USANA Health Sciences Inc (USNA) 2020 Q4 法說會逐字稿

Good day, and welcome to the USANA Health Sciences Fourth 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.

Thank you, and good morning. We appreciate you joining us to review our fourth quarter and full year 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 to our business, operations and financial business. We caution you that these statements should be considered in conjunction with disclosures, including specific risk factors and financial data contained in our most 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 fourth quarter results and posted our management commentary results and outlook document on the company's website.

We'll now get brief remarks from Kevin before opening the call for questions.

Thank you, Pat, and good morning, everyone. We appreciate you joining us to review our fourth quarter and full year results as well as our initial outlook for 2021. Overall, we are very pleased with how we performed against the many new and unique challenges of 2020. Our strong performance in the face of unprecedented pandemic reflects the continued demand for our high-quality nutritional products and successful execution of our strategic initiatives.

In 2020, we found that we were well positioned, well prepared and nimble enough to adapt to and succeed in this unprecedented operating environment. Because of this, we ended the year with more customers, higher net sales and record earnings per share. As you can see from our initial outlook, we are expecting 2021 to be another record year for USANA. 2020 was truly a transformative year for our business as we accelerated many aspects of our customer experience strategy. We've been actively investing in the USANA customer experience for several years now with an emphasis on our digital strategy.

In 2020, we capitalized on the groundwork we had already laid and accelerated many other projects to successfully operate during the pandemic. We approved our websites, digital shopping experience, associate training, customer communications and our overall technology infrastructure. Additionally, we introduced several new digital tools that allow our sales force to continue sharing and selling USANA products in a predominantly virtual environment.

These enhancements to our business as well as many other technical and operational improvements have meaningfully improved the experience that our sales force and customers experience when doing business with USANA. Although we recognize that the pandemic is not over, our outlook for fiscal '21 reflects an expectation that we will see progress through 2021 towards a more normalized operating environment. While we've learned a great deal hosting several virtual events this past year, we look forward to the future opportunities of engaging again with our sales force and customers in an in-person setting when it makes sense to do so.

Our business is built around fantastic nutritional products, relationships and personal interactions. We plan to leverage the benefits of both virtual and in-person events moving forward. During the first half of the year, we expect to hold virtual-only events for our sales force and maintain our work-from-home plan for employees.

During the year, we will continue to execute our digital strategy, drive growth in existing markets with our emphasis on China, launch our new active nutrition product line and other products that actively seek out business development opportunities. As we execute this strategy, we are projecting another amazing year for the company.

In closing, I am very confident in our strategic direction, the competency and agility of our team and the strength of USANA's underlying business.

With that, I'll now ask the operator to please open the lines for questions.

(Operator Instructions) And we'll take our first question from David Bain with ROTH Capital.

Great. First, congratulations on a fantastic 4Q execution. I guess my first question would be if you could potentially capsulate the potential route to new market that you suggest in your press release that you're laying the ground work for. I mean, obviously, that can take many forms such as China bid or be strictly organic. Is there any way we can think about the potential immediate impact to a new market in relation to your strategy?

Well, our strategy for the last several years is -- has been that we wanted to focus our resources on our existing markets and focus on growth where we are currently doing business. We feel like we've got a number of hand in that area and feel very confident that it's time for us to move into exploring other opportunities around the globe.

If you look at some of our peer group, they're in -- some of them are in 50 or 60 markets around the globe. And we do see that as a potential growth opportunity, but it's not the primary strategic growth strategy for the company. We do see international expansion as an important piece. But again, like you mentioned, it takes quite a while for it to have an impact. Jim, do you want to add?

Yes. I mean, when we look at the markets that we've selected as we go forward, and of course, we're at this point in time because we're -- when we look at it about 18 to 24 months out, we wouldn't announce that to the field, but we do have a plan and a strategy as we go. There's just a lot of work that has to be done from setting up a market, and that's everything from logistics to where and how we're going to produce our products to hiring the right staff, all of that goes down a path. And that's why we're looking at that 18 to 24 month runway before we actually launch the market. So you're looking at an impact probably the end of '22 when we look at starting up the market. So you'd see a financial impact into '23. So it's ways out. But again, we feel, and we always have gone down that path of every couple of years of opening a market that we need to have the right runway to make sure it's a smooth opening.

Yes. And David, I would add on, I think a little bit of your question is the method and manner we entered China. That's definitely something we consider and evaluating whether a partner makes sense as we kind of look at the opportunities. And to Jim's point, a lot of the work has been done historically. And we have these markets kind of set on the shelf and kind of timing for when it makes sense. Thank the method and the manner. I think we have an idea, but we're still in the process of kind of getting to that point.

Okay. Fantastic. And I guess my follow-up would be, if maybe you could give us a sense as to what benefits either from a cost structure standpoint or revenue generation through technology or otherwise, just from best practices? Or really what you've learned that could become permanent out of COVID?

One of the things that we definitely have learned is that it is very -- we are very capable on an international level at a very high sophistication level when you're operating in several different languages across the world, that we can do it virtually. And for me, I don't have to get on a plane and fly to China. And we can still have a very positive impact. One area where I've been pleasantly surprised is as we've launched new products and the new initiatives that we've been able to do it completely from a virtual perspective. And seeing huge success.

And so our -- one of our big takeaways is that we're going to proceed in the future, utilizing a hybrid approach where we're going to leverage technology in a more meaningful way and encapsulate some of the in-person opportunities. But just surely from a management perspective, I become very much more accessible to our global community and customer base by leveraging technology. And so that's a huge learn for us because a significant piece of our SG&A -- our spend is done on live events and travel. And it has changed our basic business model somewhat because we've been so used to being on planes, travel all over the world to get in front of our people. And so that's been a big learn, and it will dramatically change how we do business here. I don't know if you guys want to?

Yes, I mean the other thing, perhaps from the management team and how we're doing our business, when we look at the sales field, we talk about digital transformation and our digital footprint. We're seeing a huge adoption when it comes to running your business digitally. So as well as the company figuring out how to do it, our field across all of our markets has figured out that way to run their business across Zoom, WeChat, whatever form it is, and to continue down a path of growth. And we were pleasantly surprised in 2020. And I think that's one of the biggest reasons that we had such a great year that adoption to the digital platforms.

And David, this is Doug. A little bit more perspective there. In some of our markets and some pockets within existing markets, we've seen a hesitation of resistance to adopting some of the technology we rolled out. And this environment has almost forced them to use it. And I think we've heard a pretty good response from that. And so that's been kind of a pleasant surprise for us to go back and get more and more folks using the tools.

Yes. For us, I'd like thinking about it that although COVID had a negative effect in many people's lives, it's really been an accelerator for USANA, and helping us accelerate the strategies that we already have in place versus a disruptor. And I'm very grateful that we have -- we're able to accelerate things that were already in place when we had to immediately pivot to the new operating environment. And so I see it in a lot of ways from our strategy side an accelerator versus the disruptor.

Awesome. And I'm sorry, since it's my first call as an analyst on your stock, if I could ask just one thing as a follow-up to that, deepening digital revenue generation, the whole thing that you've spoken to, are you seeing an overall younger demographic in the network?

I think -- well, this is an anecdotal kind of a response to your question, and Doug has the numbers better than I do. But based upon what I'm seeing just from a participation, even from a digital perspective, I do see a younger population even on my social media accounts and see those who are actively engaging with me as the CEO of the company. I do see a younger group or the younger population continually coming into the business, which I see is very positive. And so again, this is just my observation at a very high level, but I would say, yes, we do see a younger demographic coming into the business.

Yes. I would say as well, from a relevancy aspect we're set up now to actually meet the demands of that younger crowd where before when it was mostly done in in-person, it really didn't have that effect. Right now, we're doing everything digitally. That's the platform that the younger crowd wants to work on, and we're continuing to make that. So like Kevin says, we're seeing it, I think in the future, we'll see more of it bringing that demographic into the business.

And maybe a few other comments there. I think in our higher growth markets, we have a younger demographic, and that's been really clear. I think in some of our other markets, what we've seen is we've seen to Kevin's point, we've seen some more of this younger group come in. But we've also seen more of our legacy customers start using the technology more. So I think all those things are positive.

Yes, I agree with that.

And next, we'll move to Sebastian Barbero with Jefferies.

A few questions for me, please. I'm wondering, first, if you could talk about some of the trends you're seeing overall in the consumer health markets including changes in customer behavior over the past 12 months? And how does this compare across your different markets? And also, if you can talk about retention rates for your associates and preferred customers and how these have trended versus the pre-COVID levels?

As far as kind of the recent trend, Sebastian, I think what we've seen, we talked about it early in 2020, we saw a spike initially as kind of the rest of the world started dealing with the COVID pandemic, and we saw a spike in some of our immunity products that were designed to go back and support immune functions. And we've definitely seen a spike kind of drift down, but it's still clipping at a higher run rate of growth than the rest of our products. And so without a doubt, we've seen that. Across all our markets, we're seeing a more keen awareness of health and wellness. And that allow us to go back and have more robust conversations and have dialogue with these customers and consumers that we have out there.

I have to pertain to your second question, we produce that active customer count number for a very specific reason. When someone comes in and buys and they don't buy again, typically, we don't get something, let's just say, we're going doing this other stuff. So that active customer count captures who purchased in the most recent 90-day period. And so we think that's kind of the best transparency metric we use internally as well.

Got it. And you guided to China to grow between 6% to 12% in 2021, which on an organic basis, it's likely between flat to up 6%. I'm wondering if you can talk about any changes in the market in recent months, including meeting protocols in the competitive landscape. What gives you the inflection -- what gives you the confidence and inflection this impact over the next 12 months? And also any color you can give us on early '21 trends? And what does your guide imply in terms of growth cadence for the year?

Yes. And sorry, Sebastian, it's coming across a little bit muted on the -- on your voice. So was this specific to China you asked the question?

Yes. Yes, so just trying to understand any changes in the market in recent months, particularly as it leads to meeting protocols. And also, if you can give us some color on early 2021 trends and what does your guide implies in terms of growth cadence for the year?

Yes. And I'm sure as you read, many of the same information that we're getting, China's kind of a nuance marketplace where you have different restrictions, a different guidance really provincially and even at the municipality level. And so I think the questions we're leading up to the year is how China has this under control and they weren't having any issues. And you've obviously seen recently in the news that have these pockets of kind of outbreaks happen and the China government is really fairly quick to respond.

We've always stayed attached to kind of the direction that we're getting from our government relations folks and the conversations they're having with the government there. And so we're kind of toeing that line. But we do see -- it really is kind of a nuance thing, and it's not real specific to China as a whole. But that factors in kind of the best estimates we have.

The other thing in the market, I think as a whole, what we're getting from our folks with boots on the ground. As we're seeing overall growth in the market, not really as you saw it in that mid-single digits to mid-single digits plus. We expect to outpace that a little bit. But that's kind of how we see it right now. The competitive landscape is really not too altered from what we've seen historically. There always are new entrants and stuff. Right now, I think that's -- we just haven't seen kind of the same noise in that area, and it really is from established players really kind of getting a foothold and executing their strategies.

Okay. And in terms of Active Nutrition, this new line launched in Q2, you mentioned you'll have a focus on weight management and digestive health. Will this be some sort of shake? Or will it be a full comprehensive weight loss program backed by some digital tech embedded in it?

Yes, the Active Nutrition is more of a full program. Right now, what I would consider our line to be at the foods line with our nutramino in the products there. We're looking at shakes, bringing back bars. As we've mentioned in past calls, we have a USANA north facility, which literally a stone throw away from where we're sitting now at our corporate headquarters, and we're going to be making our own powder beverages and bars in that facility.

We've actually started already because we're looking at launching Active Nutrition, and we talked about that. Really the impact for a handful of markets will be in the second quarter, and then we're going to have additional phases of launch throughout 2021. So we'll see the full impact of Active Nutrition, really into 2022, but we'll see those trends happening in the third and fourth quarter this year. But it's much more than just a foods launch. It's programs, there's influencers, there's all kinds of different ways to get more of a community around the experience instead of just more foods.

And so this is a little bit of a novel approach for how we've approached different product introductions in the past. And for us, there's a real focus on lifestyle and versus a product or 2 that are being launched out there. If we can truly affect someone's lifestyle in a positive way to improve their health, we're really wanting to take a more holistic approach to the lifestyle as we move forward. And so we're excited as a health company to be able to round out our offering in those categories.

Got it. Okay. And last one for me. Switching to capital allocation priorities. There's some active buybacks in Q4 results of building cash for strategic partnerships. And if that's the case, can you walk us a little bit -- can you give us a little more details around your M&A criteria? You're looking for companies solely in the direct selling industry? Or are you also considering brands outside, like you did with Built Brands? What product categories do you believe or opportunities that could nicely complement your portfolio? And then in terms of what sort of capacity do you have and are you willing to take on leverage to execute?

Yes. I mean, regarding the opportunities, Sebastian, the focal point has really been on a kind of organic business. We also are actively looking for things that don't necessarily fit directly in the direct selling business that we can go back and acquire core competency that we can leverage in our other channels as well. You use the Built Brands is a great example to go back and accelerate our understanding our know-how to go back and execute on what we have. And so those are good examples. I think geographic expansion, we look at vertical integration, technology, anything to go back and kind of play in the health and wellness space.

And I think in May, even if that's not directly correlated to direct sales channel at this point, but we believe those opportunities are there to leverage going forward.

And then regarding leveraging stuff, yes, we see opportunities in itself without a doubt. We're not afraid to go back and put a couple of times EBITDA on the books of the debt. We're just looking for that opportunity. And you believe me the deal flow that we're evaluating on a regular basis now is far beyond what we've done historically, and we're looking for those opportunities and really evaluating those on a pretty dynamic basis.

And next, I'll move to Doug Lane with Lane Research.

I just want to focus, if we could on the customer accounts, to a lesser extent, even the active associate accounts, where it's really been a tale of 2 stories this year, where outside of China, the growth has been remarkable, but inside China, it just doesn't seem to be getting any better. So let's -- if we could start with the good, the 30% increase in active preferred customers year-over-year outside of China. I mean, how sustainable is that? And what kind of number should we be thinking about for 2021 as far as that's concerned?

Yes. I would say, over the last couple of years, the strategy that Kevin has encouraged the group to go back and adopt is really focusing on the consumer. And you see in all our markets across the globe that focus first and foremost is on the customer. At the end of the day, we grow the company by having more individuals and families to consumer products. And I think if we do that incredibly well, and we've been executing on it. I think that makes it easier and easier for associates going forward as well from a business opportunity perspective. So that focus hasn't changed, and we'll keep raining into that going forward.

China has had a couple of unique challenges back-to-back in a couple of years. And so that's -- I think we're coming out of that. I think the China team over there is really work hard to go back and build a base so we can really leverage going forward. And the feedback we get is they're encouraged and excited about the opportunities we have going forward and really see some momentum moving forward in the business.

Yes. On China, I think the one concern that I would have, again, it was a great quarter, but the one sort of number that stuck out on the concern side was that the preferred customer number decelerated so much sequentially from 193,000 to 164,000. So what happened in the quarter to impact the customer number in China?

Yes. It had to do with that trial program that we ramped beginning end of Q2 and Q3, and really encouraged our associates to go back and just share the opportunity, and we created a very linear compensation for a short period of time. And so it really encouraged them to go back and reach out and attract. And as that trial program ended, you saw some of those numbers drift down. And even with the decay and some of those lift in the customer numbers in Q3, overall, I think our Q4 numbers were catalyzed by the momentum created from that program as a company as a whole. We also benefit modestly currency, but that was the primary catalyst in the change of the accounts there.

Are you seeing any lift in China? I mean, especially on the active associates, we saw and less -- to a lesser extent, our deceleration there as well. But the associate account in China continues to sort of drift lower here. So I'm wondering, is -- are you looking for an improvement in 2021 or just sort of stabilization in China? China because it's almost half your business.

Yes. I think we're looking for progress there. You go back and see that reflected in kind of the outlook numbers that we have. We're not going to go back and grow unless the customers are moving in the right direction. I think the confidence is there and kind of the momentum is there, and the plans are there on the strategy. This is an investment year for China and they're taking full advantage of that. We see progress in executing those investments.

And next, I'll move to Ivan Feinseth with Tigress Financial Partners.

Congratulations on another great quarter. What were the strongest product categories and the strongest products in the most recent quarter and what kind of product trends are you seeing with product demand trends and interest from customers and associates are you seeing?

Yes, like Doug mentioned a little bit earlier, the immune health continues to be the product line that's outpacing anything else. And then when we look at it, we did a lot of programs throughout 2021 from a promotional activity as well from incentives as well as product launches. I mean we launch more products in 2020 -- excuse me, 2020 than we ever have. And that was part of our overall strategy to create some growth in the market and lesson the distractions of COVID-19.

And -- but again, that immune health is continuing to be the line that's moving forward. I would say, in 2021, hopefully, when we've talked about it that Active Nutrition would be the catalyst throughout the year when it comes to new product launches. But I don't see the demand for immune health to really go down in 2021.

And how are you like helping your associates like to educate in market immune health that it should continue long after, hopefully, that the pandemic gives in the rearview mirror?

I think that's a part of what you saw in the years. I mean, part of what we do is training to make sure that our associates can tell the story of our products and why the high quality is needed throughout the world, and we continue to do that in the markets. And we talked a little bit about the challenges this year that we've overcome. And that's doing that training really from, say, online, digital, Zoom, WeChat, whatever that is, platform to get it done. But we continue to do that, and we'll do that when we launched Active Nutrition in March, at the end of March, really what's going to happen in the first couple of months is dedicated to an understanding and training of our associates, then we'll really roll that product line out a little bit later in the second quarter. But it's incredibly important for us as a company to arm our associates and sales field to be able to tell that story of our products and why we're better than the competition.

Yes. I would say the other thing is, we -- years ago, we acquired a production company that makes incredible content. And it really is a dynamic way to go back to share the message and education. One of the things that our China market has planned this year is to go back and replicate a lot of that capability within market. It will go back and build brand awareness, speed content velocity, many really positive things there that they're working on. And so more and more, we continue to go back and kind of leverage that know-how and expertise and find creative ways to share that information in a digital way.

And how do you envision, what kind of events are you going to have for the Active Nutrition launch?

Yes. I mean, right now, those events, and we're really launching a handful of markets to start with U.S., Canada, Mexico, Australia and New Zealand will be following shortly. And those would be virtual events that we train our associates using WebEx or Zoom mostly for those markets. And it's going to be training on the products themselves but also the programs that go along with it. We're also doing user trials at the moment. So that information will come out during that, and it's all been positive thus far. We're really excited about Active Nutrition. And for us, it will be another area that we talk about from an excitement standpoint is bringing that technology and producing those products ourselves here at the company. It's been something over the last -- well, I've been with USANA 15 years. It's been my biggest headache. Is dealing with a lot of third-party manufacturers who are no longer not dealing with it at this point in time. But bringing that in-house is really going to have an impact to our ability to launch new products, new flavors and try things at a faster pace than we've ever had in the past.

Yes, something that we're, Ivan, that we're doing with Active Nutrition that we haven't done before, with relationship to your question is we have an ambassador program, which is we've taken some of our business builder associates out there who are our health advocates. And we're actually currently having them involved with the product, working with our science team, our R&D team, getting that expertise that they, from a product knowledge perspective as well as helping us put the program together that assist us directly the boots on the ground.

It's almost like a working focused group that is helping us build to the launch. And so we already have embedded, so to speak, a group of advocates who have great experiences with the product as ambassadors throughout these markets, which will give us a huge boost as we launch the products.

And what do you feel the size of the active market -- Active Nutrition market is relative to your current market? I mean, there are a lot of companies that purely do sports-related, performance-related stuff. It is pretty big. And what do you think is going to be your unique attributes and your competitive advantage when you go into this?

Yes. So just for clarity, Ivan, I think that whole kind of fitness and exercise stuff will be a little bit down the road. And usually, we're going to be focusing on kind of weight management, healthy snacks. We think the market is a really large market, and it's something we can go back and really leverage our existing customer base to go back and help tell the story through some of the technology we've talked about. So we think it's a big opportunity. I think just managing expectations here a little bit.

First and foremost, Jim and Walter Noot, our Chief Operating Officer, really been working hard to go back and get that production operation up and going in a very thoughtful, meaningful way. And then after that, we're going to launch in select markets in Q2 and just systematically roll that out and start broadening out the product base.

And it really is a more holistic offering. I think so many things we see out there are very just product focused. And we plan to definitely have something that's broader than that, which will roll in things for nutrition and exercise and those types of things going forward as well.

All right. And then on -- I guess, this is the first call since you announced your investment in Built Brands. Can you go into a little detail about what attracted you to, what opportunities you see? How are you going to work with them? What's going to be the benefit to USANA and as consumers of your product, what can they expect from it?

Yes, with Built Brands, the deal itself was an investment in the company from a minority investment, but what we really were interested in was some of the aspects that we did gain from that company, they're right down the road from us, maybe 30 minutes, running literally millions of bars a year. And the thing that we wanted to do was get expertise into our facility a little quicker. We're going to be world-class at making foods and powdered beverages, but we're just not that right this second, and it's going to take a little bit of time to get there. So there's the sharing of knowledge from an operational standpoint that was a benefit.

The other thing is that we're using their formulation and R&D team to help us create a USANA bar with some of the learnings that they have and some of the technology that they have, and that will probably turn into many bars in the future. And again, that's going to speed up the process for us as USANA to launch a product because we'll be able to use their expertise. And really, it wasn't as much about the investment, which we have our high hopes that we will get a great return from that investment, but it was about the operational excellence and the ability to get a new bar from an R&D standpoint quicker than our normal process.

And just Ivan, from my perspective as the CEO, I have the great opportunity to go down to Built bar and sit with their CEO for a couple of hours, and we were able to strategically brainstorm. How could we have some synergies together. They're in a completely different market than we're in. They have a completely different approach to how they deliver and manufacture and sell products. And so for me, the synergies that come from someone who's actually serving somewhat to help versus an active nutrition market already in a different way is very important from a learning perspective on top of investment opportunity, which I think is a very great use of our capital and also gaining the new core competency, but also the synergies that come from us being a partner with someone who has somewhat of a similar business, but yet does it in a completely different way.

It's exciting. And I'm looking forward to the Active Nutrition launch and more about the USANA bar you've built. I mean they tend to lean keto paleo, which I think is a big market, more than a fad. But I think it is an important nutrition focus. So what are your thoughts on that?

Yes. We'll be looking for bar of paste to go back and obviously have, obviously, some protein but also some nutritional benefit as well with different focal areas. So that's something that we're -- we've been developing and looking down the path, but I wouldn't say that we have anything specific in line with the app, but we definitely have some things that are catered towards health benefits.

And just to that point, also, we're always looking for different delivery way -- different ways of deliver nutrition. And with some of these bars, we had prototypes where we've had them fortified with various vitamins and minerals within a very tasty chocolate bar. And it's a great different delivery system that we're exploring also as we look at these avenues. So to your point, whether it's keto or what it might -- whatever it might be, it really opens up a host of opportunities for us from a sheer delivery perspective.

Yes. And the other area, too, when it comes to bars, like Kevin is talking about, we've historically had 3 or 4 bars as an offering. Now the new foods plant and having that supply chain managed by ourselves, we could have a lot more entries into the bar area as well as the powder beverage area because we're not held under the same contractual obligations that we are with third parties with really large runs and everything else that makes it more complicated to have a lot of variations. So that's something that we're going to be able to support back the nutrition line with.

All right. Appreciate the insight and the update. And congratulations again on the results. And wishing you a much more ongoing success in 2021.

And that will conclude the question-and-answer session. At this time, I would like to turn the call back over to Mr. Patrique Richards for any additional or closing remarks.

Thank you 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) 954-7358.

And that will conclude today's call. We thank you for your participation.