Usana Health Sciences Inc Q1 FY2021 Earnings Call

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. Patrique Richards, Executive Director of Investor Relations and Business Development. Mr. Richards, please go ahead.

Thank you. Good morning. We appreciate you joining us this morning 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 outlook for fiscal year 2021, 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 Hekking; as well as other executives. Yesterday after the market closed, we announced our first quarter results and posted our management commentary results and outlook 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 first quarter results. This was another excellent quarter and a great start to an exciting year for USANA. We generated double-digit sales growth in each of our regions and total customers increased both year-over-year and sequentially. This is better than expected performance and was driven by the successful execution of our first quarter initiatives and continued strong demand for our high-quality nutritional products. Accordingly, we've raised our full year net sales and diluted EPS outlook. In addition to our financial performance, we accomplished several other key initiatives. In late March, we launched our new, much appreciated and anticipated active nutrition product line and the initial reactions from our customers have been very encouraging. This product line promotes a holistic approach to healthy weight management, as well as digestive health, energy, and hydration. While the initial launch of the line was limited to the United States, Canada, Mexico, Australia, and New Zealand, we plan to roll the line out to additional markets as the year progresses. Additionally, we continue to execute our digital experience strategy, which entails further enhancing the overall shopping experience for our customers with a particular emphasis on the China market. These enhancements allow consumers to easily interact with USANA while sharing their experiences with others. Finally, I'll comment briefly on our updated guidance. As we noted in yesterday's release, we raised both net sales and diluted EPS guidance. While we don't provide quarterly guidance, we noted that we have planned for and are offering a worldwide short-term sales program during the second quarter. This program is designed to further reward associates for sales to new customers for a limited period of time and is being offered in each of our markets. We offered a similar short-term sales program during the third quarter of 2020, which was very successful. We anticipate a reasonably similar response in the second quarter this year. Accordingly, we expect our net sales in the second quarter to be the highest net sales quarter of the year as we ramp up our strategy. In closing, we believe that we are positioned for continued growth and are confident in our overall strategies, both long-term and for 2021. With that, I'll now ask the operator to please open the lines for questions.

Kevin, you mentioned the active nutrition launch in the market since you introduced it recently, but where specifically do you see the timing for the Asian markets, particularly China? I mean, third quarter, fourth quarter or late in the second quarter? Just a little bit more granularity on that?

Yes, Doug. This is Doug. So China, just because of the regulatory timeframe for products is probably going to not be this year. I mean, they're obviously doing some products in line with the overall product category here. But having the full rollout for some of the other stuff, I don't think we'll expect in the current fiscal year.

But what about Korea, Philippines, those kinds of markets?

Yes. We have pretty much six more markets in the Asia Pacific focused happening in the third and fourth quarters of this year. And like we've talked about before, with active nutrition it actually started the last day in March, so we really didn't have an impact on the first quarter; we'll see more of an impact in the second quarter, as you know, the sales start going for the first markets that were launched. But again, we'll see more of the impact in 2022 because, again, the rollouts happened in the third and fourth quarter for the remaining markets.

And Doug, this is Kevin. Part of the active nutrition line includes our meal replacement drink, NUTRIMEAL. We are planning to reintroduce it in China, but it won't be part of the active nutrition line. NUTRIMEAL is included in that line, and we expect to launch it in the third or fourth quarter in China. Doug, I would like to follow up briefly on the Active Nutrition. In terms of strategy alignment, we have been investing in the plant and in building brands. Internally, we are quite excited about the potential impact of this. While it's still early during the launch period, we are encouraged by the initial response we are observing.

You're four weeks into it, so you should have some initial feedback, which is good to hear. Can you discuss the near-term promotion that's boosting sales in the second quarter? However, based on my calculations, there seems to be a significant slowdown in growth anticipated in the third and fourth quarters. Is this simply due to comparisons, or is there something else happening beneath the surface, especially with the rollout of this new product that you hope will help with those comparisons to last year?

Yes, I think your observations are accurate, but the comps, if you look at the third quarter of last year, we ran the same promotion that we're talking about in the second quarter this year and the third quarter of last year. And then, the fourth quarter of last year, we had that extra fiscal week. So yes, you're right. There are a few events that are doing the other stuff. But I think we're pleased with how we're executing, and the results in the first quarter for us were beyond our expectations, modestly.

Yes, yes. And then, just lastly, the organic growth in Mainland China of 8.1%. Probably the best quarter in at least a couple of years here. So is that again, just trying to get a feel for sustainability of the accelerated growth in Mainland China? Was there a one-off event, promotion, something going on there? Or can we expect to see some sustainability of this kind of growth rate?

I think it would be mindful, like what we talked about, we're running in the second quarter. I mean, that's in all the markets. So we did obviously expect to go back and see China benefit from that as well. We often offer promotional packs right around Chinese New Year, the Lunar New Year, and China had similar type packs last year, but they just sold a little bit better this year, and that was definitely additive. We talked to our management team in China and the executives responsible for that. What we're hearing is positivity, and we just have to go back and keep driving on that customer account growth number, and then that really takes care of itself going forward.

Thank you. And we will take our next question from Sebastian Barbero of Jefferies.

It is encouraging to see growth accelerating in Q1. Can you provide more insights on the recent trends in the Chinese consumer health market, any changes in consumer behavior, your ability to hold meetings, and what percentage of your sales are now going through the WeChat platform?

So Brent Neidig, who has responsibility for the China market, is sitting with us. We'll let him chime in and comment on that.

Yes, I would say that the market is returning to a somewhat normal condition. The impacts from the coronavirus last year really helped slow down growth. And I think things are somewhat returning to normal this year. So it's returning to a somewhat normal state.

And you have the ability to be holding meetings today. And if so, what's the size of them?

Yes, meetings have returned. They aren't at the same level as in previous years, but there is a positive upward trend. Additionally, we are seeing about 10% of our weekly enrollments coming through the WeChat platform.

Got it. Okay. And the Q4 20 results, the team guided for China growth of 6% to 12% for the year. Now, Q1 was 13%. So a bit of an overdelivery there, do you have any changes to your full year guide in terms of flexibility for China growth?

No, we don't. I think we're still right in that range, Sebastian, relative to our numbers. And I think there's ebbs and flows in different periods. And like we said, a few of these short-term promotional things around the Chinese New Year outperformed what we expected. And maybe that same level isn't present every quarter, but we do expect kind of, as indicated, some good growth in China this year and expect to see some good progress.

Okay. Thank you. And then, that was still early. There's starting to be evidence that your digital investments are shifting the premise of the model more towards a high base of preferred customers, which has been a goal of yours over the past couple of years. Curious to learn more about the feedback you've been getting from associates in the new digital tools and training you're providing? And also, how you're expecting personalization to improve customer experience?

Yes. I mean, obviously, over the last several years, we have really increased our focus on the preferred customers. And again, you can go back and definitively see that with accounts and the preferred customers. Our general belief is the more we market directly to consumers, the easier the job is by the associate. And the easier it is to build a business. But you're right, training programs and information, and just better and more refined communication is something that's well underway. We have a host of teams that are working on onboarding and customer listening. And we're able to go back and be pretty responsive to kind of short-term feedback that we're seeing. We're also actively looking at retargeting associates and customers with certain behaviors that have purchased from us in the past and seeing some success there. And we're fairly early in the game, but we see some opportunity for going forward.

You announced that you bought back $70 million of shares in the first quarter and there are remaining funds under the existing plan. Can you help us understand your capital allocation priorities for the rest of the year?

You're correct, Sebastian. If we look at our cash levels, we've decreased slightly from our typical range. However, we still see opportunities given the current pricing, which seems a bit disconnected from our performance. If you review various models, you'll find that our spending is projected to increase this year due to several strategic initiatives, which we outlined in our first release of annual guidance. I anticipate we will see a consistent trend, and we'll remain opportunistic based on the current environment. As we've stated, we're actively assessing various business development opportunities, and it's possible something may materialize. Our main focus is on expanding our existing business, and everything else will follow in terms of priority.

Thank you. This concludes today's question-and-answer session. I would now like to turn it back over to Patrique Richards.

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 801-954-7961.

Thank you, ladies and gentlemen for your participation in today's call. You may now disconnect.