Good day and welcome to today’s USANA Health Sciences Fourth Quarter Earnings Conference Call. This meeting is being recorded. At this time, I’d like to hand the call over to Andrew Masuda. Please go ahead, sir..

Thank you and good morning, everyone. We appreciate you joining us to review our fourth quarter and year end 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 2023 as well as uncertainty related to 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 am joined 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 and fiscal 2022 results and posted our management commentary document on the company’s website. We will now hear brief remarks from Kevin and Jim before opening the call for questions..

Thank you, Andrew and good morning everyone. We appreciate you joining us. USANA reported fourth quarter and fiscal 2022 results that were largely in line with our preliminary results announced on January 5. Fiscal 2022 presented a challenging operating environment for USANA.

As with many companies, global inflationary pressure continued to negatively impact our materials and supply chain costs as well as our consumers’ purchasing behavior across several key markets. In particular, the operating environment in Mainland China continues to be difficult to navigate.

During the final two weeks of fiscal 2022, we saw an increase in demand for certain of our products following the Chinese government’s unexpected easing of its COVID-19 policy.

While we are encouraged by this increase in demand, it is still too early to forecast long-term consumer demand in this critical market, particularly given the seasonality we experienced during the Chinese New Year holiday, which recently ended.

That said, we anticipate that we will begin to see more normalized – a more normalized operating environment in China during 2023 and remain confident in our long-term growth opportunity in this key market.

Notwithstanding the challenges we have seen in China and many of our other markets, USANA’s business has remained financially and operationally strong and is strategically positioned for future growth.

Importantly, the company’s focus on health and wellness has never been more relevant as consumers around the world are more focused on their well-being now more than ever.

We made progress throughout the year on several strategic initiatives, including various digital commerce initiatives to support our business, new market expansion, the launch of our affiliate program in select markets and the completion of 2 acquisitions.

As we begin 2023, our top priority remains generating long-term sustainable growth in active customers.

While our associates did well in adjusting to a virtual selling environment, it’s become more and more evident that in-person meetings and events are an invaluable catalyst to building relationships and generating excitement and positive momentum in our business.

Consequently, one of our key priorities this year is to return to live sales meetings and events where possible. We have planned events in South Korea and Macau, China in the first half of the year with attendance at each event expected to be very strong, particularly given the absence of these events over the last several years.

Additional strategies for this year include offering new incentive opportunities for our sales force increasing our readiness for new market expansion, growing the two companies we acquired in 2022 and evaluating additional acquisition opportunities.

I’d like to now turn the call over to USANA’s President, Jim Brown, for his comments on our key 2023 operational strategies..

Thank you, Kevin and good morning everyone. Although generating customer engagement and growth is our top priority in 2023, we are also focused on cost and margin management.

In particular, we will concentrate on strategically managing inventory, adjusting our sales promotion strategy to emphasize more local and regional offerings and fewer global offerings, implementing price adjustments to mitigate our increased cost structure and the current operating environment and capturing other operational efficiencies throughout our worldwide business.

As a reminder, we made a strategic decision 2 years ago to build inventory levels to mitigate supply chain and stock out risks. As the supply chain has become more stabilized, the risk in this regard is lower, and we have meaningfully reduced inventory.

We will, however, continue to closely manage and monitor our inventory to ensure we’re able to deliver the best possible customer experience in a cost efficient manner.

In closing, we are optimistic that the successful execution of all of our strategies will allow us to build sequentially on our fourth quarter results in 2023 and position USANA to return to year-over-year growth in 2024. With that, I’ll now ask the operator to please open the lines for questions..

Thank you, sir. [Operator Instructions] Our first question comes from Linda Bolton-Weiser from D.A. Davidson. Please go ahead..

Yes. Hello. Good morning. So I was wondering if – so the – obviously, the China sales in the fourth quarter performance was a lot better than we had projected originally. And you talked about the pickup in the last couple of weeks.

Can you talk about what you are seeing more recently? Like has the pickups continued? And specifically, can you say anything about like how January was in terms of the performance there in China?.

Yes. Linda, this is Doug. And so obviously, with what we saw at the end of the year was really kind of in response to the complete change in really COVID policy in the market. And so we saw those two weeks pick up. We saw a little bit of that trickle.

But we are just coming out of Chinese New Year and it’s kind of what we had in our remarks that we just – we are waiting to go back and see how this normalize and kind of what that level is. We are obviously optimistic with the market and we think them shifting forward.

The opening of the market is positive, but it does create some transitionary adjustments that we will have to make and our consumers will have to make in the market. So we are still trying to evaluate what that looks like..

And we have Brent in here who oversees our China market.

Any other color or perspective there, Brent?.

Yes, you said it great there, Doug. December was very strong with the change in the COVID policy and we saw that demand go into January. But as Doug mentioned, Chinese New Year hit at the end of January. And every year, there is always a slowing that’s associated with that. And similarly, we saw that same slowing.

So time will tell as we come out of Chinese New Year and into February and March to see what demand is going to normalize out..

Okay. And then I guess when I just look at the results, again, versus what I was expecting, I guess the Southeast Asian piece that was quite a bit worse there.

Can you just kind of talk about – I mean are there both COVID impacts still going on, coupled with just macro business or is that just specific stuff with your business that’s going on in Malaysia and Philippines, I guess I’d be interested in? Thanks..

Yes. Let me start that off and I have Jim and Kevin maybe comment on top is, within that area, obviously, in Southeast Asia, COVID has hit us particularly hard. I think Philippines and Malaysia are kind of key examples of that.

The other issue playing into the performance both sequentially and year-over-year in the fourth quarter in that region, is that we didn’t – we were not promotion-heavy.

It was an atypical quarter for us with the level of promotional activity and it was a choice by us just relative to all the things that have been kind of pushed and encouraged and incented. And it was just a choice by us.

And so what we think going forward and what we are hearing from the leadership in the market, maybe Jim talk about that, is pretty positive..

I mean we started really traveling again into the third and fourth quarters of last year and the leadership in the markets from the events that we went at are excited and planning on really starting off the new year growing, and that’s why we’re so positive on this year.

But just like Doug said, usually in the fourth quarter, it’s a little slower we didn’t have as many promotions planned by us. We were very promotional heavy the first part of the year because of COVID, and we kind of wanted to bring that down to a more normalized run rate..

Okay. And then when – you talked about in the – just the gross margin performance in the quarter. You mentioned an inventory valuation negative impact in the quarter.

Is that kind of a one-time thing in nature or do you think that will continue or just can you give a little more color on that?.

Yes. And it was both the quarter and the year. I mean I think the year, just from carrying more inventory, it creates some exposure, some risk and just making those decisions. And so we’ve dealt with that some of that risk as far as making adjustments to inventory where necessary.

But we think, and you heard in Jim’s prepared remarks, that a lot of the instability of the supply chain and how we’re having to react has definitely stabilized, and it bodes well going forward. The operations team under Walter Noot’s direction has really done a great job really managing the inventory. And so I think we’re in a good spot now.

And I think we will see a little bit less, I guess, friction costs relative to that strategy..

Okay. Let’s see. I guess in my model, I had that actually, you made good progress. I think the inventory was $67 million in the third quarter.

What was the inventory at the end of the year?.

It was about flat. And I would remind you that we made a small accounting change in the third quarter. We have a small piece, about $3 million, that we have in long-term. And so you’d probably have to layer that up to have to be comparable to past years.

I think with the change in strategy during the COVID period, we’ve looked at that a little bit different and kind of worked with our accounts to be on the same page there, but there is about $3 million in long-term, there and so you’re about flat. So you’re really – the number is about that 70%, 71% range.

And we’re peaking out about pretty close to $100 million in inventory. So we think this is meaningful progress. And the group has done a great job adapting a relatively short period of time..

Okay. Thank you.

And then – so you’ve talked about this affiliate – before I go on to that, can I just ask, in terms of the outlook for 2023, I mean do you have any projection as to like if the working capital line will be a positive or negative influence on cash flow?.

Just because of some of the spin-up and some of the timing of the payments, we definitely saw bolstered operating cash flows in the fourth quarter. And so you’ll see that drag just as it kind of corresponds. And a lot of that is because a lot of inventory came, and sales really pretty robust at the end of the year.

And so you had some time where we generated revenue but hadn’t actually paid commissions. There is a little bit of a delay between when we generate sales to pay the commissions. We have accrued liabilities there. But I think it will be a little bit of a drag, but that really is kind of the isolated event that would cause that..

Okay. And then just in terms of the outlook for 2023, I mean you’re still kind of figuring in some inflationary cost pressures.

Is there any way of quantifying like those pressures like in millions of dollars that you’re figuring in for 2023?.

Yes. I mean I think we’ve just seen overall, as we’ve gone back and have positions that have left come on board, they are coming in at a much higher rate.

We’ve had to go back and address many of the key areas, I think, particularly in the production environment and select positions outside of their materials, probably the biggest from just the overall framework of our P&L in mark – China obviously has a little bit different because they are doing all their sourcing locally and into production locally.

The rest of the world, we’ve probably seen in that 5% to 8% pressure on change in material costs. And like I said, as we get a little bit more stabilization, we think there is some opportunity to negotiate and look for alternative sourcing as well. But we’re definitely proactive there.

I think stability and kind of executing and having the stuff to run our businesses is first priority, though..

Okay.

And just along those lines, can you remind us what your price – excuse me, what your pricing strategy has been and what you took in 2022 and then maybe what you might plan for 2023 on the pricing front?.

Yes. We’re still rolling out 2023. So I’ll probably hold off now. I think what we’ve done in the last several years is we’ve probably definitely operated below where the inflationary pressures were, just having some unknown out there and when it would come back.

And so we’re definitely looking for price adjustments that would reflect some of the current cost pressures that we’re seeing and trying to do. Obviously, we want to do as little as possible.

Just in the environment in the direction from Kevin and Jim is just really being thoughtful and we’re working with the local sales leadership in each of the markets to arrive at that. But it will be probably a clip above. And we’ve been in that 2% range the last couple of years, and it will probably be a little bit above there..

Okay. Thank you. And then finally, on the – you have talked about this affiliate program.

Can you just talk about kind of how you’re approaching that rollout and what the pace is? And is it just a matter of going country by country and rolling it out or region by region? Like kind of what’s the general plan with that?.

Yes, sure. We actually rolled out the affiliate program for the Americas in November. It was considered a soft launch, and then we had a full launch just a few weeks ago in January. We’re going to look at that over the next few months to make a determination of where we’re going to roll it out. We have plans to do it.

It’s mostly going to be country by country, not regions. And it’s going to be the countries that we also – we see affiliate programs. And we know we’re getting feedback from the field that they want a simpler way to earn with a faster way to earn, and that’s how we will approach it.

And we will go through 2023, some in the second half and then into 2024. We’re ready for it. But again, we want to see how it’s working and then you see if we need to make any adjustments to the program itself before we roll it out completely..

Okay. Thank you. That makes sense. I guess, I will leave it there and then take the rest offline. Thank you..

Thanks, Linda..

And I’ll take our next question from Susan Anderson from Canaccord Genuity. Please go ahead..

Hi, thanks for taking my question. Just a couple of questions here. I guess on the Americas and Europe. I’m curious just your thoughts on the active customer count, where you see that going this year.

And any drivers you have to kind of reverse the declines there? And then also just wanted to get your thoughts on how you’re expecting promotional activity to play out this year. I know it was lower last quarter.

Are you expecting that to continue into this year?.

This is Kevin. Thank you, Susan. Just to talk about the Americas and Europe. One of the key strategies behind our affiliate launch is to attract a different demographic, meaning a younger demographic who is navigating themselves very openly to a direct sales model. maybe not so much a traditional model.

And so as we become more relevant in that space, we expect to support and expect to see our active customer counts increase in these markets and so the key strategies behind the affiliate program and launching it here in the U.S. especially is precisely that.

The attraction of a different demographic that may be more open to receiving, as Jim said, pay quicker in a simple and easy way to receive a commission in a new marketplace. And so we’re optimistic as it relates to the United States.

We have a very, very strong base – in the U.S., we have a very strong customer base that has many of whom have been with us for many, many years. And so we’re going to build upon that base but also really focus on some new customers and approaching them in a new way.

And so as it relates to our promotional activities were definitely, as compared to Q4 especially, going to increase that. And we have later in the year an event that is specifically for the U.S.

Canada, Mexico and Europe event that we will hold targeted specifically at these groups, where we will again launch some new opportunities and, again, communicate with them face-to-face versus being virtual. So – and then there was one last part of the question, Doug. Susan, I did – there was one other part of the question I can’t remember..

Yes. No, I think it was just on the active customers and the promotional activity, which was very helpful. But also, I wanted to ask about just capital allocation. Curious what your thoughts are for this year in terms of the puts and takes between share repurchases.

And then I think you mentioned in your remarks, M&A, potential acquisitions that you guys still potentially looking to seek out there? And then along those lines, how are you thinking about something that would be complementary to the business? Thanks..

Yes. So let me go reverse just a little bit and just kind of put a little bit more color on your prior question that Kevin responded to. One of the things we did during this last year, I think particularly in the markets that have launched, now with affiliate is we ran a test program during the year.

And the way we ran that program kind of created a pretty heavy lift in our PCs for the short period of time. And so as that program expired and stuff, you have definitely seen that reflect in our customer accounts.

So, we are really looking to build sequentially from the base that we report in the fourth quarter in that region as we run these programs and just to kind of put a little bit of context and color there.

And then as far as capital allocation, it’s very similar to what we have done in the past, but there is definitely a heightened focus on business development and looking at some inorganic opportunities, and so we will continue to do that. I think with the two acquisitions we made last year, we are pleased we are making progress.

We have some very high hopes and expectations of these companies. And it’s a good time right now to deploy some of our capital in this area and be pretty assertive there when things make sense. And so some of your question is, what type of structure, I mean we would look at vertical. We definitely look at complementary.

We are definitely looking to go back and learn in some areas that we are not actively participating in from our business. And so we think there is a variety of options out there that we think will be very additive to the organization as we move forward there. And share repurchase, we had $83 million outstanding.

And so we haven’t really commented on specifics there. But just as a note, that’s what’s currently authorized with the Board..

Great.

And are you guys seeing valuations become more attractive in things that you have been looking at?.

The conversations and the gap between buyer and seller have definitely been more palatable than they were a year ago or 2 years ago. But it’s still always an argument, making sure that we see value and how we see the future of that organization.

It’s always a bit of a struggle, but it’s definitely more palatable than it has been the last couple of years..

Great. Thanks so much for all the details. Good luck this year..

Alright. Thanks for being on the call..

And our next question comes from Ivan Feinseth from Tigress Financial Partners. Please go ahead..

Hi. Thank you for taking my questions.

And can you give me a little bit of color on some of the products that are really selling well? Where do you see opportunity? Like, for example, during the winter, are you doing exceptionally well, let’s say, in immune boost products? And also, what going forward, new key growth areas are you targeting?.

Yes. I mean when you have mentioned it, right, the last couple of weeks of China, and we said it before, we are a little bit higher in volume and demand than expected. And that goes back to the COVID environment where they opened up. So, products that are immunity or overall health, we saw a pickup on that, and we saw multiple times the normal amount.

So, that’s backed off a little bit when we look at the China New Year, and we are going to decide and see where it’s going after that. So, we are excited about it, but kind of hesitant to see what it’s going to do throughout the year.

And then on new products, and we have talked before, one of the big things that we do is we launch new products and usually around one of our big events, and we talked about them. We have two in Asia Pacific or one in Asia Pacific or one in China beginning of this year.

And then we have another event in August for the Americas, and that’s where we would roll out more new products at that point in time. And for us, we are looking at innovation. We are looking at delivery methods and the science that’s out there to make us – or help us make those decisions..

And then Ivan, you had asked about some of these other areas. And hopefully, you picked up in our release that we are a little bit more forward on the talking of international markets. And maybe Jim, just high level comment, I know we can’t talk about the market, but rough timing to some of these other stuff..

Yes. So, for the new market, again, we have a plan on when we will announce that and it would be at one of our major events. And we are looking at probably the fourth quarter for a launch of the new market. We have been doing work literally the last 1.5 years to get prepared.

When we do this, you have to go in and register, find the right people to run the market. And we have been very successful, excited about the talent that we brought on for that market. So, we will see it. It won’t have a huge impact on this year, and we will look at a bigger impact in ‘24, but that’s creates excitement through the field.

They like that opportunity throughout the company to move forward. And we are excited about the announcement. We just – we are just not ready to announce it right now..

And then what products are your associate sellers saying they are seeing the strongest demand for? And also, what are they – like feedback from their customers? Are they getting that things they are looking for?.

Yes. I think it’s at least with us, Ivan, it’s a fairly common theme. I think obviously, in the heightened COVID period, as Jim commented on, we have seen really a high demand for products that are designed to support immune function. We saw that as we first entered COVID and saw the spike in volume.

And we think – and you have commented several times in conversations we have had that people are more engaged and interested in their health. But in general, overall health and well-being, they are exercising more. They are taking a more holistic approach to their health, and supplementation is a big part of that.

And so we have seen stuff has been fairly consistent. We are always getting different feedback on new product offerings, and we are trying to continue to go back and formulate that and really respond. But we are definitely – we have got our ear to the pavement and listen to what the consumers are telling us..

Yes. And another area of focus for us is the affiliate program. We talked about that. That’s a new way to earn as well as to introduce products. So, we are looking at products that fit that model really well, where an influencer and affiliate could talk about them and show them and their price in that realm to be effective with that program.

So, you will see some products this year come out that are specifically designed for that affiliate program..

Then one last question, I mean, sadly, if we weren’t in the pandemic of COVID, we would be focusing on the pandemic of diabetes, which is just going to continue to get worse unless people to address many of the dietary issues.

So, what type of opportunity do you see there? Are you working on that? And then also the other area of sleep seems to be – sleep supplements in that area, there seems to be a lot of demand.

And that all comes together with sleep and wellness as well as being managed by diet, the same thing with diabetes can also – diet is a key part of managing that.

Can you give some thought or comment on that?.

Yes. Ivan, this is Kevin. I couldn’t agree with you more on the epidemic from a diabetes perspective and other health challenges, which underscores the relevance of our company and what we are talking about and offering.

We have spoken for many years about the glycemic index and about how maintaining a more consistent glycemic score, meaning not spiking or allowing large dips to happen in your blood sugar levels, will help in many ways with symptoms and/or onset diabetes and other things related to that.

And so as you look at many of our products and our foods-related products, we do take into account and look at the glycemic index and try and maintain through our nutritional drinks as well as our foods a healthy glucose level throughout the day. And we – our Nutrimeal Drink is especially good for that.

On top of all the nutrients that it’s supplying, very, very consistent in helping us maintain a low index on the glycemic index. We do have some other foods type products that were – that are in development that I think will further help in that category.

Again, holistic health is really a focus of ours, and diabetes is one of those that is at the top of the list. And then I can’t emphasize – and you are aware of this as well, but a couple of things that are most important as it relates to diabetes are exercise outside of what we are putting in our mouth, exercise. And then you bring up sleep.

Sleep is so critical to the health of our bodies. And we have a great sleep product that we actually, just a couple of days ago, talked about how we can enhance and reformulate and be involved in sleep. We also have a calming product to help people calm down in the evening so that they are in a state of rest and sleep.

And then again, we are encouraging the mental side of things for people to do those things which will help. One of the things I encourage every time I speak is the notion of meditation and the notion of mentally being calm so that our bodies will be willing to accept the rest of the sleep we have at night.

And so that’s a fairly long answer to your question, but I think your question is so critical to the health of our country and the world that it can’t be understated..

And I would make a little bit more color. We have seen this in the Healthy China 2030 initiative, and the government is really thinking companies should be far more proactive here.

And what Jim has really pushed us towards this, we have made some pretty meaningful investments in our foods facility, and we will really have a good base that we can go back and build off as we introduce some of these new products and really build out that line..

I appreciate the time for my questions and wishing you and your associates a big 2023..

Thanks Ivan. Take care..

[Operator Instructions] As there are no further questions in the phone queue, that concludes today’s Q&A session. And now I would like to hand the call back over to Andrew Masuda for any additional or closing remarks. Over to you, sir..

Thank you everyone 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. This concludes today’s conference call. Thank you for your participation. You may now disconnect..