Earnings Call Transcript - USNA Q3 2025

Operator, Operator

Greetings, and welcome to the USANA Health Sciences third 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.

Andrew Masuda, Director of Investor Relations

Thanks, 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.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 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 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.

Jim Brown, President and CEO

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 on 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. 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 in the location of our inventory to support tariff mitigation efforts and working capital investments in our venture companies, Hiya and Rise Bar. 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, improved control of inventory levels and help to mitigate supply chain risk 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 the 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, Hiya. Although Hiya 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 Hiya is fully operating as a subsidiary of a public company. There has been significant progress made that we believe will support the Hiya 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 Hiya in the new product formulation, international expansion and cost savings opportunities. Another example, we anticipate to begin the manufacturing of Hiya 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 Hiya 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 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 are 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 rightsizing 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 Hiya 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.

Operator, Operator

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

Anthony Lebiedzinski, Analyst

You mentioned both in the release and this morning that you've observed an uptick in sales activity and leader productivity recently, which is promising. Could you provide some additional insights into the trajectory of your business trends from July through August, September, and so far in October?

Brent Neidig, Chief Commercial Officer

Sure, Anthony. It's Brent. We have seen some promising trends from our new compensation plan that was launched earlier in July. And I think primarily what we've seen is we've seen more engagement and excitement around the offering than we historically have seen over the last couple of years. So it's been quite promising from that perspective. As Jim mentioned in his notes, we're really trying to focus on the upfront earnings opportunity. We know that as soon as people can engage with USANA, as soon as they see success and that they can see that success sooner, they're more likely to stay with us longer. And so that's what's really resonated with our field right now and our Brand Partners. And historically, that's somewhat been a challenge over the last couple of years. As people's expectations have changed in today's marketplace, they've been looking for an easier upfront earnings opportunity, and we feel like we've delivered on that front. So it's still early. Yet what we've seen in September, now the first couple of weeks in October, all signs are pretty promising, especially from our more mature markets like the United States. We've seen some reengagement from some of our longer tenured Brand Partners, which is really encouraging to see.

Jim Brown, President and CEO

Yes. Just a further comment on that. During the quarter, we mentioned we didn't have the best quarter or it didn't meet our expectations. We did the kind of launch at the beginning of July of the compensation enhancement as well as some other stuff for our Brand Partners, and we saw a slowdown at that point in time where people were absorbing and not really getting into the business for a while. And then we've seen what Brent talked about. The pickup has really been after our Global Convention in August. So it really hit right at the end of August into September. So very promising signs, but again, early yet.

Doug Hekking, Chief Financial Officer

Yes. And Anthony, this is Doug. Just for context, and we talked about a little bit of this in the prerelease. When you roll a lot of information out, as Jim said, it takes some time to process. So we anticipated a little bit of softness as they took time to digest and understand and have some more of these in-person meetings. And our convention served and that investment there, I think, served as well to be able to have some of those conversations. But we saw maybe a little bit softer than we anticipated and lasted a little bit longer. But as Jim and Brent both indicated, we're pleased by kind of the traction we have now. There's a lot of work to do, but we're definitely leaning into it and working on executing the plan.

Anthony Lebiedzinski, Analyst

All right. That's very helpful context. And I guess that explains why the Americas and Europe region performed relatively better than some of your other regions, I guess, right, as far as looking at the percentage of your sales declines. Is that why? Because they're more mature of those markets?

Doug Hekking, Chief Financial Officer

We had the event and made some sales there. It's important to note that the Rise Bar represents a relatively small percentage of our overall sales. You can see that reflected in the figures we provided for the Americas and Europe. While what Brent mentioned is certainly accurate, it's also true that part of our contribution comes from improved performance at Rise Bar.

Anthony Lebiedzinski, Analyst

Got it. Okay. And then can you just also talk about the incentives that you plan for the fourth quarter and whether some of those incentives may need to spill over into early '26? Or do you think this is just a short-term one-quarter event?

Brent Neidig, Chief Commercial Officer

Yes. Anthony, we're going to continue to look for strategic opportunities to provide incentives for our Brand Partners. Specifically now, as we've just launched our new compensation offering, it's really important for all of our Brand Partners around the world to understand it, to feel excitement around that offering and to really get going working according to that plan. So I think it's been indicated already, but we do have some incentives planned for the fourth quarter which should help us land with where we're guiding in terms of revenue. And it certainly will spill over into Q1 of next year just like it always does. We're always looking for opportunities for promotions to incentivize our Brand Partners.

Anthony Lebiedzinski, Analyst

Understood. Okay. And then just switching gears to Hiya. So as I look at the active customer count, that has declined. Can you talk about the reasons for that? And how confident are you that Hiya can get back to growth next year?

Walter Noot, Chief Operating Officer

Yes. This is Walter. Yes, we're very confident with Hiya. We've had some slowdowns. In the third quarter, we expected more pickup because typically, their business is all direct-to-consumer and they do a lot of marketing through Meta. And Meta has changed algorithms and so we're trying to figure that out. And we've been through this multiple times with Hiya in the past so we expect that to bounce back. And as Hiya continues to grow through direct-to-consumer and retail and international expansion, yes, we expect that to continue to grow.

Anthony Lebiedzinski, Analyst

Got it. Okay. And then lastly for me before I pass it on to others. So in terms of just the rightsizing of your organization that you plan to do in the fourth quarter, how should we think about the level of annualized operating cost savings that you plan to achieve with this?

Doug Hekking, Chief Financial Officer

Yes. Anthony, this is Doug. So we're very early in the process. And so one of the components, as Jim mentioned, the rightsizing of staff is part of it. There's far more to it than there. And so I think what we'll look to do because we still got a lot of work and analysis and progress to make, we'll look to comment on that in February more fully. But we definitely expect to go back and see some cost savings and kind of cost reduction as a part of this process. And we'll talk about that in more detail in February.

Operator, Operator

Our next question comes from Susan Anderson with Canaccord Genuity.

Susan Anderson, Analyst

I guess maybe just a follow-up on Hiya. It sounds like as you integrate it further, maybe there's some more efficiencies to be had there. Maybe if you could talk about that a little bit more, I don't know if you could quantify it and the impact it's going to have to margins at all.

Walter Noot, Chief Operating Officer

Well, I won't provide all the specifics just yet, but we will have more information in February. To clarify, Hiya's main product is vitamins, and they also offer protein powders. We have reformulated their products for our manufacturing process, and we are fully prepared to produce all of their vitamins in-house. Additionally, we excel in operational efficiencies due to our business scale, allowing us to effectively support the supply chain. Previously, Hiya was using a third-party logistics provider, and we assisted them in transitioning to a new provider, which significantly reduced costs and improved efficiency.

Susan Anderson, Analyst

Okay. Great. That's really helpful. And then maybe if you could just talk a little bit about just the industry in general. Are you seeing any, I guess, slowdown from consumers as it relates to either VMS or wellness purchases? Are they looking for more value maybe than what they were 6 months or a year ago? And I guess maybe if you could talk about it by region as well.

Doug Hekking, Chief Financial Officer

Yes. Susan, to clarify, this is on the broader business, not specifically related to Hiya. Is that accurate?

Jim Brown, President and CEO

Yes. We're a part of some associations that help the industry in general. And quite honestly, the direct selling business has struggled over the past few years, probably since COVID. A lot of direct selling companies are basically enhancing their offerings, making it quicker and easier to earn modest income as well as share products. So we have seen that same struggle over that time period. But I think we're getting there when it comes to what we just offered in July through August of this year, and we're setting ourselves up for the future. Yes. And definitely, the product or the vitamin side of the business has struggled some. There is a lot of competition out there. And our biggest challenge is to make sure that we can easily show people our competitive offering. And again, our offering is a little bit different than some of the companies out there because of the direct selling industry. We offer fantastic products as well as an opportunity to earn. So that's one of the highlights when we go out there when we look at Hiya and Rise. And that information, I'll let Walter speak to that.

Walter Noot, Chief Operating Officer

Hiya focuses on children's vitamins, and the market for these products is quite competitive. However, Hiya offers a unique experience for its customers, and its direct-to-consumer subscription model has proven to be very successful for us. They have gained market share from other brands and are likely to continue this trend. On the other hand, Rise offers protein powders, bars, and ready-to-drink products, and this segment is also performing very well for us, particularly due to the increasing demand for protein in the U.S. We are effectively taking advantage of this growth opportunity with both Hiya and Rise.

Doug Hekking, Chief Financial Officer

Yes. And Susan, a little bit more color on kind of just the broader category and what we're seeing with the consumers. We also play in a space where we have what I believe to be the best quality product out there. And one of the commercial team's strategies is to get better and better and better at articulating that story so they really understand the value proposition. We're not a commodity-type product. That's not a place we're going to play. And we're going to continue to differentiate what we're offering and we're going to make sure that we convey that story so consumers understand the differentiation of our products.

Susan Anderson, Analyst

Okay. Great. Can you share your thoughts on whether there's an opportunity for Hiya to acquire more direct-to-consumer businesses? The direct-to-consumer segment seems to be performing well. How do you envision your future strategy in this area?

Jim Brown, President and CEO

Yes. This is Jim. You're definitely hitting it. Our future strategy is diversification. We're committed to the direct selling channel. We're going to continue to work on making that grow and be a big engine. As we get cash through our business, we are going to look at other opportunities in M&A or opportunities within the companies that are there to actually expand within. So yes, that is part of our strategy. I think diversification will make a stronger USANA and we'll continue down that path. And even if you look at where we've been with direct sales and getting modest growth there just over time with the growth rates of both Hiya and Rise, we'll see a shift in our overall portfolio of getting more omni-channel and more diversified.

Doug Hekking, Chief Financial Officer

Yes. I would also say kind of given the recent announcement during the fourth quarter, as we look to pivot to be more agile and adaptable and work on some of these cost reductions from a capital allocation priority in the near term, it will be investing in the commercial strategy as the top priority and, as Jim mentioned, kind of our venture companies because we see really good opportunity in both Hiya and Rise. And we continue to evaluate different opportunities. But those, without a doubt, will be our priorities from a capital allocation.

Operator, Operator

There are no further questions at this time, so I'll hand the floor back to Andrew Masuda for closing remarks. Actually, one question just came in from Ivan Feinseth with Tigress Financial Partners.

Ivan Feinseth, Analyst

I have a few questions. As far as now, I see your strategy is to delineate between direct-to-consumer and still your sales marketing channel. But as an example, there's still a lot of confusion about supplements that I feel that your adviser channel can help. Like everybody is saying the #1 supplement that you should take is magnesium. But there's just tons of different formulations. You should take magnesium formulated with different amino acids or different formulations at night versus the morning. How do you feel your product line could meet some of those demands and that your adviser channel could help consumers better understand that?

Kathryn Armstrong, Advisor

Ivan, it's Kathryn. I think the data on magnesium is interesting and still, as we've discussed, a little confusing, right? So when we look at the clinical data and sort of who has been pushing the clinicals and what types of forms have been studied and whether or not there's been a lot of A/B testing of them versus each other, the data there is not consistent and solid. I think in alignment with USANA's core values, right, we are always prioritizing science and ensuring that our customers and Brand Partners have the best possible options. So we continue to look at different magnesium blends as well as all of the different elements that are important for human health. And we'll continue to look at that and to ensure that the research that's being vetted is being vetted objectively.

Ivan Feinseth, Analyst

And then how do you feel that RFK's Make America Healthy initiative is helping you to create some sales opportunity, getting more people interested in the need for supplements? How are you kind of capitalizing on that both direct-to-consumer and to your sales channels?

Jim Brown, President and CEO

Yes, Ivan, this is Jim. Generally, we value any guidance that emphasizes the importance of vitamins and supplements for people globally. Looking at some of our other markets, there are government initiatives we can leverage to educate consumers and provide valuable offerings to meet their needs. We've been discussing this for years; our diets often fall short, which highlights the significance of supplements. Over time, people are becoming increasingly knowledgeable and recognizing this, benefiting both USANA and the entire industry. As Doug mentioned earlier, we provide the best vitamins in the world and will keep doing so. We will always assess the needs of our customers and Brand Partners and make necessary adjustments to our offerings. Whenever government bodies or other organizations highlight the need for supplements for overall health and diet, it works to our advantage. Please go ahead, Ivan. Sorry.

Ivan Feinseth, Analyst

For a long time, the government has kind of been a headwind to the supplement industry, and now it really looks like it's going to be a tremendous tailwind led by the Make America Healthy initiative.

Jim Brown, President and CEO

Yes, I agree with that. And again, that's just fantastic for the industry. And we've believed that all along. We've been in business 30 years. I can only imagine, I've been with the company right at 20, how difficult it was at the beginning when vitamins were really not looked at positively or there was just no information about it. And our Founder, Dr. Wentz, made the decision to move forward and give us the best product line out there. So yes, again, we'll go along with what's out there, and it's especially helpful when it's positive to the industry.

Operator, Operator

Thank you. That was our last question. So I'll now hand the floor to Andrew Masuda to close.

Andrew Masuda, Director of Investor Relations

Thanks, and thank you all 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.

Operator, Operator

Thank you. And with that, we conclude today's call. All parties may disconnect. Have a good day.