Hello, and welcome to the USANA Health Sciences Second Quarter Earnings Call. My name is Jess, and I'll be your coordinator for today's event. Please note, this call is being recorded. Until the duration of the call, your lines will be on listen-only. However, there will be the opportunity to ask questions. I will now hand over to your host, Andrew Masuda, to begin today's call. Thank you.

Thank you, Jess, and good morning, everyone. We appreciate you joining us to review our second-quarter 2024 results. Today's conference call is being broadcast live via webcast and can be accessed directly from our website. 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 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. I'm joined by our President and CEO, Jim Brown; our Chief Financial Officer, Doug Hekking; our Chief Commercial Officer, Brent Neidig, as well as other executives. Yesterday, after the market closed, we announced our second-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. During the second quarter, we saw continued macroeconomic pressure in several of our key markets which continued to impact our associates' productivity and consumer spending. We continue to take action to strategically address these challenges, including making USANA's overall value proposition more attractive. Our strategy includes restructuring our commercial team to better drive our initiatives, heightening our focus on product innovation, increasing our efforts to engage our sales leaders with an associate-first approach, expanding into India, and continuing to pursue M&A activities. These strategic initiatives are a meaningful undertaking and are focused on driving long-term performance. This effort will be a multiyear endeavor and will take time to fully realize the rewards of these efforts. Before providing a few highlights from the quarter, I'd like to provide an overview of the restructuring of our commercial team. Over the past several months, we have reorganized our sales, marketing, and communications departments into one commercial team to better position us to execute our customer growth strategy. A significant part of this strategy is centered on our ability to deliver three fundamental things to our sales force: best-in-class products, a simple message that highlights the benefits of these products, and an income opportunity that is simple, rewarding, and worthy of our associates' time and effort. Accordingly, our new commercial team is comprised of three core global teams: product, opportunity, and brand, as well as our regional and local business units. Our global teams are designed to do the following: The product team is responsible for ensuring that we bring innovative best-in-class nutritional products to the market. Accordingly, this team is focused on increasing our market share and driving customer growth, with science remaining at the core of our business. The opportunity team is focused on delivering a rewarding compensation plan with an associate-first approach offering for both part-time and full-time entrepreneurs. The brand team will deliver USANA's story and brand framework which will align all company messaging, both internally and externally, improving messaging effectiveness and bolstering our global reputation. I believe the collective output of the new commercial team will better position USANA to make these fundamental deliveries to our sales force and support long-term customer growth. Now on to some strategic highlights for the quarter. I recently returned from India after spending a week in our offices in Gurgaon with our local leadership team and sales force. While I was there, I saw the energy and excitement for USANA's brand and products from our sales force and customers. Our local leadership team, led by Regional Vice President and Managing Director Puneet Madan, continues to attract high-quality leaders, and we remain very excited about the long-term potential that this important market presents. As we've consistently communicated, sales contribution from this important opportunity is currently small. However, we plan to consistently and systematically build this market over the next several years. We also strengthened our leadership team across the company during the second quarter. Dr. Catherine Armstrong joined USANA as our new Executive Vice President of R&D. Dr. Armstrong received her PhD in Biochemistry from Notre Dame and is a seasoned scientific leader with 17 years of experience in consumer products, direct selling, and consulting. She brings a wealth of knowledge, technical prowess, and extensive expertise in product development and innovation. Dr. Armstrong will be instrumental in helping lead USANA's product development and innovative initiatives. Peter Wang has been promoted to Global Vice President and General Manager of China. Peter joined USANA Baby Care in January 2022. Since then, he has been instrumental in driving a transformation with our China sales business. He worked closely with the team to successfully launch China's Healthy Family strategy which is focused on ensuring China's continued growth over the next several years. He has played a pivotal role in driving sales, building close relationships with sales leaders, optimizing our business model, creating innovative growth strategies, and developing our organization. I'm truly excited about Peter's future contributions, as well as his dedication, enthusiasm, and leadership in this important market. I'll close by saying that we operate our business with a focus on building sustainable long-term success in the form of customer growth. I'm confident that successful execution of these strategies will position USANA to return to growth. With that, I'll now ask the operator to please open the lines for questions.

And our first question comes from the line of Anthony Lebiedzinski from Sidoti & Co. Please go ahead.

Good morning, and thank you for taking the questions. Overall, I think you guys did a pretty good job of explaining your second-quarter results in the press release and management commentary. So I'll focus most of my questions on forward-looking topics. But first, I just wanted to follow up, Jim, on one of the things that you said at the beginning of the call. One of the things that you're looking to do is to make the value proposition more attractive. Can you expand on that, what that means in terms of pricing or how should we think about that? And then I have a couple of other questions.

Yes. When I talk about the value proposition, you can get into specific products and how those are priced and how the opportunity rewards for the consumption of those products. But we always look at it as our team, our associates in the field need to be value adding in general. We want to supply more than just products and a great opportunity. We want to have other offerings that their customers and associates can depend on to stay as a community, as a family with USANA. But of course, it comes down to nuts and bolts as well on how we price our products. We will continue, as I stated in the opening comments, to be a science-based company and have premium products, and that's where we've been for the last 30 years, and we'll continue down that path.

Yes. Anthony, this is Doug. Maybe just chime in here. A lot of the value proposition, as we look at it, is conveying the differentiation of the products and also the innovation that we have on the horizon that Jim mentioned. So there's a host of things that go into that. You should not perceive this as just pushing down a path of price adjustments. This value-add and making sure the consumer understands the true differentiation of our products in addition to a great deal of product innovation on the horizon.

Got you. Okay. And just a follow-up on the product innovation side. I wanted to get a better understanding of that. As you're looking to focus more on new products, what is the typical time frame from the moment you think of an idea to when you bring it to the market? What is that time frame now, and what do you expect going forward with the changes you are making? I know this might be a simple question, but it may not have a simple answer. I just wanted to gain more clarity on that.

Yes. It's not really a simple answer. But I talked about it with the restructuring, and we've gone as far as restructuring internally and have three product teams over our product lines in nutritionals, skincare, and foods. It takes about 1.5 to two years from the initial decision to go down a path on a product, the science, the testing, and everything else. We're just not happy with that. We think we should be able to do it within a year's time. Those teams will be the catalyst to get that done. They have ownership. They're looking at the entire product life cycle, and of course, innovation in new ingredients or systems will help with that as well. But it's longer, and that's one of the reasons that we've made the decision to do some restructuring and get more of a team focus with cross-functional teams together to get things done quicker.

Got you. So this restructuring was completed, I believe, soon after Jim, you became CEO. So what's a reasonable time frame for you guys to see tangible benefits from this? I know it's going to take some time, but could we see something by next year or do you think it will take longer for that to play out?

Hey, Anthony. It's Brent here. I'll take that question. As Jim mentioned, historically, it takes upwards of three years in some instances to develop a product. That's just not satisfactory for us. So with this restructure, we've been able to accelerate the time it takes from ideation to commercialization. We expect, especially on our most premium differentiated products, that scientific research aspect is still going to be time-intensive. However, once that science has reached the point where we want to take the product through the commercialization process, we believe that through our transformation that's taken place internally, we could see 50% to 75% improvements or reductions in the time it takes to bring a product to market. More recently, we’ve seen the time from ideation to commercialization take as little as six months, which is a dramatic improvement for us internally. We’re going to continue to push hard on that process to make it as quick as possible because the market is always changing, and we need to ensure that we're meeting the market where it's at, not trying to play catch-up all the time. We’ll see improvements, and we have some additional products that are going to come to market soon this year, which we're happy about. We're planning many more upgrades and new products to be launched in 2025, so we're already starting to see the fruits of the restructure, and it's only going to get quicker over time.

Yes. And Anthony, I would chime in that both Brent Neidig and Walter Noot, as Jim assumed the mantle of CEO, took on additional responsibility. A lot of the back half of last year was them meeting with everybody, trying to reassess where we were at. The bulk of the changes in the actual structure with the right people in the right places have really been more recent than that. I think you've got the structure in place, and I think it's the right alignment, but I want you to have a correct understanding of kind of the timing of that.

Yes. It was really this past quarter when we made significant changes to the team size and structure. So within just a quarter, we've made dramatic improvements, and it's only going to accelerate over time.

That's great to hear. Just switching gears, I know in the release and commentary, you talked a little more about your acquisition strategy there. As far as the pipeline goes, can you speak to that in terms of potential acquisitions and then share buybacks? How are you thinking about that in light of the current stock price?

This is Walter Noot. For acquisitions, we've got a full pipeline. We've been very busy talking to companies and our biggest issue is ensuring that we acquire companies with a strong cash return. We spend a lot of time vetting these companies with our banks. Things seem to be opening up a bit right now; if you look at the general market, there appear to be more opportunities and more companies becoming available. There's a huge list right now, and we're very excited.

Yes. I want to add, when we're looking at business opportunities, we want a very strong management team that will stay on and run those businesses. We're looking at it from a long-term opportunity, not just something where you're going in to manage something and then go down the path of selling it. Our strategy is to bring great businesses on to be part of the USANA structure.

Yes. Anthony, this is Doug. I’ll follow up on the broader capital allocation narrative. It's a very similar discussion we've had in the past. Jim leads a lot of these conversations with the Board about capital allocation and where we're at. We're evaluating many opportunities, and share repurchase is definitely in our arsenal, but we're assessing that in context with other things we're currently evaluating too. It’s a discussion we have every quarter with the Board, and we’ll keep you updated. We really don’t have any comments at this point as far as future plans in the immediate near term.

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

Thanks, Anthony.

Thank you.

Your next question comes from the line of Linda Bolton-Weiser from D.A. Davidson. Please go ahead.

Hi. I was curious about what happened in the Mainland China region in the quarter. I was rather encouraged by the performance last quarter with some growth there, and then it seems like the growth went away even against, I think, an easier prior year comparison. Was it just that there were promotions in the first quarter but none in the second quarter? Could I get a little more color on China? Thanks.

Linda, this is Doug. I'm going to give you a brief response of what we've said historically here, and then I'm going to let Brent respond who has far more market insight in that key market for us. We had said at the end of our first quarter that we would expect a softer Q2 due to the promotional cadence. China had more prominent promotions in the prior year and the sequential quarter, and that's something we had called out a little bit. I'll let Brent go back and respond.

Hi, Linda. There was certainly some softness in the results, primarily due to two factors. First was the cadence of the promotional calendar that we have. We space promotions according to market needs, not necessarily to hit revenue targets, as we don’t want to overwhelm the long-term benefits. The second factor is that there is economic softness and headwinds we're seeing in the market right now. This all relates back to why we continue to look at strengthening our value proposition so that even during economic softness, people are willing to pay for premium solutions that meet their needs. The better we can cut through that noise within the marketplace, the more likely people will continue to choose USANA, and that's what we're striving towards.

Yes. And Linda, I would say, as Brent noted, we're really excited about the management team over there, especially with the elevation of Peter Wang. A solid team allows Brent to operate in a broader sense, so we're quite excited about the team structure there.

Okay. On the opposite side, the Americas and Europe regions did quite a bit better than our projections. Can you call out something that made the performance there different and better?

Yes. I think it's really the continued effort at addressing the current environment. The team has done a nice job. I would call out Canada, which has done particularly well, and we've been pleased with the progress there, especially in a sequential sense. We're gaining traction.

Yes, we're really pleased with our leadership here in the market, and they've been aggressively going after our associate-first strategy and reengaging local leaders, both in Canada and the Americas. That strategy is starting to take hold, and we’re developing positive momentum. This will tie into our Americas Europe convention taking place next month in Las Vegas, where we're excited about many key initiatives launching in the second half of the year. We're optimistic about the long-term trajectory of the market.

Your gross margin came in just about as I projected, and it seems stable. What is making the gross margin stable despite sales declines?

Numerous factors contribute to that situation. One is currency rates negatively affecting us. Non-variable costs are putting pressure on the top line. The mix dynamic regarding China has had robust gross margins that now represent a bigger share of the overall. We’ve seen improvements there. We've also seen our operations and procurement team do a good job managing the environment. There are a variety of factors at play.

One observation is that distributors often desire more training programs to assist them and their downlines in selling products. I don't hear you mentioning much about training initiatives. Is this an area needing more focus or is it not as relevant for your business?

Linda, it's Brent here, and you're speaking music to our ears. You've really hit it on the head. Part of the value proposition we provide for our associate-first strategy is not only providing a rewarding compensation opportunity. A big part of that is training, which plays a crucial role in their effectiveness and ability to portray our message to their prospects. Training takes up much of our commercial team's resources to deliver content in an engaging, concise manner for new associates so they can succeed right out of the gate. This training evolves with time, and we continuously provide education and resources for our associates to develop into their best selves and best customers, which aids their ability to present our products compellingly.

Okay, thank you. That's all from me.

Thanks, Linda.

Your next question comes from the line of Doug Lane from Water Tower Research. Please go ahead.

Hi. Good morning, everybody. Just looking at your revised guidance and trying to sort of back into some second-half trends we can expect. The two things I'd like to drill down on are, in my math, sales are looking to be in the second half somewhere close to flat to down, maybe mid-single digits, which is obviously an improvement from the first-half trend. So what drives you to believe that the trends will improve in the second half versus the first half?

Yes. Doug, this is Doug, your alter ego here. I think a great deal of what Jim and Brent discussed regarding the commercial team and the strategic initiatives outlined are key parts of that. One aspect is our active engagement with associates to ensure robust communication. We want to take every opportunity to talk with them, which is critical to our business. We heard this especially during the COVID period.

Yes. It's the cadence on promotions. We're going to address that some in the third and fourth quarters, but it's really about executing our strategy and aligning our efforts, just like Doug indicated. Our associate-first strategy is about providing them with tools to succeed, and training is a big part of that.

Thank you. That's helpful, Jim. The second thing I want to focus on is the operating margin where you revised your range but not very much despite the sales shortfall. The first-half operating margin was 9.5% to 9.6%. So how do you back into a second-half margin that's below that?

Yes. It really is the disconnect with the softer top line and loss of leverage with some infrastructure costs. We've been selective in paring back some infrastructure costs we don't deem as valuable going forward while also investing in the strategic initiatives that Jim mentioned. We'll continue to allocate our resources wisely, and the strength of our balance sheet allows us to lean into these initiatives knowing they will help growth.

That makes sense. If you're increasing your investment, sales trends should improve. Lastly, regarding the tax rate, it's been rising significantly into the 40% range after being in the upper 20s, low 30s. What's changed in USANA that's driving this tax increase?

I think the dynamics from a tax book standpoint of where income sits, that's the primary driver. We've experienced several years of currency adjustments and our concentration here in the U.S. creates some operational leverage dynamics. The softness in sales and where many investments occur on strategic initiatives are still domestic. There's more opportunity here, but no quick fix. We're looking at decisions to ensure the long-term health of the company.

Directionally, should we expect to remain in the 40s, or can you do something to get back into the 30s in the next year or two?

As we pursue the strategies driven by Brent, Walter, and Jim’s leadership, I believe that top-line momentum could aid in adjusting that tax rate, and we'll see the impact of capital allocation decisions moving forward. Okay. Thanks, Doug.

We currently have no questions in the queue. We have no further questions in the queue. I will turn the call back over to your hosts for any closing remarks.

Thank you, Jess, and thank you, everyone, for your questions and participation in today's conference call. If you have any remaining questions, please feel free to contact Investor Relations.

Thank you for joining today's call. You may now disconnect your lines.