Earnings Call Transcript
USANA HEALTH SCIENCES INC (USNA)
Earnings Call Transcript - USNA Q4 2020
Operator, Operator
Good day, and welcome to the USANA Health Sciences Fourth 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. Please go ahead, sir.
Patrique Richards, Executive Director of Investor Relations and Business Development
Thank you, and good morning. We appreciate you joining us to review our fourth quarter and full year 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 fourth 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.
Kevin Guest, CEO
Thank you, Pat, and good morning, everyone. We appreciate you joining us to review our fourth quarter and full year results as well as our initial outlook for 2021. Overall, we are very pleased with how we performed against the many new and unique challenges of 2020. Our strong performance in the face of an unprecedented pandemic reflects the continued demand for our high-quality nutritional products and successful execution of our strategic initiatives. In 2020, we found that we were well positioned, well prepared, and nimble enough to adapt to and succeed in this unprecedented operating environment. Because of this, we ended the year with more customers, higher net sales and record earnings per share. As you can see from our initial outlook, we are expecting 2021 to be another record year for USANA. 2020 was truly a transformative year for our business, as we accelerated many aspects of our customer experience strategy. We've been actively investing in the USANA customer experience for several years now with an emphasis on our digital strategy. In 2020, we capitalized on the groundwork we had already laid and accelerated many other projects to successfully operate during the pandemic. We improved our websites, digital shopping experience, associate training, customer communications, and our overall technology infrastructure. Additionally, we introduced several new digital tools that allowed our sales force to continue sharing and selling USANA products in the predominantly virtual environment. These enhancements to our business as well as many other technical and operational improvements have meaningfully improved the experience that our sales force and customers experience when doing business with USANA. Although we recognize that the pandemic is not over, our outlook for fiscal '21 reflects an expectation that we will see progress through 2021 towards a more normalized operating environment. While we've learned a great deal hosting several virtual events this past year, we look forward to the future opportunities of engaging again with our sales force and customers in an in-person setting when it makes sense to do so. Our business is built around fantastic nutritional products, relationships, and personal interactions. We plan to leverage the benefits of both virtual and in-person events moving forward. During the first half of the year, we expect to hold virtual-only events for our sales force and maintain our work-from-home plan for employees. During the year, we will continue to execute our digital strategy, drive growth in existing markets with our emphasis on China, launch our new Active Nutrition product line and other products that actively seek out business development opportunities. As we execute this strategy, we are projecting another amazing year for the company. In closing, I'm very confident in our strategic direction, the competency and agility of our team and the strength of USANA's underlying business. With that, I'll now ask the operator to please open the lines for questions.
Operator, Operator
Thank you. The question-and-answer session will be conducted electronically. We will take our first question from David Bain with ROTH Capital.
David Bain, Analyst
Great. Thank you. First, congratulations on a fantastic 4Q execution. I guess, my first question would be, if you could potentially encapsulate the potential route to a new market that you suggested in your press release that you're laying the groundwork for? I mean, obviously, that can take many forms, such as China did or be strictly organic. Is there any way we can think about the potential immediate impact to a new market in relation to your strategy?
Kevin Guest, CEO
Our strategy over the past few years has been to concentrate our resources on our existing markets and pursue growth where we are already established. We believe we have a competitive advantage in this area and feel confident about exploring new opportunities globally. Some of our competitors operate in 50 or 60 markets, which we view as a potential growth avenue, though it is not our main growth strategy. We recognize international expansion is important, but as you pointed out, it requires time to see significant effects. Jim, would you like to add anything?
Jim Brown, President
Yes. I mean, when we look at the markets that we selected as we go forward and, of course, at this point in time it's about 18 to 24 months out. We wanted to announce that to the field, but we do have a plan and a strategy as we go. There's a lot of work that has to be done from setting up a market, everything from logistics to where and how we're going to produce our products to hiring the right staff; all of that goes down the path. That's why we're looking at that 18 to 24 month runway before we actually launch the markets. You'd see a financial impact into '23, so it's ways out. But, again, we feel, and we have always gone down the path of every couple of years opening a market that we need to have the right runway to make sure it's a smooth opening.
Kevin Guest, CEO
Yes. And David, I would add on, I think a little bit of your question is the method and manner in which we entered China. That's definitely something that we considered and evaluated whether a partner makes sense. As we look at the opportunities, to Jim's point, a lot of the groundwork has been done historically and we have these markets kind of sitting on a shelf and are just waiting for the right timing. We have an idea of the method and the manner, but we're still in the process of getting to that point.
David Bain, Analyst
Okay, fantastic. My follow-up question is if you could share any benefits you've gained, whether in terms of cost structure or revenue generation through technology or other means, based on best practices from what you've learned during COVID.
Kevin Guest, CEO
One of the things that we definitely have learned is that we are highly capable on an international level and at a very high sophistication level when we're operating in several different languages across the world. We can do it virtually. For me, I don't have to get on a plane to fly to China, and we can still have a very positive impact. I'm abundantly surprised that as we've launched new products and new initiatives, we've been able to do everything completely from a virtual perspective and seen huge success. One of our big takeaways is that we're going to proceed in the future utilizing a hybrid approach where we're going to leverage technology more meaningfully while also incorporating in-person opportunities. Just from a management perspective, I'm now more accessible to our global community and customer base by leveraging technology. That's a huge learning for us because a significant piece of our SG&A spending is dedicated to live events and travel, and it has changed our basic business model somewhat because we've been so used to traveling all over the world to get in front of our people. This has been a big learning, and it will dramatically change how we do business here. I don't know if you guys want to add?
Jim Brown, President
Yes. I mean, the other thing actually from the management team is how we're doing our business. When we look at the sales field, we talk about digital transformation and our digital footprint; we're seeing a huge adoption when it comes to running your business digitally, both within the company and across our field. They've figured out how to run their businesses through Zoom, WeChat, and whatever form it may take, and they are continuing down a path of growth. We were incredibly surprised in 2020, and I think that's one of the biggest reasons we had such a great year; the adoption of those digital platforms.
Doug Hekking, CFO
And David, this is Doug. A little bit more perspective there: In some of our markets and some pockets within existing markets, we've seen hesitance or resistance to adopting some of the technology we rolled out. This environment has forced them to use it, and I think we've heard pretty good responses from that. So, that's been a pleasant surprise for us to see more and more folks using these tools.
Kevin Guest, CEO
Yes. For us, I like thinking about it that while COVID had negative effects in many people’s lives, it has really been an accelerator for USANA and helped to accelerate the strategies we had already put in place rather than serving as a disruptor. I am very grateful that we were able to accelerate things that were already in place when we had to pivot to the new operating environment. So, I see it as an accelerator rather than a disruptor in many ways from our strategy side.
David Bain, Analyst
Awesome. And I'm sorry, since it's my first call as an analyst on your stock, if I could ask just one thing as a follow-up to that. Deepening digital revenue generation, the whole thing that you've spoken to, are you seeing an overall younger demographic in the network?
Kevin Guest, CEO
I have noticed that, in response to your question, there seems to be a younger population engaging with our company, particularly through my social media accounts. This younger demographic is actively participating and coming into the business, which I view positively. While this is just my personal observation, I can confirm that we are seeing more younger individuals joining the company.
Doug Hekking, CFO
Yes. I would say, as well from a relevant aspect, we're set up now to actually meet the demands of that younger crowd, where before, when it was mostly done in-person, it really didn't have that effect. Right now, we're doing everything digitally. That's the platform the younger crowd wants to work on, and we're continuing to make that.
Jim Brown, President
Yes. And maybe a few other comments there. I think there are higher growth markets with a younger demographic, and that's been very clear. In some of our other markets, we've seen more of that younger group come in, but we've also seen more of our legacy customers start using the technology more. So, I think all those things are positive.
Kevin Guest, CEO
Yes, I agree with that.
David Bain, Analyst
Fantastic. Congratulations, again. Thank you.
Kevin Guest, CEO
Thanks.
Operator, Operator
And next, we'll move to Sebastian Barbero with Jefferies.
Sebastian Barbero, Analyst
Hi, thanks for taking my question and congratulations on the quarter. A few questions from me, please. Wondering first, if you could talk about some of the trends you're seeing overall in the consumer health market, including changes in customer behavior over the past 12 months and how does this compare across your different markets? And also, if you can talk about retention rates for your associates and preferred customers and how these have trended versus the pre-COVID levels?
Kevin Guest, CEO
As far as kind of the recent trends, Sebastian, I think what we've seen, and we talked about early in 2020, is that we saw a spike initially as kind of the rest of the world started dealing with the COVID pandemic. We saw a spike in some of our immunity products that were designed to support immune functions. We've definitely seen that spike kind of drift down, but it's still clipping at a higher run rate of growth than the rest of our products. Without a doubt, across all our markets, we're seeing a more keen awareness of health and wellness, which allows us to have more robust conversations and dialogues with our customers and consumers.
Sebastian Barbero, Analyst
Got it. You mentioned that China is expected to grow between 6% and 12% in 2021, which on an organic basis likely means growth will be flat to up by 6%. Can you discuss any changes in the market over the recent months, including meeting protocols and the competitive landscape? What gives you the confidence that there will be an inflection over the next 12 months? Additionally, can you provide insights on early 2021 trends and what your guidance suggests regarding growth cadence for the year?
Kevin Guest, CEO
Yes. I'm sorry, Sebastian, it's coming across a little muted on your voice. So, was this specific to China that you asked the question?
Sebastian Barbero, Analyst
Yes, yes. Just trying to understand any changes in the market in recent months, in particular as it relates to meeting protocols. And also, if you can give us some color on early 2021 trends and what does your guide imply in terms of growth cadence for the year?
Kevin Guest, CEO
Yes. And I'm sure, as you read, we are getting much of the same information. China is a nuanced marketplace where you have different restrictions and different guidance, really provincially, and even at the municipality level. I think the questions that we're getting leading up to the year is how China has a better control and they weren't having any issues. You've obviously seen recently in the news how the current outbreaks happened, but China was really quick to respond. We've stayed attached to the direction we're getting from our government relations folks and their conversations with the government. Therefore, we see a nuanced response that's not specific to China as a whole, but that factors into the best estimates we have. The other thing in the market, as a whole, what we're getting from our folks with boots on the ground is we're seeing overall growth in the market; not at the mid-single-digits to mid-single-digits-plus, but we expect to outpace that a little bit. That's how we see it right now. The competitive landscape is not too different from what we've seen historically; there are always new entrants and things like that. Right now, we haven't seen much noise in that area, mostly from established players getting footholds and executing their strategies.
Sebastian Barbero, Analyst
Okay. And in terms of Active Nutrition, this new line launched in Q2, you mentioned you have a focus on weight management and digestive health. Will this be some sort of shake or will it be a comprehensive weight loss program backed by some digital tech embedded in it?
Kevin Guest, CEO
Yes. The Active Nutrition is more of a full program. Right now, I would consider our line to be a foods line with our new trivia on the products there. We're looking at shakes, bringing back bars as we've mentioned in past calls. We're just on a facility which is literally a stone's throw away from where we're setting up our corporate headquarters. We're going to be making our own powdered beverages and bars in that facility. We've actually started already because we're looking at launching Active Nutrition and talked about that really the impact for a handful of markets will be in the second quarter; then we'll have additional phases of launch throughout 2021. So, we'll see the full impact of Active Nutrition really into 2022, but we'll see those trends happening in the third and fourth quarters of this year. It's much more than just the foods; there's influencers and all kinds of ways to create a community around the experience instead of just more food. This is a little bit new for how we approach product introductions in the past.
Jim Brown, President
For us, there is real focus on lifestyle versus a product or two that are launched. If we can positively affect someone's lifestyle to improve their health, we want to take a more holistic approach to lifestyle as we move forward. We're excited as a health company to round out our offering in these categories.
Sebastian Barbero, Analyst
Got it. Okay. And last one from me, switching to capital allocation priorities. Just like buybacks in Q4 results are building cash flow and strategic partnerships. If that's the case, can you give us more details around your M&A criteria? Are you looking for companies solely in the direct selling industry, or are you also considering brands outside, like you did with Built Brands? What product categories or opportunities do you believe could nicely complement your portfolio? And in terms of your capacity, are you willing to take on leverage to execute?
Kevin Guest, CEO
Yes. Regarding opportunities, the focal point has really been our organic business. We are actively looking for things that don't necessarily fit directly in the direct selling business that we can acquire as a core competency we can leverage in other channels as well. The Built Brands is a great example of how to accelerate our understanding and execution. Geographically, we would look at vertical integration, technology, and anything in health and wellness space. Regarding leveraging, we see opportunities. We're not afraid to put some debt on the books. We're looking for opportunities, and we believe the deal flow that we're evaluating on a regular basis is far beyond what we've historically done. We're evaluating those opportunities on a pretty dynamic basis.
Sebastian Barbero, Analyst
Got it. Thank you.
Operator, Operator
And next, we'll move to Doug Lane with Lane Research.
Doug Lane, Analyst
Yes, hi. Good morning, everybody. I just want to focus if we could…
Kevin Guest, CEO
Hey, Doug.
Doug Lane, Analyst
I just want to focus on the customer counts and, to a lesser extent, the active associate counts, which tell two different stories this year. Outside of China, the growth has been remarkable, but inside China, it doesn't seem to be improving. Let's start with the positive, the 30% increase in active preferred customers year-over-year outside of China. How sustainable is that, and what number should we consider for 2021?
Jim Brown, President
Yes. I would say over the last couple of years, the strategy that Kevin has encouraged the group to adopt is really focusing on the consumer. You see it in all of our markets globally; we focus on the customer first and foremost. At the end of the day, we grow the company by having more individuals and families consuming our products. If we do that well, it makes it easier for associates going forward from a business opportunity perspective. That focus hasn't changed, and we’ll keep emphasizing that. China has had a couple of unique challenges in back-to-back years, but I think we're coming out of that. The China team has worked hard to build a base we can leverage, and the feedback we’re getting is encouraging and exciting about the opportunities we have going forward. Really, we will see some momentum moving forward in the business.
Doug Lane, Analyst
Yes. On China, I think my one concern is that the one number that stuck out is the preferred customer number decelerated sequentially from 193,000 to 164,000. So, what happened in the quarter to impact the customer number in China?
Kevin Guest, CEO
Yes. It had to do with the trial program we ran in Q3 and Q4 and really encouraged our associates to share the opportunity and we created a very linear compensation for a short period of time. It encouraged them to reach out and attract. As that trial program ended, you saw some of those numbers drift down. Even with the decline in some of those customer numbers in Q4, I think our numbers were catalyzed by the momentum created from that program overall. We also benefit modestly from currency, but that was the primary change in accounts there.
Doug Lane, Analyst
Are you seeing any lift in China? I mean, especially on the active associates, we saw a deceleration there as well, but the associate count in China continues to drift lower. Are you looking for improvement in 2021 or just stabilization in China? I've been following China because it's almost half your business.
Doug Hekking, CFO
Yes. I think we're looking for progress there. You can see that reflected in kind of the outlook numbers that we have. We're not going to grow unless the customers are moving in the right direction. I think the confidence is there, the momentum is there, and we have solid plans and strategies. This is an investment year for China, and they're taking full advantage of that while we see progress in executing those investments.
Doug Lane, Analyst
Okay. Thanks, Doug.
Operator, Operator
And next, we'll move to Ivan Feinseth with Tigress Financial Partners.
Ivan Feinseth, Analyst
Thanks for taking my call, and congratulations on another great quarter.
Kevin Guest, CEO
Thanks.
Ivan Feinseth, Analyst
What were the strongest product categories and the strongest products in the most recent quarter? What kind of product demand trends and interest from customers and associates are you seeing?
Kevin Guest, CEO
Yes. As Doug mentioned earlier, immune health continues to be the product line that's outpacing anything else. We did a lot of promotional activities in 2021 from incentives and product launches; we launched more products in 2020 than we ever have. That was part of our strategy to create growth in the markets and lessen the distractions of COVID-19. Again, immune health continues to be the line that moves forward, and I hope that in 2021 we might talk about Active Nutrition being a catalyst throughout the year for new product launches. But I don't see demand for immune health really going down in 2021.
Ivan Feinseth, Analyst
And how are you helping your associates to educate the market on immune health, ensuring that it continues long after the pandemic?
Kevin Guest, CEO
I think this is part of what USANA is. We train our associates to tell the story of our products and why high quality is needed around the world. We continue to do that in the markets. We've overcome challenges this year by doing training online through digital platforms, such as Zoom, WeChat, etc., to ensure our associates are well-equipped. When we launch Active Nutrition in March, the first couple of months will be dedicated to understanding and training our associates. We'll roll out that product line a bit later in the second quarter, but it's incredibly important that we arm our associates and sales field to tell the story of our products and why we are better than the competition.
Jim Brown, President
I would say the other thing is we acquired a production company years ago that creates fantastic content and uses a dynamic way to share the message and education. Our China market plans include replicating a lot of that capability within the market. This will build brand awareness, enhance content velocity, and many positive actions they're working on. We continue to leverage that knowledge and creativity to share that information digitally.
Ivan Feinseth, Analyst
And what kinds of events are you planning for the Active Nutrition launch?
Jim Brown, President
Right now, those events will be virtual for handful of markets: the US, Canada, Mexico, Australia, and New Zealand will follow shortly. Those will be training sessions on the products and the accompanying programs. We are also doing user trials at the moment, which will provide positive information. We're really excited about Active Nutrition. Another area we discuss from an excitement standpoint is bringing technology into product production. This has been a significant headache dealing with third-party manufacturers, but bringing that in-house will really impact our ability to launch new products and flavors at a faster pace than we've ever had.
Kevin Guest, CEO
Ivan, to add, we've developed an ambassador program incorporating some of our business builders and health advocates to work directly with our science team and R&D team. They're assisting us by providing expertise on product knowledge and helping establish programs for real-world boots on the ground. We currently have a group of advocates with great experiences for these products, which will provide a huge boost as we launch.
Ivan Feinseth, Analyst
What do you feel is the size of the Active Nutrition market relative to your current market? There are many companies purely focused on sports-related, performance-related products, but it's a significant opportunity. What do you think will be your unique attributes and advantages when entering into this market?
Kevin Guest, CEO
Yes. Just for clarity, Ivan, I think all fitness and exercise stuff will be a tad down the road. Typically, we're going to focus on weight management and healthy snacks. The market is large, and it's something we can leverage from our existing customer base to tell the story through technology. We feel it's a great opportunity. That said, Jim and Walter Noot, our COO, are working hard to get the production operation thoughtfully and meaningfully. After that, we will launch in select markets in Q2, roll out systematically and broaden our product base. It is a holistic offering; many solutions we see are product-focused. We plan on being broader than that, incorporating nutrition and exercise resources moving forward.
Jim Brown, President
We will be looking to develop a bar that has, obviously, protein but also nutritional benefits, using learned information and our R&D team. It will cater to health benefits.
Kevin Guest, CEO
For many of these bars, we have created prototypes fortified with various vitamins and minerals within a tasty chocolate bar. Different delivery systems are essential for us to explore.
Jim Brown, President
We had three or four bars historically as an offering. Now, with our new plants and managing that supply chain ourselves, we can offer more varieties into the bar and powdered beverage areas. We are no longer bound by complex contractual obligations with third parties, allowing for more variation. This is crucial to supporting Active Nutrition.
Ivan Feinseth, Analyst
I appreciate the insight and the update, and congratulations again on the results. Wishing you ongoing success in 2021.
Jim Brown, President
Thank you, Ivan.
Kevin Guest, CEO
Thanks, Ivan.
Operator, Operator
And that will conclude the question-and-answer session. At this time, I would like to turn the call back over to Mr. Patrique Richards for any additional or closing remarks.
Patrique Richards, Executive Director of Investor Relations and Business Development
Thank you for your questions and your participation in today's conference call. If you have any remaining questions, please feel free to contact Investor Relations at 801-954-7358.
Operator, Operator
And that will conclude today's call. We thank you for your participation.