USANA Health Sciences (USNA) Q1 2022 Earnings Call Transcript

USANA Health Sciences (USNA -2.43%)
Q1 2022 Earnings Call
Apr 27, 2022, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and welcome to the USANA Health Sciences first quarter conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Andrew Masuda, director of investor relations.

Please go ahead, sir.

Andrew Masuda

Good morning. We appreciate you joining us to review our first quarter results. Today's conference call is being broadcast live via webcast and can be accessed directly from our website at ir.usana.com. Shortly following the call, a replay will be available on our website.

As a reminder, during the course of this conference call, management will make forward-looking statements regarding future events or the future financial performance of our company. Those statements involve risks and uncertainties that could cause actual results to differ perhaps materially from the results projected in such forward-looking statements. Examples of these statements include those regarding our strategies and our outlook for fiscal year 2022 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 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 first quarter results and posted our management commentary document on the company's website. We'll now hear brief remarks from Kevin before opening up the call for questions.

Kevin Guest -- Chief Executive Officer and Chairman of the Board

Thank you, Andrew, and good morning, everyone. We appreciate you joining us to review our first quarter results. USANA delivered solid first quarter results in the face of continued challenges across several key markets. Despite these challenges, both net sales and diluted EPS grew sequentially during the quarter.

Our operating results for the first quarter varied across several key regions and markets. For example, the U.S. market generated year-over-year sales growth and performed modestly above our expectations. Conversely, some key markets in Southeast Asia Pacific generated softer-than-expected results during and after the Lunar New Year holiday despite our efforts to offset the seasonality through promotional offerings.

Nonetheless, worldwide sales and operating results were in the range of internal expectations. During the quarter, we made progress on several of our 2022 strategic initiatives. We resumed the rollout of our Active Nutrition line across certain markets, and we continue to make enhancements to the overall customer experience through strategic digital investments. As we all have seen, the operating environment in China has become more challenging and unpredictable due to the escalation of COVID-19 and the accompanying lockdowns, restrictions and other disruptions to individuals and businesses.

Shanghai has experienced citywide lockdowns, and the Chinese government recently began implementing restrictions in parts of Beijing. At this point, we do not have transparency into whether these restrictions will continue to increase in the coming weeks in Beijing and other areas of China that are important to our business. Nevertheless, given the current circumstances, we anticipate some negative impact on our results in China, and we've lowered our fiscal 2022 outlook to reflect this uncertain environment. Regardless, we remain committed to supporting our associates, customers and employees in this key market and will continue to adapt to these ever-changing conditions to generate momentum in the business.

In closing, we remain confident that the successful execution of our global strategies will position USANA to deliver long-term sustainable growth in the future. With that, I'll now ask the operator to please open the lines for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] We'll go first to Chris Neamonitis at Jefferies. Your line is open. Please go ahead, sir.

Chris Neamonitis -- Jefferies -- Analyst

Great. Thanks, everyone for the questions. I wanted to ask about China and Asia Pacific. So maybe starting with China, still a sequential improvement despite the New Year and some of the more extreme restrictions, right? So can you talk about how maybe that market progressed within the quarter, maybe month by month? Are you seeing more digital uptake offsetting some of those external pressures? Or maybe just help us think about how you're able to support customers in that market.

Brent Neidig -- Chief Officer and Managing Director of China

This is Brent. We started a little sluggish in January, and we did see an uptake in February and March, and I think that was primarily due to a lot of the initiatives that we rolled out in the latter half of the quarter. So I was very optimistic to see that, especially given the challenging circumstances that are there throughout the country. We're very pleased with the effort that we made and for the results that we were able to deliver despite the challenging circumstances.

Chris Neamonitis -- Jefferies -- Analyst

Great. And then on -- maybe on Asia Pacific, could you unpack for us the macro trends you're seeing, specifically in Malaysia and the Philippines? I know you mentioned in COVID fatigue with customer accounts could be hanging in there. So what are you hearing or seeing as it relates to productivity in those markets? And is there any sort of kind of clearing event you would be able to point to as we move through the year?

Doug Hekking -- Chief Financial Officer

Yeah, and I think you have two different stories really. I think the Philippines is coming off a really challenging year and they've been working -- I think, similar to what in China, have been working very diligently to go back and get the momentum turned and moved in a good direction. And I think we saw some flattening on a sequential basis and a little bit better performance sequentially, but we got some work to do there. In Malaysia, which has really been one of our top-performing markets year-on-year, you had a little bit of dynamic of year-over-year comps on the timing of promotions and kind of the cadence of promotions between the two quarters.

And it really is the first time in Malaysia, we're starting to see this in a few markets. It's the first time that many of these folks were able to go out and see their families during the Lunar New Year. And we saw a little bit more of that than I think what we had banked in. So we saw a little bit deeper dip during the Chinese New Year, and we saw some of these promotional packs that we typically surround with that period of time, maybe not resonating quite as strong as what they did last year.

And I think -- so a host of factors, but I think that's a market that we're still incredibly high on and expect to go back and see some progress as the year goes on.

Chris Neamonitis -- Jefferies -- Analyst

Got it. And then just last one for me, just on input cost trends. I think last quarter, you flagged about 5% to 7% of pressure on materials. But the new guidance implies maybe that's maybe stepped up since a couple of months ago.

So is that how should we be thinking about it? And maybe if you could help us think about how that trend evolves through the year? Are you seeing any sort of relative stability in those baskets?

Doug Hekking -- Chief Financial Officer

Well, because the last time we've updated, there hasn't been that much time this past. I think we're still oriented in that same range that we had, but it's definitely something with our operations group, we're watching as kind of we're bringing the raws and finished, we go back and market and sell. And so we'll definitely report on that as the year progresses. But right now, just because it's so recent to when we reported the year there's not that much more to add there at this time.

Chris Neamonitis -- Jefferies -- Analyst

Got it. Thanks everyone.

Doug Hekking -- Chief Financial Officer

Thank you.

Operator

We'll go next to Doug Lane of Lane Research. Your line is open. Please go ahead, sir.

Doug Lane -- Lane Research -- Analyst

Yes. Hi. Good morning, everybody.

Kevin Guest -- Chief Executive Officer and Chairman of the Board

Good morning.

Doug Lane -- Lane Research -- Analyst

Good morning. On the inflation front, do you -- have you enacted any price increases or what's your plan for price increases for the remainder of the year?

Doug Hekking -- Chief Financial Officer

Yeah, we have and we've spent a great deal of time with each of the individual markets. We've met as an executive team. And we've tried to go back and take kind of a moderate approach and not being too forward leaning on that. So toward the end of the quarter, mid- to late first quarter, most of these price changes were enacted, but they were relatively small in comparison to some of the inflation pressures we're seeing.

And kind of given our gross margin, we felt that was kind of the appropriate tack to go back and take. So you're somewhere in that two, two and a half percent range on a weighted basis on some of that, but that definitely wasn't reflected for the full quarter.

Doug Lane -- Lane Research -- Analyst

Got it. And looking at your operating margin assumption, I think you took 50 basis points out of your range. And your cost of goods and your associate incentives have been pretty stable. They really -- the pressure has been the deleveraging on the SG&A.

Is most of that 50 basis point reduction just further deleveraging on the SG&A because of your sales reduction? Or do you anticipate a little bit more gross margin pressure that you've been seeing in the last couple of quarters?

Doug Hekking -- Chief Financial Officer

Yeah. I think we've definitely seen an elevated pressure on kind of the cost of materials that we're producing. But a lot of what you're seeing in at least the first quarter relative to expectation, I think, really was a little bit deleveraging on the sales line. And you can go back and clearly see that just on the year-on-year comparison there.

That's where the bulk of the operating margin was lost year-on-year in kind of that loss of leverage on the sales performance in Q1.

Doug Lane -- Lane Research -- Analyst

OK. Yeah, definitely. And on your sales reduction, because again, the sales number in the first quarter, it looks like it'd be what people were expecting. And so that means, obviously, the reduction in second, third and fourth quarter.

And you mentioned that the second half, you still anticipate growth but not as much as before, but is really the bulk of the revenue reduction going to hit the second quarter because of the lockdowns in China?

Doug Hekking -- Chief Financial Officer

Yeah and I wouldn't say that. There's some timing of events. When you look at the second quarter of last year, we had the short-term program, every market did in the second quarter last year. And we've spaced that program out, so you see more of the distributed offering this year through markets.

And so China, one of our bigger markets who performed well on this. Really, we're kind of wrapping that up and having a big part of that in the second quarter. It's -- I think it's been a little bit more challenging environment. I think as the government has kind of elevated, kind of how they've handled the COVID environment.

And it's not an opportune time to go back and run something like this, but it was already underway. But I think as a whole, I think we saw some reasonably good performance there and maybe a little bit different than what we've seen in past years. But -- so I think you'll go back and see a little bit of progress sequentially in the second quarter. And we're hoping to go back and get a little bit more visibility, Doug, as far as what that situation is in China.

What we saw this time just it wasn't the same response from the government that we saw the first time we kind of went through the initial COVID. And so we're adapting and responding to Brent's point, I think the team has done a great job. I think we have new -- some new digital assets in the studio in-house that really allows us to kind of be pretty active in that environment. But I think the main reason you've seen some of the softening in our guidance is just from some of the unknowns we're seeing in that environment.

Doug Lane -- Lane Research -- Analyst

And is it more impacting your ability to sell product or your ability to get products out to your customers?

Doug Hekking -- Chief Financial Officer

Well, I think for a period of time, really toward the end of first quarter, we had a small bump in deferred revenue, I think, particularly in trying to go back and get products delivered to Shanghai because of some of the lockdowns and shutdowns there. And so we've been able to date get products, manufactured products, but there has been some disruption in delivery relative to some of the positions the government had. We've been trying to find compliant productive ways to try to get product out, but we're definitely going back and staying in touch with the government as we do this just stay in good standing.

Doug Lane -- Lane Research -- Analyst

OK. That's helpful. And just lastly, you mentioned in your previous call that you were planning to have an in-person event in China in the second half. Have you made a call on that yet or you're still waiting and see on that?

Brent Neidig -- Chief Officer and Managing Director of China

Yeah, Doug, just given the uncertainty, we decided to change the event that we had. We initially planned for Nanjing in September, and we've decided to go to a hybrid event. So as Doug already mentioned, we have an in-house media studio, so we're going to leverage that asset and produce some high-quality content from the studio and plan on more small in-person gatherings throughout our branches and distributor workshops throughout the country. Just I think given the current environment, I think it would be really unreasonable if we were able to actually pull an event off in person at that magnitude.

Doug Lane -- Lane Research -- Analyst

Got it. Make sense. All right. Thank you.

Kevin Guest -- Chief Executive Officer and Chairman of the Board

Thanks, Doug.

Operator

[Operator instructions] We will go next to Linda Bolton-Weiser at D.A. Davidson. Linda, your line is open. Please go ahead.

Linda Bolton-Weiser -- D.A. Davidson -- Analyst

Yes, hi. Thank you. So I was just curious about the Americas and Europe region, which I think it was down about 3% in constant currency, and yet the U.S., I think, was up 5%. So I'm just kind of wondering, was the decline so big in the other parts of the region that, that offset the growth in the U.S.

or can you just give a little more color on that region? Thanks.

Doug Hekking -- Chief Financial Officer

Yeah, thanks, Linda. Yeah, the primary catalyst there is we saw modest softening in Canada, which is a great market for us. But I think the bigger challenge we had is in our Mexico market. And Mexico has had some competitive issues and some kind of going through some stuff.

And so we've been actively supporting them, and I think we're optimistic. But yes, year over year, Mexico was a tougher performance quarter for them.

Linda Bolton-Weiser -- D.A. Davidson -- Analyst

OK. And then I know when you had reported and talked about the fourth quarter results, you gave a little bit of sequential guidance for revenue. Thinking in the same way now, I mean I'm kind of seeing that revenue has to be down sequentially in the second quarter from the first quarter. Am I thinking of that correctly?

Doug Hekking -- Chief Financial Officer

Yeah. What we have -- and we typically don't do a great deal of talking on a quarter-to-quarter basis, but we're expecting to see some incremental progress. I don't think it's going to be dramatic, but we are expecting to go back and take some steps forward on kind of revenue performance in Q2.

Linda Bolton-Weiser -- D.A. Davidson -- Analyst

So you mean sequential revenue level in dollars?

Doug Hekking -- Chief Financial Officer

Correct.

Linda Bolton-Weiser -- D.A. Davidson -- Analyst

OK. OK. And then just I saw that you added like a small amount of debt to the balance sheet. Is that just related to your cash repatriation or like what was the reason for that?

Doug Hekking -- Chief Financial Officer

Yeah. It's just timing. I think from time to time, we'll go on the line just as different things in our operations dictate. We did do a little bit of buyback activity in the first quarter, roughly $25 million.

And so it really is a matter of timing and some of that comes with capital or inventory buying or paying of annual bonuses. And so we'll float on that periodically. And sometimes it's in and out before the quarter is over and sometimes there's a small residual lay over, but that was really the nature of that.

Linda Bolton-Weiser -- D.A. Davidson -- Analyst

OK. Thank you very much. I appreciate it.

Doug Hekking -- Chief Financial Officer

OK. Thank you, Linda.

Operator

And with no other questions holding, I'll turn the conference back for any additional or closing comments.

Andrew Masuda

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.

Operator

[Operator signoff]

Duration: 18 minutes

Call participants:

Andrew Masuda

Kevin Guest -- Chief Executive Officer and Chairman of the Board

Chris Neamonitis -- Jefferies -- Analyst

Brent Neidig -- Chief Officer and Managing Director of China

Doug Hekking -- Chief Financial Officer

Doug Lane -- Lane Research -- Analyst

Linda Bolton-Weiser -- D.A. Davidson -- Analyst

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