Earnings Call Transcript - USNA Q3 2021

Operator, Operator

Good day, and welcome to the USANA Health Sciences Third 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 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, 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 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 third 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

Thank you, Pat, and good morning, everyone. We appreciate you joining us to review our third quarter results. As we reported in our mid-September press release, disruptions and lockdowns due to the ongoing COVID-19 pandemic affected our performance in several of our key markets during the quarter. Yesterday, we reported that our final third quarter results were modestly better than our preliminary projections, and we reiterated our fiscal 2021 net sales and earnings per share outlook. So the takeaway is that although the back half of the year has presented unanticipated challenges, we expect 2021 to be a record revenue year for USANA. As we enter the fourth quarter, the operating environment in many of our markets around the world remains unpredictable. So it's difficult to project when sales activity and momentum in our business will completely rebound. Notwithstanding the current environment, we continue to execute our growth strategy and are optimistic about our prospects for continued growth in 2022, and more importantly, in the long run. We will also continue to place a high priority on strategically investing in the business today in order to drive growth tomorrow. Our overall growth strategy continues to be centered on generating sustainable customer growth and engagement, curating microentrepreneurs and enhancing the overall experience our customers have when doing business with USANA. In this regard, we continue to be focused on: one, improving our technology and providing our associates and customers with a seamless shopping experience; two, launching new products and product lines; three, identifying and executing growth opportunities in existing markets; four, pursuing international expansion opportunities; and five, capitalizing on business development opportunities, including strategic investments and acquisitions. I'll close by saying that we remain confident in the strategies we are pursuing for the long-term health of our business, and in our overall long-term growth potential in our markets globally. With that, I'll now ask the operator to please open the lines for questions.

Operator, Operator

We'll take our first question from Stephanie Wissink with Jefferies.

Unidentified Analyst, Analyst

Team, it's actually Chris on for Steph. I wanted to touch on the fourth quarter, if I might. The midpoint of your guide really implies a flattish to slightly negative sales number. But just given the outsized drop in customers reported at the end of this past quarter, how do you gain confidence in generating that level of revenue on a smaller overall starting base? Are you seeing anything, October to date, that would imply this sort of attrition has stabilized?

Douglas Hekking, CFO

Chris, this is Doug. I would hold off on discussing the specifics of what we're seeing so far in the quarter. One positive aspect of our customer account reporting is that it reflects actual purchases during the quarter. In the third quarter, as you mentioned, there was a decline compared to the previous quarter and the same quarter last year. A significant reason for this decline was the lack of a short-term sales program. We were optimistic about several initiatives but were disappointed not to see those customer accounts come through as hoped. Last year, we observed a similar trend after implementing this program. We certainly made additional efforts, but the current environment proved to be more difficult for executing our plans. We acknowledge the importance of engaging customers early in their journey with us. Regarding the fourth quarter, the data from the third quarter suggests that we might see customer accounts remain similar to what we experienced previously. Based on our current guidance, that's what we're anticipating at this time.

Unidentified Analyst, Analyst

Got it. That's great color. And then for my second one, I just wanted to ask if it's your sense that maybe the drop in customers is a reflection that some may have moved away to maybe alternative solutions? And then maybe just as a quick follow-up to that, how do you think about reactivating and reengaging some of those lost customers and associates? Any color there would be great.

Douglas Hekking, CFO

Yes. And once again, I think when we have a pretty prominent short-term program like we had in the third quarter of last year and the second quarter of this year, we have seen some dips in customer accounts following that. We believe that we changed a little bit of the structure and we put some programs in place to offset that. And that's obviously not what we saw, and we're definitely not totally pleased with the results. I think the environment has something to do with it. But I think it's less to do with the overall thing. I think it's more to do with the customers that we brought on during that period of time and how we engaged them early on.

Kevin Guest, CEO

Yes. Yes. This is Kevin. An additional thought is we continue to focus our strategy on growing our active customer count, which is an opportunity for us to look at retention and how to retain people. Our long-term strategy over the last several years that we've talked about on these calls is our advance in technology and advancing our technology base. And so we're starting to see some of those things roll out, which we believe will help us in the future as it relates to our active customer count.

Douglas Hekking, CFO

And then the second part of your question, Chris, was really reengaging some of those customers. We always have some marketing efforts ongoing. Oftentimes, that's met with somewhat limited success as far as reaching out to someone after they're not buying any more. But it's something we continue to do. I think we're finding new things that do work as we move forward.

Operator, Operator

We'll take our next question from Doug Lane with Lane Research.

Douglas Lane, Analyst

You mentioned the delaying of certain new products given the COVID-19 resurgence and the disruptions there to your business. Can you be a little bit more specific on what the change in plans was there? Is it basically just been pulled back from a 2021 event and will be included in 2022? Or exactly how did that timeline change?

Douglas Hekking, CFO

Yes. I think that's about it. Either the products will be pushed to the fourth quarter or they will roll into the early part of next year. A lot of it depends on the disruptions in transit times and other factors, and whether the market is really able to fully manage that in the current situation, which varies based on specific market impacts.

Douglas Lane, Analyst

And what were the key products that were delayed?

Douglas Hekking, CFO

We still had some additional work with our Active Nutrition and some products that had pretty close ties to that. Just some product introductions that we had scheduled that have been kind of pushed out. But primarily, Active Nutrition was a big focal point.

Douglas Lane, Analyst

Does that change your outlook for 2022? Will that push out from product activity you had slated for 2022? Or will that just be added to what was already scheduled for 2022?

Douglas Hekking, CFO

Yes. I believe that as long as we don't encounter any unforeseen challenges, it shouldn't disrupt the other plans we have for 2022.

Douglas Lane, Analyst

Okay. That's fair enough. And then same question really with live events. If I remember right, you were talking about a live event in the fourth quarter, and I assume that that's been scrapped. But can you update us on when you expect to be hosting major live events again?

Douglas Hekking, CFO

Yes. Go ahead, Jim. I'll let you take that one.

Jim Brown, President

So right now, in China, they're having a national meeting that's scheduled for the beginning of December, so right around the corner. That is scheduled now to be live. Of course, that could always change according to the market. In market, there are large events that are happening there. In our second quarter at our AP convention, that's going to be a virtual event like we've been doing. And then in August of next year at our international 30th anniversary event, that's planned to be live. Again, those could change according to requirements or what happens with the pandemic, but right now that's the schedule.

Douglas Hekking, CFO

And Doug, maybe to add on there, I think once again, it really relates to what the activity level is in market and what makes sense in the market given the current environment. It's nice to see that the China team is eager to have some in-person opportunities. Hopefully, that comes to pass like we're planning. You've seen Korea be able to go back and have a few small in-person events as well. We see that as a very encouraging sign going forward.

Douglas Lane, Analyst

Okay. That's helpful. And the global events in Salt Lake City, and that's next August or July, I believe. And you mentioned it's the 30th anniversary, so I would expect maybe a bigger event than usual. How should we think about what kind of promotional and product events are going to happen around your 30th anniversary convention?

Douglas Hekking, CFO

Yes. It's interesting times because under normal circumstances, it would be a huge event. The thing that we're going to do is we're going to continue to have that live. We know that there are certain markets, for example, China, that brings 1,000 to 1,500 people that may not be open to come to the event. Of course, we want to look at potentially having some products announced at the convention and entertainment at a different level than we have in the past because of the 30th anniversary. When it comes to attendance and what we're planning, we're planning kind of flat to down from previous years when we've had that event, only because we're just not sure of what markets will be open at that time.

Douglas Lane, Analyst

No, that makes total sense. And just lastly, can you talk about China? Just what's going on with that market? I mean, other than just the pandemic-related openings and closings that we read about in the paper. What about the nutritional supplement market in general and your business there? Specifically following that 100-day review period, which really doesn't seem that anybody has really recovered from that. Can you talk about the market for supplements and USANA's products specifically in China?

Douglas Hekking, CFO

Yes. I believe the broader market indicators support these types of products. The pandemic has sparked many discussions. There’s no doubt that the disruptive event affected consumer confidence. People are increasingly aware of the importance of taking charge of their own health and using products that enhance well-being. Therefore, we are optimistic. Our team has shared positive feedback about the plans they are rolling out next year, although the process has taken longer than we initially expected.

Operator, Operator

That concludes today's question-and-answer session. Speakers, at this time, I will turn the conference back over to you for any additional or closing remarks.

Patrique Richards, Executive Director of Investor Relations and Business Development

Thank you for your questions and for your 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.

Operator, Operator

This concludes today's call. Thank you for your participation. You may now disconnect.