Good morning, and welcome to the USANA Health Sciences Second Quarter Earnings Call. 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 second 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 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 Hekking; our Chief Commercial Officer, Brent Neidig; our Chief Operating Officer, Walter Noot, 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. USANA delivered positive second quarter results consistent with our internal expectations. Consolidated net sales grew 11% year-over-year, and adjusted earnings per share increased 36% from the prior year. Notably, we repaid our line of credit, which had carried a balance since our acquisition of Hiya this past December, and ended the quarter debt-free with $151 million in cash on the balance sheet. From an execution standpoint, this was a pivotal quarter for USANA as several strategic initiatives are in the process of being implemented. These initiatives are designed to strengthen our partnership with our brand partners, whom we used to refer to as associates, accelerate product innovation, elevate the business opportunity, and evolve our brand messaging. As I mentioned, we made a deliberate and intentional decision to change the terminology we use when referencing our sales leaders from associates to brand partners. The term brand partners reflects a more strategic, collaborative relationship and better represents the crucial role these individuals play in the sustainable long-term growth of our business. If you recall, last year, we reorganized our sales, marketing, and communications departments in our direct selling business into one cohesive commercial team. This team is focused on delivering three fundamental benefits to our brand partners: best-in-class products, an income opportunity that is simple and motivates the entrepreneur with a rewarding compensation plan, and messaging that conveys product benefits and an income opportunity in a simple and compelling manner. This structure also positions us to improve the value proposition of USANA to our brand partners and customers by enhancing our already best-in-class products, becoming faster and more agile in developing and releasing new products, better understanding specific brand partner and customer needs in each of our markets to deliver a more tailored experience, providing increased opportunities for brand partner engagement, including events, meetings, and reward trips, and improving USANA's compensation offering for both part-time and full-time entrepreneurs. By making these changes, USANA will be at the forefront of today's evolving and competitive landscape for entrepreneurs. At a high level, our new opportunity entails an enhanced compensation plan, improved business building tools, and an updated brand story. Our updated compensation plan is a meaningful step forward in modernizing and simplifying our direct sales model to attract and reward new generations of entrepreneurs as well as existing brand partners. Some of these enhancements and incentives have already been deployed, and more incentives will roll out throughout the third quarter and fully launch by October, providing USANA brand partners with an improved opportunity and supporting resources to drive customer acquisition and retention. The compensation enhancements also simplify the opportunity for brand partners to attract new generations of entrepreneurs by providing a better opportunity for new brand partners to earn compensation early in their USANA journey while simultaneously rewarding existing brand partners for activity that contributes to growth. Along with these enhancements, we've also launched new tools in our back office and mobile environment to make operating the USANA business easier than ever. For example, new functionalities will provide brand partners with data-driven recommendations on how to grow their business and maximize their earnings. We have refined our brand by using clear language that highlights USANA's key differentiators and present them in a compelling and easily repeatable format. Additionally, we continue to enhance our in-person meeting strategy, and our key regions plan to host more in-person events that are upscale and modern to attract new and younger generations. In conjunction with our new opportunity, we plan to announce several additional product launches, along with various sales incentive offerings at our upcoming global convention next month in Salt Lake City. We expect approximately 3,500 of our best and most active brand partners from around the world to attend our global convention, and we plan to focus on recognizing their efforts and on actionable training to help them grow their businesses and to share more products. We're excited, optimistic, and confident that these changes we are making to our direct sales model will be additive to customer growth, increase engagement, and deliver long-term sustainable growth. Moving on to our acquired businesses. We are encouraged by the recent performance of these entities, which provide USANA the ability to reach a broader demographic of the health and wellness market while providing diversification and strengthening USANA's financial profile. I'll start by sharing an update on our direct-to-consumer business Hiya. Hiya had another strong quarter as year-over-year top-line growth remained strong with improved profitability. Overall business activity levels remain encouraging as the Hiya team recently launched a new partnership with Disney and rolled out Special Edition Disney Lion King and Disney Princesses branded multivitamin packs. We completed additional integration milestones during the quarter. And as we move into the next phase of the integration in the back half of the year, we will look to execute upon identified synergies and operational efficiency opportunities across logistics and manufacturing. We remain confident in Hiya's growth outlook as the Hiya team continues to execute its strategies to increase its market share in the children's health and wellness market by further growing and expanding its product offering, entering new distribution channels, and expanding its geographic footprint into international markets. Rise Bar, which was acquired in 2022, delivered strong double-digit top-line growth in the second quarter driven by solid order activity with key retail partners. While still relatively small, we are encouraged by the recent momentum, and the Rise Bar team remains confident and focused on expanding its product offerings, growing further with existing retail partners and landing new retail partners. Please note that we are investing meaningfully in the third quarter as we hold our global convention, introduce new and updated products, and roll out exciting changes to our brand partner compensation plan. These investments, which have been included in our annual guidance, are anticipated to create short-term pressure on our operating margin during the third quarter. In closing, this is an exciting time for USANA as we take meaningful steps to modernize and evolve our direct sales business. Our acquired businesses are performing well, and will further allow us to expand our reach in the health and wellness market. We remain confident in our fiscal 2025 outlook and believe that the successful execution of our strategies will deliver sustainable long-term growth. With that, I'll now ask the operator to open the line for questions.

And our first question comes from Anthony Lebiedzinski with Sidoti & Company.

So first, starting off with China. So your sales in your largest market outperformed our expectations even with a drop in active customers. So can you just provide more insight as to what's going on in China? What are you seeing there? What happened in the quarter? And how should we think about the balance of the year, especially with the upcoming incentive program changes?

You bet, Anthony, it's Brent here. Thanks for the question. We were pleased with the performance of China throughout the quarter. Now if you recall, there was a lot of tariff activity that took place this year, obviously, and especially with our Chinese business. We have about a little bit of exposure from cross-border goods that are coming from the United States into China. And because of the tariff uncertainty, we did experience some increased buy-up from our consumers in the market, which did attribute to some of the increase in performance throughout the quarter. But that tariff exposure outside of that, we were pleased with the performance from our brand partners. There still is a lot of optimism in the marketplace. We have a great management team there, and there's a lot of cohesion amongst our brand partners. So things are still performing well. There is economic uncertainty, which we're still paying close attention to. But outside of that, I think we're very optimistic about what the long-term potential of that Chinese market is.

Got it. Yes. And then just looking at your overall active customer count, so as far as the overall decline that we saw in the second quarter, how much do you think was macro-driven versus some of it was because of the upcoming changes in the compensation programs, do you think?

I think there's a good portion that's attributable to the latter that we did get out that we were going to be making adjustments to the incentive program, and our sales teams around the world have been working for the last month in extensive communication with our brand partners to help them understand what the changes are. And naturally, through that process, there's always going to be some reservation about learning what that new program is and how that affects them. And so we did see a decrease in acquisition, especially in the latter half of the quarter, and that really impacts that active customer count. So that's something that we knew would happen. And we're optimistic that this trend will turn around here in the third quarter as these new incentives continue to roll out.

Got it. Okay. So perhaps, I mean, you could just give us an example of maybe just walk us through an example of how a new brand partner would be compensated under the new incentive program compared to the legacy incentive program? Is this something you could just provide us kind of more details with?

Yes, sure. So we found through our research and through our data that, especially with the current trends in the marketplace, it's becoming harder and harder for people to find success early on in their journey with USANA, and so that's something we specifically wanted to address with these enhancements. The vast majority of our incentive program has remained unchanged, but there are some smaller elements of the plan that specifically relate to bonuses for behavior that we've made adjustments to. And we've brought some money forward in the beginning part of the journey of a new brand partner. So before, a new brand partner would join, they would buy product for themselves, and they would try to start selling product to other people. And oftentimes, it would take them too long for them to earn their first commission check. And so with these enhancements, as I said, we brought some money forward in that journey to where you can immediately start earning income off every single sale that you make to a new customer or to a new brand partner. So that's a big adjustment that's been made. We've made some other tweaks to some of the other bonuses within the program. But as a whole, our main goal is to drive acquisition through these enhancements to make it easier for people to join, make it easier for them to earn. And as they earn more quickly, they'll feel and know that USANA is successful, that this journey was the right choice for them, and they'll want to stick with it longer.

That's very helpful. I want to revisit the impact of tariffs. I know you've mentioned it briefly, but could you elaborate on how tariffs have affected your business this quarter? Also, how are you planning to address this for the remainder of the year?

Anthony, this is Doug. The impact thus far has been fairly minimal. The operations and procurement team has done a really good job getting ahead of this with their sourcing strategy and really buying ahead of some of the potential exposure on the tariffs. We really haven't seen that much get put into place. And this is on kind of primarily the importing of raws from market to market, which is not a real big part regardless. We still see a lot of positioning from negotiating power, and we're not quite sure where that will land. So I think we'll just keep evaluating and definitely putting a lot of effort. You can see that in our inventory build during the quarter. We'll update as we get more visibility to see what type of tariffs or trade policy type impact we see going forward.

Got you. Yes. And then switching gears to Hiya. So as far as their second quarter sales results, we could see what you guys did here. Can you give us a sort of a frame of reference as to how that compares to the year ago as far as the growth level there? Can you speak to that? I would be curious to get your thoughts on that.

Hiya has experienced good growth. At the beginning of the year, they started building up their customer base. Typically, there's a slight slowdown during the summer months, which they also experienced and anticipated in our models. As the year progresses, sales usually begin to increase. We have seen significant growth this year compared to last year, as reflected in the numbers. We also expect that August, particularly with the launch of Princess and other Disney products, will be a big opportunity for them.

Got you. Okay. And then just thinking about the integration, it sounds like you guys are pleased with how that's performed so far. Can you speak to the expected synergies and operational efficiencies that you may get from improved manufacturing and logistics? And I guess the second part would be also how are you guys thinking about the expanding distribution of Hiya products beyond the core subscription business?

Yes. Anthony, maybe I'll take those in reverse order. I'll let Walter chime in here if he needs some clarification. I think right now, we're going to just focus on the Hiya products within Hiya. We definitely see some opportunity down the road there, and we'll evaluate that over some reasonable period of time. The group has been actively working on a host of operational initiatives and integration initiatives relative to getting Hiya really prepped. They've got a great team, and we're making good progress on stuff. Probably a little bit early to be calling our shots as far as the savings and the uplift from there. But as we start seeing those get realized, we'll report on those and create some visibility.

Yes. And I would say without really giving numbers yet, I would say that the benefit that we're giving them is our expertise in operations because we have big operations teams, and they're really great at doing DTC. They're amazing at that. And we think they've been outsourcing their manufacturing of vitamins, powders, their 3PL that they've used. All those different areas that things that we do throughout the world, we've been helping them with, and I think you'll see in the next few quarters, you'll start seeing progress with those things. It will be really good.

Yes. This is Jim. As I mentioned earlier, we are also assisting them with potential international businesses and markets that they may enter. This won't be immediate, but you can expect to see developments in 2026 or later. Our teams are providing support because we have highly skilled individuals who have helped us establish our presence in 25 markets globally.

Got it. Okay. Yes. And nice to see you guys accelerating the share buyback so far this year. Just curious as to what your appetite is for additional share buybacks kind of going forward here?

Yes, we're going to be somewhat opportunistic. We really haven't commented and don't comment on prospective buybacks, but this is a conversation we have every Board meeting, and we discuss it and kind of discuss the efficient allocation of capital. And so that will be top of mind and trying to maximize the resources the company has. I think we feel very good about the strength of our balance sheet moving forward as well.

Got you. Okay. And then lastly for me. I mean, so obviously, you're still busy integrating Hiya. But longer term, what's your outlook about potential additional acquisition opportunities?

Yes. Just like Doug mentioned, we're looking at cash flow and cash management. We need to have some time to build, but we do have an active M&A department who are looking at opportunities. We'd love to find something out there, again, Hiya #2 or something that fits into our direction from health products. But again, it's probably going to take a little bit of time to build up enough cash to find something appealing to us. But we do have that team out there looking. And you never know something may come across their desk today, and we'd have to react to it.

Understood. Well, best of luck.

Thanks, Anthony.

Your next question comes from Ivan Feinseth with Tigress Financial Partners.

Congratulations on the results and ongoing progress.

Appreciate it, Ivan.

Right. So in light of RFK's Make America Healthy initiative, especially targeting ingredients in products and especially for children. What kind of opportunities do you see that gives you a competitive advantage in where you are? And what do you see as opportunities to follow this trend or get in on this trend going forward?

Yes, Ivan, this is Doug. I think really, foundationally, the way the company is run, we've been very deliberate, very intentional with how we develop and introduce products and what we feel really good about. It's really in our DNA. I think moving forward, you'll see more of that. And I think sometimes the environment fits there, and I think it will weed out some of the products that pop up day in and day out and kind of roll off. And so I think that definitely provides some opportunity for us. Brent, I don't know if anything else from kind of our product strategy approach.

Clearly, we're always taking a look at the external environment and trying to evaluate what we're doing internally to make sure that there's a good match there. I think the one thing that I'd say on this point, Ivan, is that we feel very confident in the internal team that we've developed, both on the commercial side and within the R&D function. With the leadership of those two groups and with the teams that they have created, we can be more agile and more responsive to key trends that we see in the marketplace. We've always been strong at that. But I think with the adjustments that we've made over the last year, we've become even more responsive. That's been a big part of the commercial team's restructure, is that we want to make sure that we have a very robust product engine that is quick, that it's responsive and that it's really responding to what's happening out in the marketplace and giving our brand partners the right products that they need to succeed out in the marketplace. So we're confident in our team's ability moving forward, and we'll continue to pay attention to those trends.

And Ivan, this is Walter. You talked about kids' health, I mean that's what Hiya does. And they're really poised for this. This is one of the reasons we were very excited about them when we saw them because they were beating all the trends in kids vitamins because they have really clean natural products, and we really believe in what they sell. So they're going to do great.

I believe that establishing healthy habits early is important, especially for young people who can sometimes develop poor eating habits. I appreciate your acquisition of Hiya and the progress they are making. Additionally, regarding the new brand partner concept, what tools or infrastructure are you developing to assist them, particularly in terms of technology like CRM systems? What support are you providing on social media to help brand partners grow their businesses using these platforms? Are you constructing an infrastructure that empowers brand partners who choose to pursue this as a career by providing them with the necessary business development tools for success?

That's a great question. In addition to providing the right product and incentives to help our sellers succeed, we believe it's crucial to equip them with the right tools. Part of the compensation enhancements rolled out at the end of last quarter and into this quarter includes improvements to the IT infrastructure and the tools available to our sellers. We're focusing on being more predictive by offering data-driven insights on which individuals within their network they should engage with to maximize opportunities. We've introduced a couple of new tools as part of this initiative, and more will be added as the launch progresses this quarter. We're also looking into additional tools related to social media to assist our brand partners in communicating effectively. Currently, one tool is being tested with a small group of brand partners, and if successful, we may roll it out more broadly. We remain proactive in this area and will continue assessing tools to ensure our brand partners have what they need to thrive.

Yes, I mean, this is Jim. Another area, just to add on to what Brent is talking about is we're like a lot of companies getting more and more involved with AI, and we see that as an opportunity to advance our tools for the future. We have a few tools right now that are being evaluated. We've got to make sure we feel comfortable with how the AI functions with our data points, but I think it's going to be a big improvement over the next few quarters and years when it comes down to how we can help our brand partners make decisions on where to put their efforts.

Congratulations again, and good luck going forward.

Thank you. Appreciate it, Ivan.

And there are no further questions at this time. So I'll hand the floor back to Andrew Masuda for closing remarks.

Thanks for your questions and participation on today's conference call. If you have any remaining questions, please feel free to contact Investor Relations at (801) 954-7210.

Thank you. This concludes today's call. All parties may disconnect. Have a good day.