Usana Health Sciences reports third-quarter challenges but upbeat on sales recovery and strategic growth initiatives, including in-house manufacturing and cost reductions.

OPERATOR - (00:00:00)

Quarter Results Today's conference call is being broadcast live via webcast and can be accessed directly from our website@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 2025, uncertainty related to the economic and operating environment around the world, and our 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 President and CEO Jim Brown, our Chief Financial Officer Doug Hecking, our Chief Commercial Officer Brent Neidig, our Chief Operating Officer Walter Note, as well as other executives. Yesterday, after the market closed, we announced our third quarter results. Our third quarter results and posted our management commentary document on the company's website. Management commentary document on the company's website. We'll now hear brief remarks from Jim.

Jim Brown - President and CEO - (00:01:24)

Before opening the call for questions. Thank you Andrew and good morning everyone. We continued to execute our comprehensive commercial strategy in the third quarter which was highlighted by the global rollout of our enhanced compensation plan. While third quarter results were impacted by softer sales and brand partner productivity leading up to the global convention in August. We are in the initial stages of the full rollout and I'd like to be clear in saying that I'm encouraged by recent activity we are seeing in the business. If you recall, we enhanced our compensation plan to ensure USANA is at the forefront of today's evolving and competitive landscape for entrepreneurs. Our commercial strategy includes an enhanced compensation plan, product innovation, updated and refreshed brand story, and improved tools to assist with building a business. The enhanced compensation plan focuses on three key elements Share, grow and Lead. This new framework is designed to help our brand partners to have greater success in building their sales organization with new brand partners and customers in a simple and explainable way. This is particularly relevant today as the desire to earn part time supplementary income or to earn income on one's own terms is as high as it has ever been. Our recent changes have systematically addressed the most important features of a competitive compensation plan in this market simplicity, early earnings potential and competitive pay for performance. We have simplified the plan, made it easier for new people to understand, act and share, improved the earnings capability of our new brand partners so that they have the potential to see success faster and we've enhanced our pay for performance criteria which will more greatly reward those who are doing more of the work. Simplicity and early success are key requirements of a younger demographic and early indications are that this offering is resonating with that audience. We are encouraged by our brand partners response to the enhancements and the recent lift we have seen in sales activity and leader productivity. We are seeing improvement across several key metrics including engagement as indicated by meeting attendance, brand partner attraction and customer acquisition, speed to earnings, their first commission and general stickiness of brand partners and customers. Qualitatively, brand partners across the world are sharing how these new changes have brought renewed excitement, energy and success to their businesses. Our vision of brand partners being a focal point continues to resonate and build trust with these entrepreneurs as they have expressed improved confidence in sharing the opportunity. During the quarter we reported an increase in inventories that can be attributed to in great part new product introductions to support our growth strategy, increased investments and location of our inventory to support tariff mitigation efforts and working capital investments in our venture companies HIA and Rise Bar, we have also begun the process of targeted in house production for our venture companies. We believe our in house manufacturing capabilities contribute to better margins, improve control of inventory levels and help to mitigate supply chain risks while providing a meaningful contribution to delivering the highest quality nutritional products. Moving on to our other businesses if you recall, these businesses provide USANA the ability to reach a broader demographic of health and wellness market while providing diversification and strengthening USANA's financial profile. Overall, we're encouraged by the year to date sales growth of these entities. I'll start by sharing an update on our direct to consumer business Haya. Although HAIA experienced some challenges in top line growth in the third quarter, the company has delivered 26% year to date sales growth, putting them on track to deliver another year of record sales. Notably, we have made significant progress on several integration initiatives. In the first half of the year, a large focus was placed on the implementation of a new ERP system and related controls to ensure that Haya is fully operating as a subsidiary of a public company. There has been significant progress made that we believe will support the HAIA team moving forward. We have also been working on other areas that provide operational synergies. For example, during the quarter we assisted the team in the transition to a new logistics partner which is anticipated to drive operational efficiency in the coming year. We also continue to leverage core competencies at USANA including research and development activities, manufacturing and general operational expertise to support HAIA in the new product formulation, international expansion and cost savings opportunities. Another example, we anticipate to begin the manufacturing of Haya products in house over the next several months, which we anticipate will continue to improve margins in the late second quarter and and back half of 2026 altogether. We're pleased with the progress we've made on all these fronts and continue to expect Haya to generate double digit sales growth for the full 2025. The team has several exciting growth initiatives planned for next year which we will address next quarter when we provide our initial outlook for fiscal 2026. Rise Bar, which was acquired in 2022, reported record third quarter net sales and year to date net sales have increased 169%. Although rise bar is still relatively small as a percentage of our sales portfolio. We're very pleased with the progress including channel expansion and new product offerings that we believe will contribute to strong future sales heading into 2026. We are investing additional resources and working capital as well as leveraging USANA's operational expertise to capitalize on current momentum and and to drive long term growth and efficiencies. We believe there is meaningful growth opportunities in the health and food space over the next several years. As included in our third quarter earnings release, we reported that we have initiated and are executing a global cost reduction process including a right sizing of our workforce. This process will focus on prioritizing top strategic priorities while also charting efficiencies that support a more agile and adaptable organization moving forward. We expect to incur an estimated one time charge of 4.7 million in the fourth quarter which has been reflected in our updated outlook. In closing, we remain confident that our comprehensive commercial team strategy will position USANA to drive long term growth in our direct selling business and deliver long term value for our customers and brand partners. Additionally, we we are succeeding in our diversification strategy with the growth of PIA in the children's health and wellness market and the growth of RISE in the healthy foods market. Together, these elements reinforce our positive outlook for the future and our commitment to create lasting value across our portfolio. With that, I'll now ask the operator to please open the line for questions.

OPERATOR - (00:08:25)

Thank you and at this time we'll conduct our question and answer session. If you would like to ask a question, please press Star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press Star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please, while we pull for questions. And our first question comes from Anthony Lebedzinski with Sidoti and company. Please state your question.

Anthony Lebedzinski - Equity Analyst - (00:09:09)

Good morning everyone, and thank you for taking the questions. So you have stated both in the release and this morning that you have seen a pickup in sales activity and leader productivity in recent weeks, which is encouraging. So can you just kind of walk us through maybe share some additional details as far as the trajectory of your business trends as you went from July through August, September, and maybe so far in October? If you could comment on that.

Brent Neidig - Chief Commercial Officer - (00:09:40)

Sure. Anthony, it's Brent. It's good to hear from you.

Anthony Lebedzinski - Equity Analyst - (00:09:44)

Likewise.

Brent Neidig - Chief Commercial Officer - (00:09:45)

We have seen some promising trends from our new compensation plan that was launched earlier this year, earlier in July. And I think primarily what we've seen is we've seen more engagement and excitement around the offering than we historically have seen over the last couple of years. So it's been quite promising from that perspective. As Jim mentioned in his notes, we're really trying to focus on the upfront earnings opportunity. We know that as soon as people can engage with usana, as soon as they see success and they can see that success sooner, they're more likely to stay with us longer. And so that's what's really resonated with our field right now and our brand partners. And historically, that's somewhat been a challenge over the last couple of years. And as people's expectations have changed in today's marketplace, they've been looking for an easier upfront earnings opportunity. And we feel like we've delivered on that front. So it's still early yet. What we've seen in September, now, the first couple of weeks in October, all signs are pretty promising, especially from our more mature markets like the United States. We've seen some re engagement from some of our longer tenured brand partners, which is really encouraging to see.

Jim Brown - President and CEO - (00:10:59)

Yeah, just further comment on that. During the quarter, you know, we mentioned we didn't have the best quarter or it didn't meet our expectations. We did the kind of launch, the beginning of July of the compensation enhancement, as well as some other stuff for our brand partners. And we saw a slowdown at that point in time where people were absorbing and not really getting into the business for a while. And then we've seen what Brent talked about. The pickup has really been after our global convention in August. So it really hit right at the end of August into September. So very promising signs, but again, early yet. Yeah. And Anthony, this is Doug.

Doug Hecking - Chief Financial Officer - (00:11:34)

Just for Context and we talked a little about this in the pre-release. When you roll out a lot of information, Out, as Jim said, it takes some time to process. So we anticipated a little bit of softness as they took time to digest and understand and have some more of these in person meetings. And our convention served and that investment there, I think served us well to be able to have some of those conversations. But we saw maybe a little bit softer than we anticipated and last a little bit longer. But as Jim and Brent both indicated, we're pleased by kind of the traction we have now. There's a lot of work to do, but we're definitely leaning into it and working on executing the plan.

Anthony Lebedzinski - Equity Analyst - (00:12:11)

All right, that's very helpful context and I guess that explains why the Americas and Europe region performed relatively better than some of your other regions, I guess. Right. As far as looking at the percentage of the sales declines, is that why because they're more mature, those markets?

Jim Brown - President and CEO - (00:12:30)

Well, no, I think we had the event. We had some sales at the event. The other thing that you have to. Recognize is because the Rise Bar has been a relatively small percentage of sales and because it's been there, we indicate, you can see in the tables that we include that in the Americas and Europe number. And so part of that contribution, without a doubt what Brent said is accurate, but part of that contribution is also from the pickup in performance at Rise Bar as well.

Anthony Lebedzinski - Equity Analyst - (00:12:58)

Got it. Okay, thank you for that. And then can you just also talk about the incentives that you planned for the fourth quarter and whether some of those incentives may need to spill over into early 2026 or you think this is just a short term one quarter event?

Brent Neidig - Chief Commercial Officer - (00:13:16)

Yeah, Anthony, we're going to continue to look for strategic opportunities to provide incentives for our brand partners specifically. Now, as we've just launched our new compensation offering, it's really important for all of our brand partners around the world to understand it, to feel excitement around that offering and to really get going working according to that plan. So I think it's been indicated already, but we do have some incentives planned for the fourth quarter which should help us land with where we are guiding in terms of revenue. And it certainly will spill over into Q1 of next year, just like it always does. We're always looking for opportunities for promotions to incentivize our brand partners.

Anthony Lebedzinski - Equity Analyst - (00:13:59)

Understood. Okay. And then just switching gears to Haya. So as I look at the active customer count that has declined, can you talk about the reasons for that and how confident are you that Haya can get back to growth next year.

Walter Note - Chief Operating Officer - (00:14:17)

This is Walter. We're very confident with hia. We've had some slowdowns in the third quarter. We expected more pickup because typically their business is all DTC and they do a lot of marketing through Meta, and Meta has changed algorithms and so we're trying to figure that out. And we've been through this multiple times with Haya in the past,, so we expect that to bounce back. And as Haya continues to grow through DTC and retail and international expansion. Yeah, we expect that to continue to grow.

Anthony Lebedzinski - Equity Analyst - (00:14:54)

Got it. Okay. And then, you know, lastly for me before I pass it on to others, so, you know, in terms of just the, you know. right-sizing of your organization that you plan to do in the fourth quarter, how should we think about the level of annualized operating cost savings that you plan to achieve with this?

Doug Hecking - Chief Financial Officer - (00:15:15)

Yeah, Anthony, this is Doug. So we're very early in the process and so one of the components, as Jim mentioned, is the right sizing of staff as part of it. There's far more to it than there. And so I think what we'll look. To do because we still got a. Lot of work and analysis and progress to make, we'll look to comment on that in February more fully. But we definitely expect to go back and see some cost savings and kind of cost reduction as a part of this process. And we'll talk about that in more detail in February.

Anthony Lebedzinski - Equity Analyst - (00:15:45)

Got it. Well, thank you very much and best of luck.

OPERATOR - (00:15:52)

Thank you. And just a reminder to the audience, to ask a question, press Star one on your phone. You can press Star two to remove your question. And our next question comes from Susan Anderson with Canaccord Genuity. Please state your question.

Susan Anderson - Equity Analyst - (00:16:09)

Hi, good morning. I guess maybe just a follow up on hia, it sounds like as you integrate it further, maybe there's some more efficiencies to be had there. Maybe if you could talk about that a little bit more. I don't know if you could quantify it and the impact it's going to have to margins at all.

Walter Note - Chief Operating Officer - (00:16:28)

Well, I won't give you all the details as far as this is Walter, by the way, I won't give you all the details on quantified. I think we'll have more information and in February about that. But specifically Haya makes vitamins. That's their number one product. They also do protein powders and we have reformulated or formulated their products for our manufacturing process. We've got that ready. So we'll be making all of their vitamins here in House, which we have all capabilities to do that. Also, as far as operational efficiencies, there's. There's just a lot. You know, we're really good at operations as far as, because of the size of our business. And so we're able to absorb a lot of support for supply chain. And they had a 3PL that they were using that we helped them move, transition to a different 3PL and that reduced our cost by quite a bit and allowed them to be much more efficient.

Susan Anderson - Equity Analyst - (00:17:30)

Okay, great. That's really helpful. And then maybe if you could just talk a little bit about just the industry in general. Are you seeing any, I guess, slowdown from consumers as it relates to either VMs or wellness purchases? Are they looking for more value maybe than what they were, you know, six months or a year ago? And I guess maybe if you could talk about it by region as well. Thanks.

Jim Brown - President and CEO - (00:17:58)

Yes, Susan, to clarify, this is on the broader business, not specifically related to Hyatt. Is that accurate?

Susan Anderson - Equity Analyst - (00:18:06)

Correct. Yeah, just in the industry in general.

Jim Brown - President and CEO - (00:18:10)

Yeah, We're a part of some associations that help the industry in general. And quite honestly, the direct selling business has struggled over the past few years, probably since COVID. A lot of direct selling companies are basically enhancing their offerings, making it quicker and easier to earn modest income as well as share products. So, you know, we have seen that same struggle over that time period, but I think we're getting there when it comes to what we just offered in July and August of this year. And we're setting ourselves up for the future. Yeah. And definitely the product or the vitamin side of the business has struggled some. There is a lot of competition out there and our biggest challenge is to make sure that we can easily show people our competitive offering. And again, our offering is a little bit different than some of the companies out there because of the direct selling industry. We offer fantastic products as well as an opportunity to earn. So, you know, that's one of our highlights when we would go out there, when we look at HIA and Rise and that information. I'll let Walter speak to that. Yeah. Haya is children's vitamins.

Walter Note - Chief Operating Officer - (00:19:26)

And the children's vitamin market's been, I would say there's quite a bit of competition there. But Haya creates a complete. A different experience for their customers. And because of that and because they're DTC and because they're all subscription, that business has actually been really, really good for us. And they've been able to take market share from other companies. And I think they'll continue to do that so for the highest side, it's been really good. Rise is protein powders, bars, RTD. And that business is really, really good for us too. You know, especially with the protein business in the US you just see a huge uptick and huge demand for proteins. And. And we're capitalizing that with Hyatt or with Rise. That's why we're seeing such growth. Yeah. And a little.

Jim Brown - President and CEO - (00:20:20)

Susan, a little bit more color. A little bit more color on kind of just the broader category and what we're seeing with the consumers, we also play in a space where we have what I believe to be the best. Quality product out there. And one of the commercial team strategies get better and better and better at articulating that story so they really understand the value proposition. We're not a commodity type product. That's not a place we're going to play. And we're going to continue to differentiate what we're offering and we're going to make sure that we convey that story so consumers understand the differentiation of our products.

Susan Anderson - Equity Analyst - (00:20:54)

Okay, great. And then I guess maybe if you could just talk about if you think there's opportunity. You know, HIE has been pretty successful. The DTC business seemed to be doing better. I mean, is there opportunity, you think, to maybe buy a couple more DTC businesses maybe to tack onto that or how are you thinking about kind of like your future strategy?

Jim Brown - President and CEO - (00:21:18)

Yeah, this is. Jim, you're definitely hitting it. Our future strategy is diversification. We're committed to the direct selling channel. We're going to continue to work on making that grow and be a big engine as we get cash through our business. We are going to look at other opportunities in M&A are opportunities within the companies that they're there to actually expand within. So yes, that is part of our strategy. I think diversification will make a stronger Usana Health Sciences and we'll continue down that path. And even if you look at, you know, where we've been with direct sales and getting modest growth there just over time, with the growth rates of both High End Rise, we'll see a shift in overall, in our overall portfolio, getting more Omni Channel and more diversified.

Doug Hecking - Chief Financial Officer - (00:22:02)

Yeah. I would also say kind of given the recent announcement during the fourth quarter, as we look to pivot to be more agile and adaptable and work on some of these cost reductions from a capital allocation priority, in the near term, it'll be investing in the commercial strategy as a top priority. And as Jim mentioned, kind of our venture companies, because we see really good opportunity in both Hyatt and rise. And we continue to evaluate different opportunities, but those, without a doubt, will be our priorities from a capital allocation.

Susan Anderson - Equity Analyst - (00:22:31)

Okay, great. Thank you so much. Good luck the rest of the year.

Jim Brown - President and CEO - (00:22:35)

Thank you. Thank you.

OPERATOR - (00:22:38)

And there are no further questions at this time, so I'll hand the floor back to Andrew Masuda for closing remarks. Actually, one question just popped in. I'm sorry, one question just popped in. One moment. Yes, go ahead.

Ivan Feinseth - Equity Analyst - (00:22:51)

And that question comes from Ivan Feinseth with Tigris Financial Partners. Please go ahead. Thanks for taking my question. I have a few questions as far as. Now, I see your strategy is to delineate between direct to consumer and still your sales marketing channel. But as an example, there's still a lot of confusion about supplements that I feel your advisor channel can help. Like, everybody's saying the number one supplement you should take is magnesium, but there's just tons of different formulations you should take. Magnesium formulated with different amino acids or different formulations at night versus the morning. How do you feel that your product line could meet some of those demands and that your advisor channel could help consumers better understand that?

Katherine - (00:23:41)

Hi, Ivan, it's Katherine. I think the data on magnesium is interesting and still, as we discussed, a little confusing. So when we look at the clinical data and who has been pushing the clinicals and what types of forms have been studied and whether or not there's been a lot of AB testing of them versus each other, the data there is not consistent and solid. I think, in alignment with USANA's core values. We are always prioritizing science and ensuring that our customers and brand partners have the best possible options. So we continue to look at different magnesium blends as well as all of the different elements that are important for human health. And we'll continue to look at that and to ensure that the research that's being vetted is being vetted objectively.

Ivan Feinseth - Equity Analyst - (00:24:30)

Thanks. And then how do you feel that RFK's, you know, make America Healthy initiative is helping you to create some sales opportunity, getting more people interested in the need for supplements. How are you kind of, you know, capitalizing on that, both direct to consumer and to your sales channels?

Jim Brown - President and CEO - (00:24:50)

Yeah, I think, Ivan, this is Jim. I think in general, we appreciate any direction that shows that vitamins and supplements are very important for people around the world. I mean, even if we look at some of our other markets, there's initiatives from the government standpoint that we can attach to and educate and give people great offerings to meet the needs. You know, we talked about this for years. Our diet Our diets really aren't hitting the mark, and that's why supplements are so important. And I think over time, people are getting more and more educated and understand that. And that just helps USANA and it helps the whole industry in general. Like Doug had said a minute ago, the thing that we supply is the best vitamins in the world. And we'll continue to do that. We'll always look to see what our customers and brand partners need and make additions or adaptations to what we're offering. But, I mean, anytime you have the government or even other agencies talk about how supplements are needed for your overall balance and diet, it's just a benefit to us. Go ahead, Ivan. Sorry. Sorry.

Ivan Feinseth - Equity Analyst - (00:25:58)

For a long time, the government has kind of been a headwind to the supplement industry, and now it really looks like it's going to be a tremendous tailwind led by, you know, the Make America Healthy initiatives.

Jim Brown - President and CEO - (00:26:10)

Yeah, I agree with that. And again, that's just fantastic for the industry. And we've believed that all along. We've been in business 30 years. Can only imagine, I've been with the company right at 20, how difficult it was at the beginning when vitamins were really not looked at positively, or there was just no information about it. And our founder, Dr. Wentz, made the decision to move forward and give us the best product line out there. So, yeah, again, we'll go along with what's out there, and it's especially helpful when it's positive to the industry. Thank you.

Ivan Feinseth - Equity Analyst - (00:26:42)

Good luck for a strong year.

Jim Brown - President and CEO - (00:26:43)

And finish. Thanks, Ivan. Thanks, Ivan.

OPERATOR - (00:26:48)

Thank you. That was our last question, so I'll now hand the floor to Andrew Masuda to close. Thank you.

Andrew Masuda - (00:26:53)

Thanks, Diego. And thank you all for your questions and participation on today's conference call. If you have any remaining questions, please feel free to contact Investor Relations at 801-954-7210.

OPERATOR - (00:27:09)

Thank you. And with that, we conclude today's call, all pardons may disconnect. Have a good day.