USANA Health Sciences, Inc. (USNA) Q1 2024 Earnings Report, Transcript and Summary

Hello, and welcome to USANA Health Sciences First Quarter Earnings Call. My name is George. I'll be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I'd now like to hand the call over to your host today, Andrew Masuda. Please go ahead, sir.

Thank you, George, and good morning, everyone. We appreciate you joining us to review our first quarter 2024 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 our 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 2024 as well as uncertainty related to the economic and operating environment around the world, 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 as well as other executives. Yesterday, after market closed, we announced our first 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. Solid first quarter results were driven by strength in our Mainland China market. Consolidated net sales totaled $228 million, down 5% year-over-year in constant currency, but up 2% sequentially in constant currency. We also delivered diluted EPS of $0.86 and generated $18 million of operating cash flow. Our performance in Mainland China was strong and benefited from a successful sales promotion designed to reward associates for growth in their business. This incentive helped to generate 10% year-over-year growth in local currency, net sales and 15% growth in active customers. Our regional sales performance outside of Mainland China in the first quarter was softer than anticipated as we continue to battle a difficult operating environment, highlighted by inflationary pressures. To combat this, we plan to offer market-specific incentives throughout the remainder of the year to motivate our associate leaders and ultimately, to help stimulate sales and customer growth. We will provide the opportunity to attend events and training as we continue to focus on supporting and actively engaging with our associates to ensure that they have the necessary products, training, resources and digital tools to be successful in growing their business. We plan to deliver a more robust product strategy. This is aligned with a more supportive of our local markets. We have already made measured progress on several of our key initiatives for 2024. I'll briefly expand upon our progress on a few of these initiatives. As part of our continued efforts to actively engage with our associates, we hosted both our China national sales meeting in Xiamen, China and our Asia Pacific Convention in Kuala Lampur, Malaysia early in the second quarter. Both events served as a platform to celebrate our associate success, engage with our associate leaders from around the world and to provide additional training to leaders, attendance at both events was robust. For instance, we had approximately 17,000 attendees at our China event, a 70% increase compared to last year, and approximately 80% of the people at our event in Malaysia were first-time attendees, which is an encouraging indication that there is excitement in the region. Additionally, the demographic of attendees was diverse and included an increased mix of Gen Z and millennials, a positive sign that you saw on this brand is resonating with customers across many ages. We also utilize both events to launch several new products. For instance, at our China National Sales Meeting, we introduced HealthPak into the market. This product, which contains our patented intelligence technology is the ultimate solution for health and convenience and contains our premium core supplements and convenient daily AM and PM packets to support optimal health. We're extremely excited to introduce this product into our Mainland China market. Overall, both attendees and our executive team came away from each event energized and motivated. Separately, we continue to build our India operations, and we made progress on introducing the USANA brand throughout the country to help generate customer acquisition. For instance, we have attracted several strong distributor leaders to join USANA and we are optimistic that they can help us accelerate sales momentum in the existing market. We are also committed to delivering a great customer experience and high satisfaction levels in this promising new market. Thus far, our team has done a fantastic job on these deliverables. Personally, I'm planning to visit India in early July. I'm excited to spend time with our associate leaders and the management team. I'll close by saying that I'm confident in the future of USANA. Our team is focused on executing our strategic growth initiatives throughout the remainder of the year, and believe that the successful execution of these strategies will expand our business, drive sustainable growth in net sales and earnings and create value for our stakeholders. With that, I'll now ask the operator to please open the lines for questions.

[Operator Instructions] Our first question will be coming from Anthony Lebiedzinski of Sidoti & Company.

So nice to see the better-than-expected results, especially in China. So obviously, the sales incentive worked well in China. You had a 15% year-over-year active customer increase. So as you look forward, do you think you need to keep going with these incentive programs? Or do you think you can drive better results from China with less incentive programs?

Anthony, it's Brent. The promotion that we ran in the first quarter in China was very successful. Now I want to give a little bit background in order to answer that question. As we look at the way that we try to incent our leaders, there are several ways that we can do that. We can do a product-based incentive. We can also do a business-based incentive. The ones that we did in the first quarter were business based. And there's multiple ways that you can consider a business-based incentive. This particular incentive really focused on personal development and professional development for these leaders focused on education and professional accreditation which was very successful. It was the first time that we ran a similar promotion in the market. So as we look forward for the rest of the year, these are things that are very low cost for the company to run. But the more frequently you run them, then the impact starts to lessen over time. And so we will pick and choose the right opportunities in order to run those. There's certainly more runway where we can leverage those throughout the year, and we'll also look at leveraging those similar type of promotions in other regions around the globe. We're not going to always rely on that, but that's one way where we feel it's a pretty successful lever that we can pull.

Got it. Yes. That's definitely very helpful in understanding the performance. So I guess in markets outside of China, where you admittedly said that you underperformed, what are the main things that you're looking to do to improve demand? I know you talked about some market-specific incentives. Maybe you can give us some color as far as timing when you expect those to happen.

Every region and market is unique. And when you look at how each region responded to the COVID environment and the current socioeconomic environment, particularly in North Asia and Asia Pacific, they were hit harder. And I think the effects of those issues have lasted longer. So as we consider the future, how do we address those issues, we have to really make sure that we have a strong value proposition. I think in the fourth quarter of last year, there was a new transition with a new commercial team, which I now lead. Part of that effort is to combine our internal sales and marketing resources to realign those to better serve and create a stronger value proposition for our sellers, especially in those regions. One way that we're going to try to address that is by rethinking our product value proposition. We've made several internal changes to accelerate our product development and to really localize our offering to meet the needs of the consumers in each of those regions. That's going to take time. But we expect over time throughout the rest of 2024 and into 2025 as we start to really ramp up our product development process and bring new offerings to those markets, it will start to resonate more strongly than they currently are. We should start to see an uplift. And like I said, with regards to the China issue, as we bring some of those business-based incentive offerings to each of these other regions where we've really first introduced those in China, as we bring those to the other regions, we expect to see an uplift as well.

Yes. This is Jim. I mean, I talked a little bit in the opening remarks about our Asia Pacific convention. We had over 8,000 attendees there. And one of the things that it's hard to know exactly the impact, but we -- from some of our top leaders in specific markets, we've got commitments on growth and bringing people into the USANA family. So it's just another positive point that we think is going to help drive 2024.

Got you. Okay. And then in terms of India, can you share any -- perhaps any more details that performed -- I'm just curious, actually, how did that perform relative to your own internal expectations?

India is -- we believe it will be a very strong long-term play for USANA, could become a very compelling market for us in the future. Right now, we're very optimistic about what we're seeing. I think operationally, we're very sound, and we've become very stable there. Those customers that we have brought in the door so far have been very pleased with the offering that we've provided in the service level. In terms of our internal expectations, I think attraction of new people has been strong and has met our expectations. We're still trying to engage those new individuals with our product. So we have several new opportunities in order to increase that engagement level to get people purchasing more frequently. But we have several plans in the works for that. So as it stands now, we're pleased with the progress and expect it to continue to grow.

Got you. Okay. And then last question before I pass it on to others. So can you give us an update on your affiliate program?

Yes. We introduced the affiliate program a couple of years ago. And right now, it's mainly in North America. And again, it was in addition to our compensation model where one of the things that we feel we need to do is get compensation in the hands of our associates around the world sooner in the process, and having ability to earn commissions off of sales immediately in a retail market is kind of what the affiliate program was meant to do. It's successful. We're looking at bringing it into other markets around the world. At the pace that they need to bring it in, probably Australia and New Zealand will be the next market to start the affiliate program. Again, our plan was never have the affiliate program be the future of USANA, but it is a part when we were looking at the gig economy. We really didn't have a program to get gig individuals into USANA and that's what the program was built to do.

[Operator Instructions] As we do not appear to have any further questions at this time, we'll turn the call back over to Andrew Masuda for the additional closing remarks. Thank you.

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.

Ladies and gentlemen, that will conclude today's presentation. We thank you for your attendance. You may now disconnect. Have a good day, and goodbye.