Nature's Sunshine Products Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 7, 2023

There are 5 speakers on the call.

Operator

Afternoon, everyone, and thank you for participating in today's conference call to discuss Nature's Sunshine's Financial Results for the Third Quarter Ended September 30, 2023. Joining us today are Nature's Sunshine's CEO, Terrence Moorehead CFO, Shane Jones and General Counsel, Nate Brower. Following their remarks, we'll open the call for analyst questions. Before we go further, I would like to turn the floor over to Mr. Brower as he reads the company's Safe Harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward looking statements.

Operator

Nate, please go ahead.

Speaker 1

Thank you. Good afternoon and thanks for joining our conference call to discuss our Q3 2023 financial results. I'd like to remind everyone that this call is available for replay via telephonic dial ins through November 21st and via a live webcast that will be posted in the Investor Relations portion of our website at ir.naturesunshine.com. The information on this call contains forward looking statements. These statements are often characterized by terminologies such as believe, hope, may, anticipate, expect, will and other similar expressions.

Speaker 1

Forward looking statements are not guarantees of future performance and the actual results may be materially different from the results implied by forward looking statements. Factors that could cause results to differ materially from those implied herein include, but are not limited to, those factors disclosed in the company's annual report on Form 10 ks under the caption Risk Factors and other reports filed with the Securities and Exchange Commission. The information on this call speaks only as of today's date and the company disclaims any duty to update the information provided herein. Now, I would like to turn the call over to the CEO of Nature's Sunshine, Terrence Moorehead. Terrence?

Speaker 2

Thank you, Nate, and good afternoon, everyone. I want to thank you for joining today's call to discuss our Q3 results. 2023 has been another strong year for Nature's Sunshine, fueled by increased investment in our global growth strategies, Digital First, Brand Power and Field Energy. And in the Q3, we continued to gain traction and deliver strong results. Today, I'll provide some context for our Q3 performance and offer some insights on how we believe the business is progressing.

Speaker 2

Shane will then take you through our financials in more detail. As we continue to build on the momentum we experienced in the first half of the year, we can clearly see the positive impact our strategies are having on the business. In the Q3, we continued to drive growth with reported net sales of $111,000,000 or $112,000,000 when excluding the impact of foreign exchange, which is a 7% increase versus the prior year. EBITDA was also strong in the 3rd quarter, coming in at $10,300,000 which was a 50% increase versus the prior year. 3rd quarter Results were driven by another strong quarter of double digit sales growth from Asia Pacific, a breakout quarter from our North American business unit that also delivered double digit sales growth and strong performance on our gross margin improvement initiatives where we're starting to realize some of the benefits from our $10,000,000 gross cost savings plan.

Speaker 2

In Asia Pacific, we continued to deliver strong results as 3rd quarter sales increased 12% versus the prior year on a constant currency basis. Field energy initiatives were a key driver with investments in field activation that focused on improved training and sales incentives, delivering solid order growth in the quarter. Brand Power Initiatives focused on investments in new consumer facing imagery, updated websites and a new consumer friendly product bundle, all of which helped attract new younger consumers. Again, these initiatives allowed us to reach more people and provide more effective follow-up in our key markets. In North America, 3rd quarter sales increased 11% versus the prior year, which is an important milestone for our North American business unit.

Speaker 2

Our strategic investments in digital and field activation are starting to have a greater impact on the business. And in the 3rd quarter, Digital sales increased 68%, driven by new customer growth that was also up 68%. Strong order growth was driven by our digital performance and improved activation with our nutritional health practitioners and retailers. New products and improved sales incentives contributed to the positive results. And moving forward, we hope to build on this momentum by further expanding our digital footprint and increasing the performance of our nutritional health practitioners and specialty retailers.

Speaker 2

In Europe, our team has done an outstanding job maintaining customer relationships, while also attracting new customers to the business. Despite the ongoing challenges, we continue to see a positive consumer response to our products and remain steadfast in our commitment to invest in field energy initiatives that focus on developing more relevant sales tools and incentives and penetrating Central European markets that continue to offer untapped potential and allow us to respond to the changing situation on the ground. Moving on to gross margins, we continue to make good progress on our margin enhancing cost savings initiatives. You will remember that we have committed to delivering $10,000,000 of gross savings by focusing on several areas. 1st, driving out costs from ingredients, packaging and formulations while maintaining quality and performance.

Speaker 2

2nd, improving efficiency and driving out waste from our manufacturing process. And third, reducing costs related to logistics and transportation. We've also taken strategic pricing to offset the ongoing inflationary pressure on our cost of goods. In the Q3, we started to see the effectiveness of our cost savings initiatives as gross margins increased 141 basis points to 73.1 percent driven by our gross margin initiatives, market mix and the price actions taken earlier this year. We look forward to realizing additional savings as the plan evolves, but right now we're on track and aggressively moving forward.

Speaker 2

In summary, our Q3 results exemplify the strong underlying fundamentals of our business and we are very pleased with our performance. I would like to leave you with the following thoughts. 1st, our business continues to outperform the market with sales growth driven by strategic investments focused on digital, field activation and brand building. Working in combination, these investments have allowed us to attract and retain more new customers, drive order growth and build momentum in the market. 2nd, Our gross margin savings initiatives are on track to deliver the $10,000,000 of gross savings we discussed.

Speaker 2

The team has verified the savings and we've already started to see the early benefits of our plans as gross margins surged in the 3rd quarter. Over the coming months, we expect to see continued progress. And finally, 3rd, We've built a strong financial position with a solid balance sheet and strong positive cash flow that will allow us to continue to invest in our growth strategies as we move forward. We're still operating in a challenging external environment, but our team is focused. They're executing our strategies well and we expect to take this positive momentum through the Q4 and beyond.

Speaker 2

With that, I'd like to turn the call over to our Chief Financial Officer, Shane Jones. Shane?

Speaker 3

Thank you, Terrence. As Terrence mentioned, we're seeing positive momentum across our largest segments, resulting in another strong quarter. Net sales in the Q3 were $111,200,000 compared to $104,500,000 in the year ago quarter, a 6% increase versus prior year or 7% growth excluding the impact from foreign exchange rates. This increase was driven by double digit sales growth in both Asia Pacific and North America. Looking at sales by market in the 3rd quarter, Asia Pacific continued to see robust growth with sales increasing 12% on a local currency basis driven by our key initiatives.

Speaker 3

In China, our digital live stream model continued to respond well as sales increased 38% on a local currency basis. Our long term outlook for China remains positive and we expect our consumer focused approach to gain momentum as we continue to invest in our digital toolkit and as the market continues to evolve. Our Taiwan leaders also continue to drive customer acquisition and order growth, producing local currency sales growth of 21% in Q3. Likewise, in Japan, our focused product offerings and investments in field energy continue to resonate well with both customers and distributors, resulting in increased order counts and local currency sales growth of 8%. In North America, Q3 sales accelerated with growth of 10% versus last year or 11% on a currency neutral basis.

Speaker 3

Recent investments in our digital initiatives were key to this turnaround as the North America digital business grew 68% during Q3. In addition, digital customers ordering directly from our website increased 68% versus prior year, a sequential uptick compared to the 52% increase we reported in Q2. Sales in Europe during Q3 decreased 2% or 7% on a currency neutral basis. This is reflective of the prolonged impact of the war and broader macroeconomic challenges reducing consumer demand in that region. In Latin America, we continue to focus on field energy, sales tools and business fundamentals.

Speaker 3

While we are seeing signs of increased activation and engagement due to this work, results continue to be lumpy, leading to a 6% decline in sales versus prior year or an 11% decline on a local currency basis. Moving to gross margins. Gross margin in the 3rd quarter increased 141 basis points to 73.1% compared to 71.6% a year ago. This strong year over year increase is reflective of the significant progress we have made on our gross margin initiatives over the past year. We are beginning to see the financial impact of that work and expect to continue to see further improvements throughout next year.

Speaker 3

Volume incentives as a percentage of net sales were 30.7% compared to 31.6% in the year ago quarter. The decrease was primarily due to changes in channel mix as a result of growth in our digital business. Selling, general and administrative expenses during the Q3 were $41,300,000 compared to $36,800,000 in the year ago quarter. This increase was driven primarily by increased service fees in China as the market continues to recover, increased variable costs related to sales growth, investments to drive our digital growth and strategic initiatives and performance compensation. As a percentage of net sales, SG and A was 37.1 percent for the Q3 of 2023 compared to 35.2% in the year ago quarter.

Speaker 3

Operating income increased to $5,800,000 or 5.2 percent of net sales compared to $5,000,000 or 4.8% of net sales in the prior year. GAAP net income attributable to common shareholders for the 3rd quarter was $2,800,000 or $0.15 per diluted share as compared to $100,000 or $0.00 per diluted share in the year ago quarter. The higher GAAP net income was primarily the result of a strong sales growth and gross margin improvement in the quarter as well as a lower provision for income tax compared to the Q3 of last year. Adjusted EBITDA, as defined in our earnings release increased 50 percent to $10,300,000 compared to $6,800,000 in the Q3 of 2022. The increase was driven by sales growth coupled with gross margin improvement.

Speaker 3

Our balance sheet remained clean with cash and cash equivalents of $76,000,000 and only $200,000 of debt. Inventory was $66,300,000 at end of Q3. That's $1,600,000 less than prior year and essentially flat compared to where we ended Q2. As part of our capital allocation plan, we continue to utilize our share repurchase optimization, buying 180,000 shares year to date were $2,200,000 or an average price of $12.35 per share. As of September 30, 2023, $21,800,000 remains of our $30,000,000 share repurchase program.

Speaker 3

Looking beyond share repurchases, our healthy capital allocation structure positions us well to continue our digital transformation and other strategic initiatives. Now turning to our updated 2023 outlook. We are narrowing our revenue guidance expecting full year sales between $443,000,000 $451,000,000 representing year over year growth between 5% 7%. This guidance is inclusive of the impact of foreign exchange, which continues to be a growing headwind, especially in Asia Pacific. With respect to gross margins, we continue to make good progress on our supply chain initiatives and expect meaningful improvement in 2024 and beyond.

Speaker 3

For the remainder of 2023, we expect improvement versus 2022 as early benefits from our initiatives and pricing are partially offset by continued inflation and foreign exchange headwinds. We also expect SG and A excluding the one time charges related to Japan to be sequentially higher during the Q4 of the year due to investment in our strategic growth initiatives along with timing of events. As a result of our strong Q3, along with the meaningful progress on our gross margin initiatives, we are increasing our guidance for full year adjusted EBITDA to $37,000,000 to $40,000,000 compared to guidance of $34,000,000 to $38,000,000 provided in the last call. Overall, our business continues to perform very well and we're very excited about both the immediate and long term opportunities before us. Continued mid to high single digit growth on a local currency basis, coupled with strong execution on our cost initiatives, should yield significant improvement in shareholder value this year, in 2024 and beyond.

Speaker 3

Now I will turn the time back to the operator. Ladies and gentlemen, thank you.

Operator

We will now begin the question and answer session. Our first question today comes from Linda Bolton Weiser from D. A. Davidson. Please go ahead with your question.

Speaker 4

Yes. Hello. Congratulations on a great quarter.

Speaker 2

Hey, Lana. Good to hear from you.

Speaker 4

Hi. So I was wondering, you talked about you know, e commerce sales driving some of the growth in North America. I was curious what percentage of your Sales in North America does e commerce represent now?

Speaker 2

It's just over 25%.

Speaker 4

Okay. So I guess, it seems like, I mean, you're having growth in non e commerce channels as well, it sounds like, correct?

Speaker 2

That's correct. Yes. So it's expanding on an expanding base.

Speaker 4

Okay. And then I'm just curious what other that 25% would that Your own website as well as like Amazon?

Speaker 2

Yes, it does. That's all digital.

Speaker 4

Okay, got you. And it sounds like the digital kind of strategy is working well in China as well. So I'm just wondering, why not I mean, I'm sure you are working to expand, but why not just take this kind of digital strategy to kind of more markets, some of the markets that are struggling a little more for growth. Are you trying to accelerate that or are some of the markets not appropriate necessarily for the e commerce approach?

Speaker 2

Yes. Some of the markets don't necessarily need it right now. We do have a rollout plan to expand digital kind of globally. So a lot of this also is we have to build the capabilities kind of globally as well. So we don't want to get ahead of our skis on this one.

Speaker 4

Okay.

Speaker 2

Clearly, you're right. The opportunities are there and we're we'll be pursuing them where it makes sense.

Speaker 4

Right. And so I was just curious about the really strong digital growth in North America. Are you Driving that at all through any sort of corporate paid for digital marketing? Or is this just all organic in the sense that it's coming from the direct sales for us?

Speaker 2

No, it's a corporate digital marketing program. So it's a fully leveraged kind of plan, traditional E Commerce Marketing.

Speaker 4

Okay, got you. All right. And then it sounds like the gross margin, I mean, The initiatives are really coming along very well. So that's good to see. I haven't worked on the math versus your guidance, but are you Thinking that gross margin will be up further sequentially in the Q4?

Speaker 3

Shane, you want to talk about that? Yes. In Q4, we don't expect A sequential improvement definitely will be a year over year improvement, but not a sequential improvement in Q4. As we move into next year, there will be sequential improvement.

Speaker 4

Okay, got you. And then In terms of your I mean, your gross margin, you did say was helped somewhat by pricing. Can you remind us what magnitude you've taken this year? And other companies have been sort of Saying that pricing has been difficult, some of the direct sellers, like it's impacting demand and it hasn't been easy. What do you think the root of your success of your pricing initiatives has been?

Speaker 2

Well, to answer your first question, I'll do the first and then I'll pass it over to Shane. Price increases were around just around 3% plus or minus and it wasn't a flat 3%. Some markets and some products were higher, some were lower. So we tried to be very Strategic in terms of where we thought we could take price. And so again, it's not a straight across the board.

Speaker 2

And as it relates to kind of some of the success we're seeing, Shane,

Speaker 3

you want Ed, comments. Yes. No, it has been successful because as Terence points out, we've been very thoughtful about this. So looking at the impact Looking where we have the most opportunity to be able to take price in places where we can't take price and really understanding our elasticity of demand not only by region, but also by product type, so that we can do that in the right places at the right time without an impact to demand. So As of yet, we continue to we passed along about 3% and without any substantial or any meaningful pullback in demand.

Speaker 4

Okay. And Can you talk about are there any particular new product introductions that are really helping drive things, especially in Asia right now in North America, where you're getting the best growth?

Speaker 2

In Asia, I referenced a new product bundle that the team has focused on. They call that their 1 pack And the one pack is a it's a simplified version of what they were selling in the past and it's good for daily use on an ongoing basis. Historically, they've sold into a larger, more complex detox program. This new one pack really does encourage easier adoption and increased repeat usage. So you can use it on an ongoing basis with a detox.

Speaker 2

You're not going to necessarily use that Every single day on an ongoing basis. So they're getting some velocity from that and that's really quite encouraging. And then in other parts of the world, especially in North America, We have launched our PowerLine. We're extremely excited about the PowerLine. That's 3 new products of PowerGreens, Power Meal that literally just launched and a Power Beets product.

Speaker 2

And each one of those are category killers. They've been designed to be category killers in each one of their respective markets and they work together synergistically to form a foundation of nutrition that basically every consumer Great tasting, highly effective products that will deliver results you can feel. So we're excited about the PowerLine. It's still new. We're just kind of a couple of months into it, partial year introduction on those, but already starting to see some good uptake and kind of some of our best product launches that we've had to date.

Speaker 2

So we're really excited about that and then we'll be launching that Throughout the world globally as we go into 2024.

Speaker 4

Okay. Thank you very much. I'll pass it on. Thanks.

Speaker 2

Sounds good. Thanks, Linda. Great hearing from you.

Operator

And ladies and gentlemen, with that, we'll be concluding today's question and answer session. I'd like to turn the floor back over to management for any closing remarks.

Speaker 2

Okay. Thank you very much. And again, we'd like to thank everyone for listening to today's call. We look forward to speaking with you again soon in our next call. And again, thanks for joining us.

Speaker 2

Take care.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Nature's Sunshine Products Q3 2023
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