Earnings Call Transcript - USNA Q2 2021

Operator, Operator

Good day, and welcome to the USANA Health Sciences Second 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

Good morning. 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 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 on 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 second quarter results and posted our management commentary document on the company's website. We'll now hear brief remarks from Kevin before opening the call for questions.

Kevin Guest, CEO and Chairman of the Board

Thank you, Pat, and good morning, everyone. We appreciate you joining us to review another excellent quarter for USANA. We're pleased to report record net sales, earnings, and active customers, with double-digit year-over-year sales growth in each of our regions. Much of this growth was propelled by a short-term sales program we offered during the quarter that not surprisingly contributed meaningfully to our results, which we expect to be not short-lived. We offered a similar sales program during the third quarter of last year that was also very successful, and we were pleased to see our sales force embrace this program again this year. Although we will not run another sales program of this magnitude in the back half of the year, we have several other initiatives planned that we expect to contribute to results in the back half of the year, which we believe will curate customers. As noted in our earnings release yesterday, we reiterated our net sales and earnings per share outlook for 2021 and remain confident in our long-term growth strategy. This strategy remains centered on customer growth and engagement and enhancing the overall experience our customers have when doing business with USANA. As we continue to execute this strategy, we will focus on improving our technology, launching new products and product lines, driving growth opportunities in existing markets, pursuing international expansion opportunities, and capitalizing on business development opportunities including strategic investments and acquisitions. In closing, we are pleased with our performance in the first half of the year and believe we are well positioned to deliver another record year for USANA. With that, I'll now ask the operator to please open the lines for questions.

Operator, Operator

Thank you. Our first question comes from Doug Lane, Lane Research.

Doug Lane, Analyst

Yes. Hi. Good morning, everybody. Just want to start off with the dichotomy between such a strong second quarter and no change to your full-year outlook, which really implies a sharp deceleration in the back half of the year even adjusting for the extra week last year. We're talking about going from 25% sales growth over mid-20s this quarter to mid-single digits in the rest of the year. I just wondered if you could elaborate on why such a sharp deceleration is expected here?

Doug Hekking, CFO

Yes. Doug, this is the other Doug here. It was really kind of what we talked about at the end of last quarter. The sales program was really the lift there, and it does have some short-term nature to it, and that's really the primary catalyst. We see an opportunity to go back and learn from the process and acquire new customers. We just engage with them, but that's the primary catalyst to what you're referring to as that sales program in Q2 and it was in Q3 last year.

Doug Lane, Analyst

I noticed after the sales program in Q3 last year, your customer count dropped off in the fourth quarter last year. So, are these customers somewhat fluid here? And are we looking for a reduction in your customers going into the third and fourth quarter this year from the second quarter levels?

Doug Hekking, CFO

Yes, I would expect at least a similar pattern to what we saw last year. We put some additional things into place this year to be more proactive in reaching out and engaging those customers, but I would expect some of that same type of thing. Many of the customers could come on through social means, and sometimes you see a one purchase and not repeat. But yes, it's a similar paradigm to what you saw last year and hopefully a little bit of progress this year.

Doug Lane, Analyst

Okay. That's helpful. And then you mentioned COVID-19 in your comments, and I just wanted to get an update from you guys if I could on how you're seeing COVID impact your business now in your various geographies around the world.

Jim Brown, President

Yes, Doug this is Jim. When we look at COVID-19 as a company in general we've had to really sit back and measure this by market-to-market like you're talking about, and we are seeing in Asia Pacific different markets have different types of lockdowns or maybe not even a lockdown, but just a different operating environment in general. We talked about the fact that we have a China convention planned in September. We've just made the decision to move that to December because of the COVID environment in Nanjing where that is planned. And in general, we're just having to pivot as we go along. Supply chain is another area that's been challenging, but the reality is we've done a great job, our operations department has done a great job maintaining supply and having limited back orders, probably back orders at the same rates as before COVID. But we're just looking at that, and our inventory has gone up a little bit to about $90 million. We would look at inventory going up a little bit higher than that as we again try and work in the COVID environment and make sure that we have a good supply chain.

Doug Lane, Analyst

So Jim, just to see if I can understand the impact here. Is it more of an impact to supply chains and margins versus demand or is it about the same? I mean how would you characterize where in the P&L it impacts the most?

Doug Hekking, CFO

Yes, this is Doug again. The question is a good one. Historically, the team has done well in navigating demanding environments. We've seen some of our key markets facing prolonged challenges, and some are in worse shape than they've been during the COVID period. At a high level, these issues do have an impact. We'll address them in the latter half of the year just as we did during COVID to support those markets. Additionally, we are starting to notice signs of inflationary pressures on certain material costs, and we are definitely experiencing that on the labor side. Overall, this likely won't result in significant changes this year. You may see a slight pressure on gross margins, but there is clearly cost pressure and business disruptions that we have historically managed effectively, and we will continue to focus on that. The team has been outstanding in each of our markets in responding to these challenges.

Jim Brown, President

Yes. Just a good example is just the logistics side of it. It's taking another four to six weeks to get products across the water to Asia Pacific. So, we've gone into our ERP system and changed some of the parameters too, and that will increase inventory, but in the end, we're trying to push more finished goods into the market so they can react and run their businesses accordingly.

Kevin Guest, CEO and Chairman of the Board

Yes, and in the short term, we've been air shipping items to the markets to make sure they have ample supply.

Doug Lane, Analyst

Okay. That makes sense. And just lastly Doug do you have an update on what your expected capital expenditures will be this year?

Doug Hekking, CFO

Yes, my best guess at this point is that we've been pretty low so far this year. We definitely had some plans for the second half of the year. I think part of the issue with the supply chain is that many of the things we anticipated receiving in terms of capital have been delayed. I would estimate that the range for the year would be between $10 million and $15 million.

Doug Lane, Analyst

Okay, great. Thanks, guys.

Doug Hekking, CFO

Thanks, Doug.

Operator, Operator

Our next question comes from Stephanie Wissink, Jefferies.

Stephanie Wissink, Analyst

Thank you. Good day, everyone. I have two questions. The first is about your native shopping app in China. The recent numbers from China look promising, and I'm curious about how much of that success you attribute to the deployment of digital tools versus the overall recovery in demand.

Kevin Guest, CEO and Chairman of the Board

Yes, we have Walter Noot who oversees that in the room with us. We'll let him respond to that.

Walter Noot, Executive overseeing shopping app in China

So our China shopping app is probably not one of the main reasons for our initial growth in China. We've had a lot of downloads. We've got a lot of usage. It's been accepted by our China market; they're very excited about it. But we take an MVP approach to our software development. So, our first phase was shopping. We're going to add kind of the auto-order function, which allows people to continue to reorder products and set it up on a schedule. We're going to add more notifications and other tools in the next few months. And so, there's a lot more coming with that. But I would just say that's kind of a strategy for us. It's a long-term play; it's not a short-term play for us.

Doug Hekking, CFO

Yes, I would also say maybe Stephanie add on a little bit to what Walter said, is the initial indication feedback from the customers in the market have been very positive. It's far more familiar to them than what the shopping experience we've had in the past. So, we're making progress, and it fits into what Kevin talked about with that customer experience. And we'll keep pushing that and keep layering on and keep building additional functionality and things that could be a catalyst to future revenue growth. Right now, I think there's a lot more satisfaction from our consumers in the shopping experience, but there's more room to grow there.

Kevin Guest, CEO and Chairman of the Board

Yes. There's more coming for the China shopping. We'll add more shopping experience with web shopping and other aspects that are more Chinese native.

Stephanie Wissink, Analyst

Yes. And I thought that was interesting that you used the word native. So, is this something that is designed in China, for China or is this something that has a platform that could be deployed around the world if you find that the consumer engagement is there to justify it?

Kevin Guest, CEO and Chairman of the Board

It's different. The Chinese shopping experience is different from non-Chinese shopping experience. Just the way their user experience works is different. So we've designed these applications. All of our work that we've done over the last 1.5 years, which some of it's being deployed this quarter and next quarter, is going to start coming out. But all of this is being done very natively. It's being done in China. It's being done for China. It's the way the Chinese people shop. It's just a different experience for them, and we are learning from that, but we are adding and changing shopping experiences around the world, more localized for their markets.

Stephanie Wissink, Analyst

That's great. I want to just jump over to active nutrition because your comments suggest that it's coming out of the gate pretty strongly. So, I wanted to ask two questions. One is the cohort of associates that you're seeing drive that business, is it similar to the cohort that you would see in your core business or is this a new cohort of associates that's coming on board? And same question for preferred customers, similar or different or unique relative to your core business?

Doug Hekking, CFO

Yes. Stephanie, I'll let Jim add on here or Kevin after I give you my thoughts on it. I think for the most part, it's some of the same folks, but what you do see is a lean with some of the folks who are consuming our supplements and our nutrition products, who have more of a lean towards kind of the weight management activity and digestive health and hydration energy; you see more of an adoption there. That was a unique way we introduced that product category, but it's been pretty limited in its introduction so far, and there are plans to maybe continue to roll that out throughout the year. Maybe Jim can touch on kind of the rollout.

Jim Brown, President

Yes, we have launched in a few markets, primarily in North America at this time. We plan to begin the second phase of the rollout in the third quarter, moving into the second quarter of 2022. We are also developing products to enhance the line. As we continue to roll it out, there will be more products and different offerings introduced in each market, as part of our long-term strategy to support the line. We see this line as a great way for associates to attract more preferred customers. It can be a product that people really connect with. Once they try Active Nutrition, we hope they will decide to stay with USANA and explore our nutritional products, which is our intended roadmap.

Kevin Guest, CEO and Chairman of the Board

And Stephanie, this is Kevin. One of the things strategically that we've talked about in past calls is the notion that we're appealing to lifestyle and we're expanding our product offering base from outside of just nutritional vitamins and a pill, so to speak, by creating the new manufacturing plant that we call USANA North and other areas where we're accumulating competitive advantages through our manufacturing skills. We're seeing that all proceed according to plan. And this year is looking like it's moving forward according to plan and what we had planned strategically from a digital strategy perspective, but also from a product perspective, as you think about Active Nutrition. I mentioned in my comments, other products and product lines. You'll see in the future that we're getting ready to release other things that will lead into USANA being more of a health company as it relates to overall lifestyle and having a more holistic approach to people as health becomes more and more of a concern, a need, and a desire for consumers globally. So Active Nutrition is our first step in a strategic move from a lifestyle perspective, and you can look to more products and product lines contributing to USANA as we move forward.

Stephanie Wissink, Analyst

Very helpful. Thank you very much.

Operator, Operator

Our next question comes from Ivan Feinseth, Tigress Financial Partners.

Ivan Feinseth, Analyst

Good morning. Thank you for taking my question, and congratulations on another quarter of great results and the launch of the Active Nutrition line. What areas in the launch have positively surprised you and possibly disappointed you? Also, where do you see new opportunities in that line?

Kevin Guest, CEO and Chairman of the Board

Yeah. I think some of the areas that surprised us, I guess, was some of the forecasting we did on the line initially was just beaten in general. We had some of our products do two to three even 10 times what we were expecting at the beginning, which is very promising. But again, with the supply chain issues we had it kind of slowed down that launch for a few weeks, and we had to pivot on it. But it's been accepted from the field really well. One of those products is a metabolism product, and it just went really well, and we're excited about getting it into the other markets and just seeing what Active Nutrition could do for really into 2022.

Ivan Feinseth, Analyst

And then on your Active Nutrition app, what kind of engagement have you seen in that? And what other apps do you see coming out to follow that?

Kevin Guest, CEO and Chairman of the Board

I think the response from people filling out the online survey has been quite positive. Many users are visiting the site and are completing the survey questions they started. Although it's still early in the process, I'm encouraged by the initial feedback we're receiving.

Ivan Feinseth, Analyst

And then what kind of feedback are you getting from associates as far as their clients what they're looking for, what they like, what they want to see more of?

Kevin Guest, CEO and Chairman of the Board

Yeah. Well, Jim go ahead.

Jim Brown, President

Yeah, I think one of the areas that we're getting a lot of feedback and it works well with us having USANA North and a bar line is just more options when it comes to bars, and we have that in our future. We're going to be looking at releasing another bar at the end of this year and potentially a couple more flavors into early next year. That's the type of feedback we get. Of course, we get other feedback, Ivan, about taste and wanting different types of flavors, and we'll work with that. We really have an opportunity having USANA North where we manufacture our bars and our powdered drinks to really satisfy the needs of our customers at a different level because before when you're dealing with third-party manufacturing your hands are tied by minimum order quantities and a few other things that don't let you pivot as well. But bringing it in internally is going to really solve some of these issues.

Ivan Feinseth, Analyst

Very good, congratulations again, and thanks for taking my question.

Doug Hekking, CFO

Thanks, Ivan.

Operator, Operator

And we have no further questions in the queue at this time.

Patrique Richards, Executive Director of Investor Relations and Business Development

Thank you all for your questions and for your participation in 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, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.