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..

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 perhaps materially from the results projecting 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 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..

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 meaningful -- 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 of our customers that they 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..

Thank you. [Operator Instructions] Our first question comes from Doug Lane, Lane Research..

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?.

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. .

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?.

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. .

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. .

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 plan 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 departments have done a great job maintaining supply and having limited back orders, probably back orders at the same rates 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. .

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?.

Yes. Doug, this is Doug again. So, the question is a good one. I think if you've seen historically, the group's done a really good job of kind of leaning into a demanding environment.

We've really seen some prolonged -- some of our key markets have a prolonged exposure, some markets are in their worst shape they've really been in the COVID environment that we're dealing with. So, just real high level -- I think some of those things there -- some of those activities take their toll.

We'll lean into that at the back half of the year just like we did when we had COVID to support of those markets. Additionally, we're starting to hear whispers and indications of inflationary pressure on some of the material costs. We're definitely seeing that on the labor side.

And what that's going to mean overall is probably not a great deal this year. You'll probably see a little bit of gross margin pressure there, but I mean without a doubt you do see some cost pressure and you do see some disruption to business that we've at least historically managed well, and we'll continue to go back and work on that.

The team has been fantastic in each of our markets in leaning into it. .

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. .

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

Okay. That makes sense.

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

Yes, I -- my best guess at this point, we've been pretty low so far year-to-date. We definitely had some plans for the back half of the year.

I think part of the issue as we talk about supply chain, a lot of the stuff that we plan for to go back and receive some of the capital win has been delayed due to this thing, but I would say somewhere between that $10 million and $15 million range for the year would be my best guess at this time. .

Okay, great. Thanks guys..

Thanks Doug..

Our next question comes from Stephanie Wissink, Jefferies..

Thank you. Good day everyone. Two questions if we could. The first is just a -- wanted to give you some time to share a little bit more about your native shopping app in China.

Just seeing the China numbers come back pretty strongly wondering how much of that you think is led by the digital tool deployment versus just the underlying recovery in demand?.

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

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 -- we've -- it's been very -- 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 product 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..

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, I think a lot more satisfaction from our consumers in the shopping experience, but there's more room to grow there..

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

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?.

It's different. The Chinese shopping experience is different than 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, next quarter we're going to -- it's going to start coming out. But, all of this is being done very native. 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..

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, 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?.

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 kind of 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 introduce that product category, but it's been pretty limited in its introduction so far, and there's plans to maybe continue to roll that out throughout the year. Maybe Jim can touch on kind of the rollout..

Yes, we've rolled out to limited markets, mostly North America at this point in time. And then we have a second phase that's going to start rolling out in the third quarter, really into the second quarter of 2022 is when this will all go out. And then, we have plans and we're working on products right now to enhance the line.

So, even as we're rolling it out there's going to be more products, more bars in different offerings in each of the markets coming out, so our long-term strategy is to continue to support the line. We look at this line as a great introduction for associates to get more PCs. It's a very -- it can be a very sticky product.

You get an experience with it, and then hopefully people that come on with Active Nutrition will then make the decision to stay with you signing and get them to our nutritional is kind of the roadmap that we have..

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..

Very helpful. Thank you very much..

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

Good morning. Thank you for taking my question, and congratulations on another quarter of great results and the -- congratulations on the launch of the Active Nutrition line.

What areas in the launch have surprised you positively and maybe disappointed? And where do you see new opportunities in that line?.

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 product 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..

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?.

Yeah. I mean, I think the people coming in and filling -- kind of filling out the online survey and stuff I think it's gone pretty well. As far as people are hitting the site and taking in those who follow -- who actually fall through the questions as they started.

So it's still really early in the game, but I think at least encouraged by the initial response there. .

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?.

Yeah. Well, Jim go ahead..

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..

And then on the bar subject like from your acquisition -- your investment in Built Brands, what are you seeing happening there? Are you going to be launching some co-branded or them helping you develop bars for your own brand?.

Yeah, we're not going to launch a co-branded Built bar but the intent with the investment was really to get expertise and speed up the R&D process to help us formulate new bars.

And when I talked about just a minute ago that we have a bar at the end of the year and potentially more flavors of a similar bar in the next year that was really driven by the collaboration with Built Bar or Built Brands, and it's just allowing us to move down that R&D into pilot batches into real products much quicker than if we were doing it ourselves.

Long-term what we're doing is we're building out a food lab; that's already started. And probably over the next launches of bars into 2022 there'll be bars that we've done ourselves. But it really helped speed up that process when we got into the collaboration with Built bar..

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

Thanks Ivan..

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

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..

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect..