Hi, and welcome to today's fireside chat with USANA Health Sciences. I'm your host, Doug Lane, and I'm the head of consumer products at Water Tower Research. Today, I'm joined by Doug Hekking, CFO at USANA. Doug, thanks for joining today. Yeah, appreciate it, Doug. It's good to be here, and appreciate the opportunity. Well, I'm glad you joined us. Before we get started, I would like to point out that the company's safe harbor statements can be found in the Events and Presentation section on its investor relations website. Just as background, USANA is one of the largest publicly held direct-selling nutrition, personal health, and wellness companies in the world. USANA develops science-based health products and distributes them internationally. USANA gets about 90% of its revenues outside of the U.S., and about 1/2 of its revenues come from mainland China. So, Doug, USANA just reported first-quarter results that showed some encouraging signs following the post-pandemic hangover that most direct sellers experienced, and in fact, most direct-to- consumer models in general experienced this hangover. I noticed that active customers and variable contribution margins have stabilized, and your balance sheet, as always, remains pristine. Do you feel we're turning a corner here? Yeah, I would say we're pleased with some of the progress that we've seen, I think particularly in our mainland China market. But there continues to be work to be done. It's a challenging operating environment right now, I think with some inflationary pressures, not just domestically, but really across the board here. And, you know, we're very, as I talk to China a little bit, very pleased with the short-term response to a promotion we ran, which is pretty typical for us in the first quarter to offset the impact of the Chinese New Year, the Lunar New Year, which has become kind of probably our biggest seasonality event of our fiscal year. But the performance in our other regions and our other top markets probably aren't where we want them to be at this point, and so we still see some opportunity there. So as you know, we think right now the environment with kind of the entrepreneurs out there and people's willingness to invest in their health, I think are really kind of top of mind for many folks. So we think that that landscape provides some opportunities in the future that we can pursue. You mentioned mainland China. It did have a good quarter. I think organic sales was up 10%. You just had a meeting there with 17,000 participants. So it feels like China, anyway, is putting the pandemic in the rear view mirror, and things are getting back to normal. But, you know, you mentioned you run a promotion there, and that could have an impact in any given quarter. You know, I've followed you guys long enough to realize that. So do you think that maybe the first quarter promotion might have borrowed from future quarters, or maybe it just exaggerated the growth that you're expecting from China this year? Or do you think that we're really on a sustainable return to growth? Yeah, I think short term, I think the promotion was kind of the lead story, and I think oftentimes it has more of a short-term effect than we would like to see. And, you know, we'd like to see some sustainable traction in the business. But we ran... You know, we're in a sales business model, and so we'll have promotions. We'll have from a value proposition to ability to earn a little bit more money, and so those things are pretty typical. But even in China hasn't been immune from some of the kind of, you know, difficulties in the operating environment. They have their own set of challenges, but it's been a really good market for us, and I think we've weathered the storm pretty well relative to what we've seen in the marketplace, and so we've been pleased. As you mentioned, I think we saw great attendance and really good enthusiasm from our sales force that attended the meetings. We had two separate meetings. We had to kind of branch out on the second meeting to keep the meeting size at a certain level. Mm-hmm. And so they had back-to-back, and good attendance and good enthusiasm, and so we're encouraged by that, right? Yeah. And you know, like you mentioned, you know, when we go through the Chinese New Year, we typically offer something either leading into it, coming out of it, or both, to try to help offset the softness that we typically see during that period of time. So we think China still is a meaningful opportunity for the company, and I think we're still early stages, and there's plenty of opportunity there. You know, we don't have an overly sizable market share, and so I think there's plenty of room for us to go back and really lean forward here. And so one of, one of the tangential things is maybe I'm sure we'll get through the conversation today, is Brent Neidig, who has been kind of, the gentleman who's overseeing our China operation for the last several years, has taken on a broader role as our Chief Commercial Officer over sales and marketing and brand, really company-wide. And China's done some things that have been pretty unique. We're, we're excited to go back and try in some of these other markets and to localize and kind of cater the message. So I think it's something good to look forward to. I think, you know, that's the beautiful part about running an operation in several regions around the world, is that we can kind of borrow some things that we see as being successful and cater it to the local markets in other areas. And so China's been a definitely standout for us. Mm. Yeah, it certainly has. So what about the rest of Asia here? We had it looks like I think you said it on your call. It was a weaker-than-expected quarter, and it was pretty broad, you know, throughout North Asia, Southeast Asia, and Pacific. Is it how much of that is macro, or is there something USANA specific that you're gonna work on strategically or tactically to try to get the you know get the numbers headed in the right direction? Yeah, I think some is definitely macro. I think, you know, we're not unique. We are positioned, and the way we've done is we really take a great deal of pride in the products that we offer. They're formulated to make a difference, and they're positioned more on the premium side. And I think in a period of time where costs of other items are going up, it does create a little bit more pressure and a little bit more disconnect with some of the consumers. And so it's something that we've heard a little bit from our sales force, and we're definitely aware of. And we still think being differentiated and offering something that truly makes an impact on someone's health is the right way to go.... But without a doubt, you know, markets not named China, there's a few other markets, but as a whole, we're not where we need to be in these markets, right? Mm-hmm. Maybe we talk a little bit about some of the efforts going forward. For years, we'll continue to focus on kind of that consumer, that preferred customer, and it's critically important, but we probably haven't focused on the associate as much as we should. As we kind of rekindle and engage and cement an associate-first approach through activities, we think it's gonna include increased engagement. It's gonna take ongoing investments in digital assets and tools, and you'll see product innovation and that type of effort pick up, both on a local and a regional basis. And as you know, you've been in the in kind of this industry for quite a while, Doug. You're very well versed here. Is our key metric out there really the number of active associates and active customers that are purchasing our products on a regular basis. But the associate plays such a critical role in delivering that from both a helping to go back and convey the product story of the company, and the differentiation to presenting the opportunity to different entrepreneurs out there. So it really is critical. And so as I mentioned, Brent, under his leadership with his new role, you know, we believe is gonna go back and create greater alignment, improved responsiveness, accelerated brand and product innovation that will include, you know, more of a local and regional approach than what we have historically. This process isn't gonna happen overnight. We think we'll start seeing some traction in the back half of this year into 2025, and you'll start seeing, even though we're always coming up with products and researching, I think you'll see the cadence of some of the product innovation picking up over that period of time. And I think the kind of fruits of that effort will start manifesting itself into future periods moving forward. The other thing we'll do real quick is we'll focus on training and education of our associates, how to help convey the story, help tell people why USANA is different and the value of our products. It really is such an important message, I think particularly in this environment, where people seem to be more aware of their health and their ability to go back and play a role there than what we've seen. And so that's, you know... There's definitely opportunity. We understand that we'd like to see more traction, but I'm fully confident in the plan that Brent has laid out with his teams. Now, I look forward to news on that front. I know that, you know, historically, you've done global product rollouts, but it sounds like they're gonna be more locally tailored, perhaps, going forward, in, you know, depending on the market. Yeah, I think we'll probably have a little bit of both. I think some of the products- Mm ... kind of go cross-border, and some of the products definitely have some nuances that meet kind of the local consumers more than kind of the offering that maybe that we have primarily founded in the U.S. Okay. And, you know, you mentioned the sort of a return to focusing on the associates, which are the micro-entrepreneurs here, for sure. And you've always reported preferred customers, and I get that. And I think the new angle is the idea of developing an affiliate model or an affiliate group of affiliates, which I assume are customers and people that want to participate in social selling, using social media to sell USANA products, not necessarily build up large sales networks. How's that progressing? Yeah, we've been trialing it in a few markets. The way we view kind of the affiliate opportunity, it's just a different way to be an entrepreneur, as you said, and so it's a different way for them to go back and earn and share, and it's quite a bit simpler. So we're definitely learning as we go along and doing this other stuff, but we would never see this replacing what we do. We see it as augmenting what we do and maybe appealing, helping to kind of appeal to a kind of a broader market of people who are looking for alternatives and what would appeal to them from an entrepreneur aspect. I mean, not to be overly simple here, but the affiliate model runs sort of parallel to the associates, right? It's not necessarily going to drive numbers into the associate ranks. It'll be kind of a separate group of customers in the USANA ecosystem, if you will. Yeah, we had launched several years in advance a program for our associates as they brought on, as we focused on the customers, they brought on customers to go back and maintain those customers, that they essentially got a unilevel compensation element of that for all those customers they personally brought in. And so we've done this for a while, and we systematically saw that grow over a period of time. And it's always trade-offs. You have to go back and make sure the stuff is architected in a way that makes financial sense, not only short term to motivate behavior, but also longer term as well. And so this all goes part of that process. So you could go back and see an associate with some affiliate-type behavior with the customers, but maybe as they approach associate, we do something different. Whereas we would view affiliates as primarily targeting potentially other affiliates, but really primarily looking at end consumers out there and sharing through, like you said, social media is a great way to tell the story there. Okay. Staying in Asia, you announced you're looking to open up India, and India, obviously, it's a large population. It's an emerging direct selling market, and I think many people anticipate it to be a large direct selling market. One of your global direct selling peers has really taken advantage of the opportunity in India, basically more than doubling its business over the last four or five years there. So, there's evidence that it's a big opportunity. It's not just a land of large numbers. Can you update us on where we stand with the opening of it, and when do you really expect India to start moving the needle for that part of the world? Yeah, and just for context, we opened India in a very kind of soft, you know, entry in the market, late 2023, mid-December. And so we're still in the very early stages of the market. And operating in India is similar to some of our other markets. It comes with its own unique set of challenges, and potential, and opportunity as well. I think we're excited about the long-term prospect, but we've been pretty consistent. We're coming into India different than we have in other markets. And so we’ve talked pretty openly about really managing expectations, that we think it's gonna be slow and steady, and systematically build traction over time. And so we're pleased with where we're seeing it now. Definitely need to make some progress, but we think over the next several years, I think it'll give us something more noteworthy to talk about. Do you think it could be as big as China? Well, I mean, if, like you mentioned, the peer company out there, that would be fantastic. That's, that's- Mm ... that's a pretty tall order. Mm-hmm. You know, maybe as we start getting some traction, really kind of lean into it, seeing some progress, we can have another conversation down the road. Okay, that makes sense. Fair enough. We talked about new products. Can you give us any hint on what might be coming down the pipe? Obviously I don't want you to front-run the announcements to the field, but is there something, a teaser you could put out there for something to look for on the new product front? Yeah, we've been pretty consistent in rolling out new products and offerings. Yeah ... and doing this other stuff. But this new structure of the commercial team, you're gonna see probably an increased cadence of innovation of the products. And so there's really not anything to offer up as far as a particular product or a new category that we'll be offering. But I would look... You'll probably start seeing some of that stuff roll out in the news in, you know, you know, in the next 12 to 18 months. And so we're excited the direction we're going, but, you know, nothing really to announce at this point. Okay, fair enough. You know, you've been talking about some of your growth initiatives, and you've been including acquisitions in that conversation, and historically you've not been particularly acquisitive. And I say that, and, you know, your largest market was entered through acquisition. So now I'm kind of going, is this something where we could see another Baby Care come down the pipe to get you into a big market, or are you thinking more bolt-in, plug-in product acquisitions, technology acquisitions, something like that? I think it could be anything under that umbrella. So I think all those things we want to table. I think with China, it made sense for us. It was a heavy investment, and if you looked at the multiples out of the gate, probably didn't make sense, but it's been a great investment for us. You could go back and see technology, you know, getting products where you have a little bit wider moat. So there's a host of things there. I think what we probably could say is that it's gonna be in the health and wellness space. We're gonna stay true to what our DNA is and who we are, and really kind of continue to go back and invest in our core direct selling business, but pursue these different opportunities. You know, I think you talked about it earlier in our conversation here, is we have a very low capital-intensive business and kind of an efficient cash flow model. So it provides some opportunities that we don't have to choose investing in organic business or doing M&A. There's things that we can go back and do both at the same time. And so I would say over the last two to three years, we've probably looked at more opportunities than we have in the company's history. Mm. Trying to find something that really makes sense, and at the right value, some of this other stuff, is a different challenge. And I think we've learned a lot from going through these processes, and a bunch of false starts, but I think we continue to go back and refine the metric. And we still think the ability to go back and broaden out and build some new core competencies and push some diversification into our model is, we think, a positive as we look at future M&A opportunities. Okay, and to be clear, you know, some of your peers have bought other brands. Absolutely. I mean, Natura buying Avon and Betterware buying Jafra. Yep. Is that something that's on the table? Yeah, I would say it's probably not our top priority as far as within the channel. I think there's some skill set and some aptitude outside of our channel that we think could be additive to not only the business that would be being acquired, but also to our existing business, and how we could go back and apply some of those different, you know, sales infrastructures and techniques. So we see some opportunity as, you know, diversification is probably one of the key objectives that we have out there. Okay. Okay, and, you know, you mentioned free cash flow. I mean, even through this down cycle, the free cash flow is there. I mean, it... And, and the balance sheet still carries very little, if any, debt. So barring acquisitions, what are you gonna do with all that free cash flow? Yeah, our pretty consistent message, and the lens we look through it at, is first and foremost, what opportunities do we see in the direct selling space, where we can go back and invest resources gonna generate a return? And through our historic return on invested capital, you can go back and see the returns we generate there, and so it makes sense. Mm-hmm. That would really be kind of top of that heap there as far as priority. I would say number two is looking for some of these inorganic paths that we want, and we're looking for companies that we can acquire, where we're gonna go back and keep that leadership on board and running this company, and leveraging their expertise, and their know-how, and their understanding. And looking to go back and create some synergies with maybe some of our production ability, maybe some of the techniques they have, we could go back and use in our business. So that would be number two. And then we continue to talk with the board on a quarterly basis- Mm ... on capital allocation and how we, you know, how we approach that. And so what we've done historically, and you know this from our numbers, is we've typically, when we've wanted to go back and return value to shareholders outside of those first two categories, we've typically done it through a share repurchase program. The company has not offered a dividend in its history, and I still think the preference is for share repurchase on an opportunistic basis. But it's an ongoing dialogue with the board, and as the environment changes, we'll continue to go back and consider different pathways to get kind of an efficient deployment of that capital. Yeah. No, I mean, you ask about the dividend just because it seems like an obvious way to return capital to shareholders, and you know, you've got a lot of cash on the balance sheet, and even one of your Direct Selling peers did a special dividend just as a way to get excess cash off the balance sheet and into the shareholders' hands. Any contemplation of even a special dividend? Yeah, we've talked about all these things, right? And so I think what's not always apparent from the outside are the pool of considerations that are currently ongoing with the company and things that we're looking at. And so it's kind of taken as part of that decision process with different things that we're evaluating. So I think absolutely we've seen those things, and we see the utility of those things to, you know, kind of be good stewards of the resource of the company. And, you know, I think right now we've just made the decisions we've had, and I think with COVID, maybe we got a little bit more conservative, which I think made sense in the time. I think we have some flexibility now that maybe some don't in the marketplace, by the way, we've kind of run the company and the way we've managed our balance sheet. You know, you still have to go back and deploy that capital and generate return on it. It's still top of mind for us to find productive ways to do that. Okay. And you mentioned COVID, and I do wanna circle back on that. I wanna circle back on China. You just had a big meeting there. I assume that that's a sign that you're back to having the meetings like you normally have at a normal size, at a normal cadence, and so that's in the rear view mirror. Inflation, has that worked through the system? Is the pricing where it needs to be, your gross margins where they need to be, or we still have a little bit going on there? Yeah, it's still moving. It's definitely not the pressure point it had been. But, you know, one of the things I'd probably point out is you've seen some compression in our overall margin profile. A part of that's top line related, part of it is we've seen some pretty decent increases in cost. Mm-hmm. And we've been pretty thoughtful, and we haven't passed on near as much as some of those cost increases, as kind of what we've seen some companies do in the marketplace. We've been pretty mindful of the position we play in the market and where we're positioned, and kind of, you know, really understanding, you know, through our sales leaders in each of the markets, what the consumers are going through. And so we've taken a pretty moderate approach, and last year we, you know, company-wide, the weighted average price increase was between 4%-5% on a global basis. And, you know, before then, we're in the two`s, and inflation's been clicking along at a lot higher level than that. You know, between material costs and transportation and labor costs, I mean, it's... You know, you've seen it really across the board. And so we've taken some kind of known and thoughtful steps in how we wanted to go back and approach that, and we continue to go back. The nice part is we're still generating good margins, and we continue to go back and invest in the future, but we are taking some of these activities that we don't see contributing to future momentum out, and that's what's funding some of these activities as well. Okay. Are you starting to see some of these cost pressures recede? Are you impacted by geopolitics in your shipping costs? I would think it's mostly between the U.S. and Asia directly, right? Yeah, we... You know, I wouldn't say geopolitics, but I think just the constraint on some of the thing. You saw carrier loads, it's a small part of our overall cost. Not go up percentage-wise, but multiples, right? Mm-hmm. And it's still burdensome. For a period of time during COVID, we had to air freight stuff because things going through the port, you have one port worker come down with COVID, they shut down the whole port. Nobody knew how to handle this, right? That, I think for the most part, people understand a little bit more of what we're up against now, and it's not the severity of response. But, you know, it's typical the case when you see costs go up, you can go back and see those flattening out and doing this other stuff, but you typically don't see them return to where they were, and that's kind of what we're looking at now. I don't think we've seen a whole lot of relief, but we're not seeing the same level of upward pressure we have over the last several years. Yeah, seems to be a common theme where margins have stabilized, your balance sheet's in great shape, and it's just getting the top line moving again. Yeah. Easy to say, right? I mean... Well, but that's, I mean, those are really the trade-offs we're making as we look within our internal operating model and allocating resources there. What are those activities that are gonna help drive and stimulate that? And you see with Brent's leadership, with the commercial team and some of the changes that he's making, we're doing things that we think are gonna go back and provide those long-term benefits, and they're gonna take some investments. At the same time, we're looking at some of these other efforts that aren't adding value and removing those to help fund this in part, right? So we're being pretty thoughtful with how we approach it and being more mindful of top-line growth than we are immediate margin capture. Yeah, that makes sense. We're coming up on time here. Before I let you go, can you update us on your Executive Chairman, Kevin Guest? Is he still... What are his plans as far as the next year or so? Yeah, I think, continuity. He's been a great bridge. You know, he and Jim Brown, who is our CEO now, had a wonderful transition plan. They continue to work together quite a bit. Kevin is still traveling for the company and speaking in advance and doing this other stuff, and he is as engaged as he's ever been. He loves the company. He's passionate about it. Yes. I love his support of Jim. Jim Brown's fantastic, and we're excited about Jim's leadership in the organization, and they're definitely different styles- Mm-hmm ... which is fine. And you know, I think Jim's kind of surrounded his structure with kind of maybe where some of the things aren't his, you know, favorites or his strengths with other people who have those, and Kevin did the same thing with Jim's presence, right? So it's, I think it's a pretty well thought out thing, and Kevin's definitely engaged and motivated to help this company be successful. That's great. Yeah, that, that makes sense. All right, Doug, I really appreciate you joining us today and participating in our conference. All right. Thank you, Doug. Appreciate it. Thanks everybody for joining us. To learn more about USANA, please visit the investor page on their website, which is usana.com. Please note the views expressed in this fireside chat may not necessarily reflect the views of Water Tower Research, LLC, and are provided for informational purposes only. This fireside chat may not be distributed or reproduced without the written consent of Water Tower Research and should not be considered research nor a recommendation. WTR is an investor relations firm, not a licensed broker, broker-dealer, market maker, investment bank, underwriter, or investment advisor. Additional disclaimers can be found at Water Tower-