluate those Great.

Susan Anderson

Okay. Thanks so much for all the details. Good luck this year.

Jim Brown

Thanks.

Operator

Until our next question is from Ivan find that with Tigress Financial Partners. Please go ahead, sir.

Ivan Feinseth

Thanks, for taking my question and congratulations on the strong year-end finish. I have two questions. One on the interest, the sales incentives that you got some great results on. Can you give some details on that and what do you find works best and what have you experienced that has not worked well, yes,

Doug Hekking

I think Brent Brent captured it well, I think what we're seeing when we do something is more far reaching than the one. The fourth quarter was for the most part available in most market. That same type of approach doesn't work in every market. That particular one we ran in the fourth quarter was really rewarding growth in sales to new customers. And you know, and you have a market like China who has a very entrepreneurial spirit, really have a strong belief in the health and wellness space. And so when we do some of the stuff in line with this China as a market those resonate and pretty well, I think we've looked at value proposition promotions here or there and those those get received well. But typically, when you do those, those are marketing to your existing customer base and you're not seeing necessarily an inflection in customer counts. And so it really is a balanced Act. And to Brent's point, we hear different feedback from different of our sales leaders and we tried to work with them to get aligned. Anything on Sprint, you didn't think we can.

Ivan Feinseth

And second IO and discussions and what's going on in the world with the GLP drugs and primarily driving reduced food consumption is going to lead to the need for nutritional supplements and additional protein supplements and how you've been progressing in your thoughts about addressing those market opportunities.

Jim Brown

And we think the same way, quite honestly, we see this as an opportunity for people to need nutritionals to balance out as they're eating less and we have a great product offering. We'll look at products that would marry up well with that new market that's being created. I mean, it is it's huge, right now that people who are taking that and having success with it. But we see that as an opportunity and our R&D teams will look at products to basically balance out that and do you feel that confident will continue to develop these products in-house or this will be part of your M&A thought process?
Yes, I would say both. But initially in house we're working on that now and it takes time to develop and get the right products tested and everything else. But again, if it from an M&A standpoint, if we find someone in that space or whatever. We'll definitely look at them. One of the areas that we want to make sure is just from some kind of competing with ourselves that we broaden our reach and we do M&A. And if we can do it ourselves, I think with the the operations that we have in us and we're just premium products and we do a great job of it. We could we can do a better. That's what you saw us.

Doug Hekking

And I would I would say our current product offering goes to specifically addressing people who need better nutrition. So I don't think we need to even though I think we're opportunistic and try M&A. So I think I think we're well suited to go back and do this. The discussions gone. There's been some development, but we want to be responsible with how we approach it and continue to be additive to someone's health and wellness journey.

Ivan Feinseth

So good luck for a big 2024.

Jim Brown

Thank you.

Operator

And here as a reminder, if you'd like to ask a question on today's call, you may press star one and your telephone keypad to register.
And our next question is from Doug Lane with Watertown research. Please go ahead.

Doug Lane

Hi, good morning, everybody. I just have a couple of quick questions on China. Following up on my discussion here, and we've got a direct selling model in China. So I would certainly view the active customer count is really a leading indicator. It's easier going forward.

Doug Hekking

But I think you always should we always tried to give some color to the activity that was in the quarter. So you can use that in perspective. Typically when you have a higher level of activity in bringing on new customers during the quarter. You're not going to have that same level stick. And that's why we give some of that context it's not disproportionate to what the average numbers are, but there is kind of the elevated the customer acquisition. And so I think it just provides contact and we've tried to be very transparent, you know, throughout kind of our history and how we communicate the.

Doug Lane

No, it's very helpful. I always sort of base my models of the customer count per unit. That's really directionally where the business is going. But I just wanted to double check because I thought that you did run a direct selling business in China, right?

Jim Brown

Yes, that's accurate that, yes, a lot of people don't a lot of other companies in this space operate different models in China because of the complexity of the regulations there. And that's the other thing I wanted to talk about is that a year ago in the fourth quarter, we were still in zero COVID, I think, in China and that came off at the end of the year or so. I just wondered if you could put some color on the overall regulatory environment in China and how that's impacting your business.

Brent Neidig

Yes. So this is Brent during COVID. It was an interesting environment for those three years where the country was pretty much locked down. No one from you saw and was able to travel into the country that what happened, many of the regulators didn't matter what they oversaw. They really were repositioned to help fight COVID. So a lot of the historical meetings interactions that we would have had with the government agencies are really went quite quiet during COVID because they were so focused on fighting COVID. Well, now that COVID has passed and things are back to normal, more or less. We've started to reengage with the government agencies. And I would say it's very typical to what it was like before COVID. There's a good working relationship. There's understanding between both sides. And I think as long as your meal complying within the regulatory framework that's been outlaid. I think we have no reason to be nothing but optimistic about the future that we can continue to grow and develop our business there.

Doug Lane

And you're back to holding meetings the same pace pre-COVID or the same magnitude pre-COVID in China?

Brent Neidig

Yes, we have returned to our meeting cadence and size that was severely restricted during the COVID era. But now in April, we have our China convention that's coming up, and that is actually going to be held in Mainland China, and we haven't done that in several years. We've had a very large response to that. So we're very optimistic about that event. And we'll continue to hold events at a very regular cadence throughout the year.

Doug Lane

That's very helpful. Thank you.

Doug Hekking

Thanks, Doug.

Operator

Yes, again, as we have no further questions, I would like to turn it back over to Andrew, Mr. Duda, for any closing remarks.

Andrew Masuda

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 eight zero one nine five four 71 zero.

Operator

Thank you very much.
That concludes today's conference. You may now disconnect. Host, Timothy.