USANA Health Sciences, Inc. (USNA) Earnings Call Transcript & Summary

Well, great. Thanks, everyone. Good morning, and we really appreciate you joining us in person as well as on the webcast. I'm Reed Anderson with ICR, and we're thrilled to have Doug Hekking here. He's the CFO of USANA. He's joined us for the first fireside chat of 2025 ICR Conference. You've had -- Doug, you had some really exciting news, last couple of weeks, the announcement of the acquisition of Hiya Health. And I think it's probably very, very interesting on so many levels, whether it's strategic, financial, operational, so many ways you can work with us. And so I think that I want to spend a good portion of our time this morning focused on that and learn more about what it means for the future. But before we do that, I think it would probably be helpful if you would just start by giving us a brief overview of USANA's business kind of along with perspective on some of the key points of differentiation, strengths of your model, kind of things that contributed to the success over the last couple of decades, okay?

Yes. I would say, foundationally, we're -- we consider ourselves a premium developer, manufacturer and distributor of premium supplements. And it's something that really foundationally we did since the inception. And so our founder, Dr. Myron Wentz, was a world renowned immunologist/virologist. And so all this foundation from a formulation, from an approach, from a commitment to how we approached it was critical. So we've been in business for just a little bit more than 30 years. We now are in 25 different markets around the world. Trailing 12 months was about $860 million. But we have 2 main manufacturing areas, both in Salt Lake City and in Beijing, China. And I think as we look about it, we have about 90% of our business right now outside of the U.S., with China being pretty close to 50% of that business, and we manufacture about 2/3 of what we sell. I would say the other relevant point is we have a robust and strong balance sheet. And we have -- and that allows some of this flexibility as far as our capital allocation process to go back and make that acquisition of Hiya.

Got it. Okay. Let's -- so that's great. Thank you. Let's shift into kind of a discussion of Hiya -- toward that because I think that is really top of mind for investors. What -- I don't think everyone is familiar with that, and so let's maybe start with a brief overview of that, kind of talk about literally the origin story, the founders, why they kind of got going here, but also the products, business model, wherever you want to take it. But I think a good, healthy, robust view that would be really helpful.

Yes. I would say foundation, when we look at it, we -- this appealed to us. And we've gone through -- we've evaluated a host of different businesses, but this made a great deal of sense to us from adding shareholder value. It was a company that had a very similar ethos to USANA and the commitment, the passion towards health and wellness, I think particularly in this case, kids' vitamins and the space they operate. And then we also saw a business that was, although relatively young, has shown meaningful growth over the last several years with ability to go back and scale that business and generate some pretty meaningful cash flow. So those, I think, at the outset would be something that I would say would be pretty appealing. Their trailing 12 months in September, they generated $103 million in sales and an adjusted EBITDA of about $22 million. And that's some pretty meaningful progress. And I think the other aspect that we're quite excited about is, really, the superior excellent management team that came with it. And we've been pretty intentional with how we structure the deal to keep them engaged and helping kind of drive future performance there as well.

And how fast they've been growing? They've been growing obviously very fast.

Yes. Probably north of 50% this last year. What we said in our initial release is kind of looking for growth approaching 30% of the top line this next year.

Okay. And there -- just kind of a sidebar there. So they're really focused on a market that you haven't focused on, the children's side of things. There is almost 100% incremental to your business the way from -- just from that target customer channel standpoint.

Yes, yes. It's -- I think when we've looked at nutrition, we've looked at it really across the age groups. But relative to penetration, we have less than 1% of our sales in children's supplements. And this is what they do for the entirety, right? And so it's -- I think it's a nice complementary offering in a channel where we don't operate and in something that's probably not real disruptive to our existing business, I think, which we're excited about.

And what does their assortment look like in terms of either number of SKUs? Or kind of what are their hero products, that sort of thing?

Yes. They have a small number of SKUs, 6 or 7 SKUs right now. About 60% of their revenue is from a daily supplement, a chewable supplement that they have. They introduced a greens product here in July -- of August '24, and it got a lot of traction in a short period of time. And we have a lot of people in our office taking are pretty excited about that product offering. It tastes like you mix the greens in there and it tastes like chocolate milk. And so hard to get people to take that when it...

Adults, not just children. That's great. You gave a little of the financial details, but maybe talk a little bit about just the structure of the deal because it was a little bit unique in that the founders are still going to retain some equity ownership. But talk about share of the structure and then kind of why that made sense for this deal for you.

Yes. So we invested $205 million for about a 78.8% stake in Hiya. And it was really important to us because they operate in a space and have some expertise, some knowledge base that we don't have. So it was important that we got the talented management team along with the deal. And so as part of this, there's a put-call feature at the end of year 3 and at the end of year 5 that gives us the ability to go back and buy the remaining rollover equity from the transaction at predetermined valuation scale. And so the -- it was important that we would have the ability to go back and do that, not necessarily be mandated to do it, but also to keep those founders engaged in running the business and doing what they've been doing. And in all honesty, I think we'd be really, really happy if we had to pay them a lot of money at the end of year 3 and year 5. And so we set it up to be really a win-win structure.

Yes. That makes sense. That's good. You've talked about the strategic aspect of it. But one thing I was going to ask, too, about, I guess, just thinking about the deal in general relative to investors because, again, it's kind of outside of your core space. It's a direct-to-consumer business. What is the key message that you want that investors to take away, whether they're prospective investors or whether they're investors in USANA today? What is really the kind of -- is there a pivot point? Or how should they think about this longer term?

Yes. I would say it's a thoughtful allocation of capital in a business that's growing quick, that's generating cash flow. We've been very consistent in delivering the message that we are committed to the direct sales channel. And so this is not a move away from that, but it is a move to something -- a move toward something that has a different distribution channel, different growth aspects that are looking for a demographic, as you mentioned earlier, that maybe we're not addressing at the same level they are. And so there's so many additive benefits to do this. And I think just bringing on some different core competencies of -- that this team brings on. And then I think we offer kind of some competencies to them to help really leverage what they're doing prospectively as well.

Yes. And you're going to run this business. They're going to run separately. You don't let them keep running the business. There'll be integration, et cetera, overlap. But how would -- because of how you're doing that, how should we think about either integration or the time line to how you become more assimilated as a couple of businesses?

Yes. I would say when we looked to the business and came into it, we recognize we're going to run it independent. We didn't layer in a bunch of synergy modeling in there to go back and justify the business. We think there's a host of opportunities there relative to us manufacturing, how we distribute, our expertise at operating internationally. I think in the near term, we're really going to work on bringing them in, supporting them and getting them acclimated to being part of a public company. Some members of our corporate development team, their whole focus will be just to help this group and be additive. We don't want to be disruptive. We don't want to distract what they've been doing. They've been doing a very good job with growth and scaling the business. And so we -- every step that we take, we want to be pretty intentional to deliver it with. But we do think down the road, there's some opportunities to go back and maybe look at some different synergies.

Okay. Again, staying with Hiya because, again, I think that really is what people are very focused on. Let's talk about their competitive position. So who are their competitors? What's enabled them to become kind of the #1 provider in a space that it's a nicher market, but it's still a big market and it's competitive? So how do you think about their competitive position? What are some of the characteristics?

Yes. I would say they positioned themselves pretty well. Trying to get kids to take vitamins, we know from our business, is not always the easiest thing to do. But I'll give them credit. They've developed something that's clean. It doesn't have sugar. And it's healthy and good for them. They've gamified it. They have this experience, they call it the Kidsperience, where when they first order, they come in and they get a bottle. And with that, they get a sticker pack, and then they get games on subsequent subscriptions. So right now, the business is 100% DTC, and it's all subscription-based. And so typically, that first order is subsidized. We charge them a discounted rate on the first order, kind of get that initial bottle out there and really engage the kids in the process. And they've really had a unique approach with how they've addressed the marketing and engaging both parent and kid and the way they've kind of broadened out their reach. So it's been pretty impressive.

And you touched on marketing. So what gives us -- some thoughts on that, too. Are they just really good in the digital space? Obviously, it's an e-commerce business. What are they doing that's really been very effective?

Yes. I think it's a simple sharing the message. They're broadening out their advertising in a lot of the areas that you'd think on Meta and Google and some of these other things. But I think that engagement, both with parent, child, I think, is what's resonating with folks. And they've done a really effective job of getting that message out there and being mindful of their spend, acquiring new customers.

Okay. All right. Again, sticking with Hiya, so let's now think about the future. You think about growing this business. Just -- more just what -- you obviously have some opportunities to cross-pollinate ideas, but really just as you want to keep growing Hiya. How do you -- help us dimensionalize how you think about that. They're obviously going to grow their customer file and just because they've got a great position in the market. But what else is there that can amplify the growth, whether it's channels, products, et cetera? How are you thinking about all that?