Nature's Sunshine Products Q1 2023 Earnings Call Transcript

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May 9, 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 Financial Results for the First Quarter ended March 31, 2023. Joining us today are Nature's Sunshine's CEO, Terrence Moorehead CFO, Shane Jones and General Counsel, Nate Brower. Following the remarks, we'll open up the call for analyst questions. Before we go further,

Speaker 1

I'd like to turn the

Operator

call 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. Nate, please go ahead.

Speaker 2

Thank you. Good afternoon and thanks for joining our conference call to discuss our Q1 2023 financial results. I'd like to remind everyone that this call is available for replay via telephonic dial in through May 23 and via

Speaker 1

a live webcast that will be posted

Speaker 2

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. 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.

Speaker 2

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 I'll turn the call over to the CEO of Nature's Sunshine, Terrence Moorehead. Terrence?

Speaker 1

Thank you, Nate, and good afternoon, everyone. I want to thank you for taking time to join today's call to discuss our Q1 results. Today, I'll provide some context for our Q1 performance and offer some insights on how we believe the business is progressing. Shane will then walk you through the specifics of our financials in more detail. We started the year on a strong note with reported Q1 net sales of $109,000,000 or $113,000,000 when excluding the impact of foreign exchange, which is a 2.4% increase versus prior year.

Speaker 1

Adjusted net adjusted EBITDA was up 12% coming in at $9,100,000 Overall, we're pleased with the momentum we're seeing as markets like Japan and Taiwan continued to deliver strong double digit growth, while most of our other markets delivered solid sequential improvements to the top line with meaningful progress and signs of stabilization in Central and Eastern Europe and digital initiatives starting to take hold in North America. We continue to operate in an extremely challenging external environment, but the underlying fundamentals and strength of our business remained firmly intact and the steps we've taken to create a more consumer focused business continued to help us build momentum in the quarter. In Asia Pacific, we continued to deliver strong results with 1st quarter sales up 9% on a constant currency basis, driven by 58% growth in Taiwan and 21% growth in Japan on a local currency basis. Our investment in field activation helped drive orders, stimulate new customer acquisition and offset lower sales in Korea and China. Remember, both Korea and China are still dealing with the residual effects of COVID restrictions and market closures that prevented them from conducting normal business activities.

Speaker 1

They've only recently been able to focus on restoring customer growth after the restrictions were lifted in late 2022. We're seeing encouraging signs as sales momentum continued to build each month in China as the country reopens. We're hopeful this trend continues and are focused on restoring growth in 2023. I believe it's worth noting that despite the challenges in Korea and China, Asia Pacific was still able to deliver a strong quarter due to the strength and diversity of our portfolio. And moving forward, we believe a continued focus on targeted new product introductions, next generation branding and sustained investment in field activation will allow us to continue to drive profitable growth in the region.

Speaker 1

In Europe, sales were flat, up 0.3% versus prior year on a local currency basis. We continued to see signs of stabilization in Central and Eastern Europe, both in terms of how people are reconfiguring their lives and our ability to adapt to the changing situation on the ground. Our team has done an outstanding job driving orders and attracting new customers despite the challenging environment. As we move through 2023, we believe continued stability in Central and Eastern Europe, combined with strong execution of our field fundamentals, will create opportunities for us to deliver modest growth in the region. In North America, 4th quarter sales were relatively flat, down 3% versus prior year, primarily driven by a decline in average order size.

Speaker 1

Consumers continued to offset inflationary pressures by purchasing smaller quantities, delaying purchases or trading down to cheaper brands. Our digital initiatives helped offset the negative sales impact from average order declines, delivering positive momentum from a 19% increase in new customer acquisition that led to strong growth in digital orders. What's more, our subscribe and thrive auto ship program represented about 26% of sales and continue to support repeat purchases. As we move forward, we believe there's an opportunity to stabilize the North American business in the latter half of twenty twenty three by expanding our digital footprint and increasing the number of nutrition health practitioners recommending our products, thus extending our leadership position as the number one nutritional health practitioner brand. We also continued to make progress on our margin enhancing and cost savings initiatives and have moved into the execution phase of the plan.

Speaker 1

As a reminder, the structural changes we're making to our product line and supply chain will provide significant improvements to gross margin, but many of the initiatives involve redesigning processes and revamping sourcing relationships, and this takes time. In the meantime, we're implementing strategic price increases in Asia Pacific, Europe, LatAm and North America to help offset the impact of inflationary headwinds and improve profitability. Before I close, I'd like to briefly share some thoughts about our ESG program, where we recently released our 2nd annual ESG report, which can be downloaded on the ESG section of our IR website. This year's report shows that the implementation of our ESG strategies along with the commitment of our employees who are striving for excellence is allowing the sustainability and transparency mindset to permeate every aspect of our business. For example, in 2022, Nature's Sunshine achieved measurable progress on our top 5 sustainability goals, including: 1st, moving to 100 percent solar power at our U.

Speaker 1

S. Manufacturing facility, reducing greenhouse gas emissions by about 35 percent second, expanding recycling efforts at 3 of our U. S.-based distribution centers, reducing waste to landfill by almost 30% 3rd, moving to more sustainable packaging by increasing the use of post consumer recycled plastics to nearly 40% 4th, conducting our 2nd annual Greenhouse Gas Inventory to better understand emissions impact. And finally, 5th, optimizing and reducing shipments, both internationally and domestically to further decrease emissions. As we continue to apply sustainable practices and processes in our sourcing, manufacturing and supply chain, I'm confident we'll have more progress to share.

Speaker 1

In closing, the strategies that transformed our business have created a strong foundation for growth and continue to support our progress during the 4th Q1. Our brand power initiatives are delivering more powerful new products, more relevant messaging and fueling more meaningful customer growth. Our field energy initiatives are attracting a new younger generation of digitally enabled distributors, retailers and nutrition health practitioners. And our digital first initiatives are building new customer acquisition and retention capabilities that will serve us for years to come. In short, we continue to focus on improving consumer appeal, leveraging core capabilities, building competitive advantage and improving productivity to drive revenue and profitability.

Speaker 1

We're pleased with the progress we're making and the opportunities that lie ahead. Our growth strategies continue to gain traction and I want to reiterate our passion, dedication and unwavering commitment to successfully navigating this unique period of market uncertainty. We remain focused on restoring growth and delivering lowtomidsingledigitrevenuegrowth for the year. With that, I'd like to turn the call over to our Chief Financial Officer, Shane Jones. Shane?

Speaker 3

Thank you, Terrence. It's great to be here. Let's jump right into results. Net sales in the Q1 were $108,600,000 compared to $110,500,000 in the year ago quarter. This 1.7% decline was largely driven by reduced sales in China and North America.

Speaker 3

As Terrence mentioned, excluding the $4,600,000 unfavorable impact from foreign exchange rates, consolidated net sales increased 2.4% in the Q1 versus last year. Gross margin in the Q1 was 70.8% compared to 68.8% a year ago. The increase was driven by prior year inventory valuation reserves taken as a result of the conflict between Russia and Ukraine, offset by cost increases related to inflation and unfavorable FX. We estimate that a combination of FX and inflation decreased gross margin by nearly 100 basis points year over year in the quarter. Volume incentives as a percentage of net sales were 30.5% compared to 30.9% in the year ago quarter.

Speaker 3

The decrease is primarily due to changes in market mix. Selling, general and administrative expenses during the Q1 were $43,600,000 including one time charges of $4,800,000 related to a criminal social engineering scheme directed at 1 of our wholly owned subsidiaries and $1,000,000 in professional fees related to the external investigation of that scheme, offset by a $700,000 reduction related to a China VAT refund. Excluding these one time charges, SG and A expenses during Q1 were $38,500,000 compared to $40,600,000 in the year ago quarter. This decrease was driven by lower service fees as a result of the decline in China's net sales and the timing of events and expenses of approximately $1,300,000 that were delayed to the Q2. As a percentage of net sales, SG and A excluding the one time charges was 35.5 percent for the Q1 of 2023 compared to 36.8% in the year ago quarter.

Speaker 3

Reflective of the impact of the one time charges, operating income was $200,000 or 0.2 percent of net sales, compared to $1,300,000 or 1.2 percent of net sales in prior year. GAAP net income attributable to common shareholders for the Q1 was $900,000 or $0.04 per diluted share as compared to a loss of $3,000,000 or 0 point adjusted EBITDA as defined in our earnings release was $9,100,000 compared to $8,200,000 in the Q1 of 2022. The increase was driven by $1,300,000 of timing related to SG and A expenses. Our balance sheet remains clean with cash and cash equivalents increasing to $66,000,000 and only $1,000,000 of debt. Inventory declined slightly in Q1 compared to where we ended Q4.

Speaker 3

As part of our capital allocation plan, we continued to utilize our share repurchase authorization, buying 90,000 shares in the first quarter were $800,000 or an average of $9.16 per share. As of March 31, 2023, $23,200,000 remains of our $30,000,000 share repurchase program. Looking beyond share repurchases, our healthy capital allocation structure positions us well to continue our digital transformation and other strategic investments. Now turning to our outlook. During Q1, we experienced sequential improvements across most of our markets and continue to expect to report sales growth for the full year in the low to mid single digit range.

Speaker 3

As it relates to our Q2, please note that we expect to ramp up expenses associated with our digital growth and other strategic initiatives. In addition, as previously mentioned, the timing of some events in Asia and North America have moved from Q1 into Q2. Therefore, we expect our SG and A in Q2 to be elevated versus Q1 prior year. While these investments will result in a sequential decline in our adjusted EBITDA in Q2, we believe they are necessary to fuel our high value growth initiatives and accelerate sales into the second half of this year and beyond. With respect to gross margins, in the near term, we expect our supply chain initiatives and targeted price increases to be offset by continued inflation and foreign exchange headwinds.

Speaker 3

Therefore, Q2 gross margins are likely to be close to what we saw in Q1 with modest improvement in the second half of the year and meaningful improvements in 2024. Overall, we're very excited about the long term growth opportunities for the business. We remain committed to driving improved efficiency and profitability and are working to pursue opportunities to maximize shareholder value. Now I will turn the time back to the operator.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer Your first question comes from Linda Boynton Weiford from Davidson. Please go ahead.

Speaker 4

Yes. Hello. How are you?

Speaker 1

Hey, Linda. How are you doing?

Speaker 4

Good. Good. So congratulations on a quarter that exceeded our expectations.

Speaker 1

Yes.

Speaker 4

I guess, Just your SG and A. Thanks for all that detail Regarding that, so you kind of said that your investment spending was kind of coming to an end. Can you just Be a little more specific about that. Like can you clarify like what quarter you think that will kind of taper off, just can you give a little bit more specifics around that?

Speaker 1

I'll start. Yes, I think our investment is not coming to an end. We're actually ramping it up. And so we pushed some things Out of the Q1 and into Q1, so we'll be accelerating our investment in our digital initiatives and then some other field activation initiatives, Shane can give you some more color commentary around that and we turn it over to Shane.

Speaker 3

Yes. So I think we mentioned that there was some timing of some about $1,300,000 of meetings and other expenses that were pushed from Q1 to Q2. So that's $1,300,000 And then in addition to that, there will be some additional expenses, primarily for our digital initiatives, but also for some other field activation. And that amount will be in the range of $1,000,000 to 1.5

Speaker 1

for the quarter. Yes. So we're really again just trying to invest in making certain that we have strong momentum going into the back half of the year and then into 2024 really driving some new customer growth initiatives. This should help us on an ongoing basis. Does that help clear things up?

Speaker 4

Yes. Thank you. Sorry if I misunderstood. So does that mean, you said it was up sequentially and year over year. Is that in And as a percentage of revenue, do you think?

Speaker 3

Yes.

Speaker 4

Okay. Okay. Got you. And then in terms of all these things that you're doing, changes to your product line and supply chain and all that work. What does this mean for your innovation process?

Speaker 4

Because I know in the past you've had a pretty good flow of new products and things that you're bringing to market. Does this change that or do you still keep up with innovation while you're making these other changes?

Speaker 1

Yes, our innovation, we've changed you'll remember a couple of quarters ago, I started talking about our master branding strategy and putting more firepower behind some kind of a fewer number of kind of large and robust brands. So that's some of what you're going to see in the back half of the year, an investment in some really foundational products for us coming online and then our investment in those brands to really support them. So we don't want to have a kind of a launch and abandon strategy or just start dropping other products into what is already a large product line. We really want to focus on having some very meaningful and impactful products going into the line in 20 20 3 and then again in 2024. So the pipeline should continue to be solid, but again focusing on what I would consider to be maybe larger more impactful products that we'll continue to invest on as a foundational principle going forward.

Speaker 4

Okay. And then, I was just curious about North America And your commentary was very similar to what it has been in terms of Lower average order values and things like that. Is there any changes that you can comment though? I mean, are things Really the same or do you think things are getting a little better, a little worse? Is there any more color you can kind of give on that market?

Speaker 1

Yes, I think things are definitely getting better. We see our legacy business is I think it continues to age, but we are bringing in new younger customers to a much larger extent, largely through our digital initiatives and through our affiliate initiatives that are really just starting to build momentum. So I think you're just you're seeing a lot more kind of activation on that digital side of the business and on the affiliate side of the business. And we're quite, I think quite optimistic about the road that lies ahead there.

Speaker 4

Okay. And then just in terms of Asia, again, you've had a couple of markets that are really growing quite well. Is the issue in Korea, I mean, is it similar to just the COVID situation and And things just kind of becoming more normalized or are there other things still that you think need to be done to kind of get the Korean market back to growth phase?

Speaker 1

I think right now the issue there is they were closed down for 2 years essentially and their installed base of customers and their ability to attract new customers over that period just diluted some of their effectiveness. So what you saw in the back end of 2022 was us selling probably more product to the same people as opposed to really driving significant levels of new customer growth. And so going forward, I think the challenge for them is going to be getting back to that new customer acquisition and customer growth that they were so good at for so long. They really are just coming out of seclusion and starting to get their legs underneath them. So the team has pretty significant field activation investments that they're putting in place.

Speaker 1

They've historically had very good field fundamentals. Again, during the closures, I think those fundamentals were stunted. But they've built some new digital capabilities. They're using a new digital toolkit. We're going to be launching some new a new website for them that's going to actually represent our new global digital platform.

Speaker 1

They'll be testing it out first actually in Korea. So I think the runway for the market is still good. It's just going to take them some time to get their legs back underneath them.

Speaker 4

Okay. And then Let's see. I think I heard you said you did do some share repurchase in the quarter. Does that signal that you are expecting positive free cash flow in the year?

Speaker 3

Yes, absolutely. Yes.

Speaker 4

Okay. That's good. And then just one last thing. By your guidance for low to mid single digit revenue growth, that's excluding currency effects, right?

Speaker 3

That's correct.

Speaker 4

Okay. That's all for me. Thank you very much and good luck with everything.

Speaker 1

Thank you. That's great. Thank you, Linda.

Operator

There are no further questions at this time. Please proceed.

Speaker 1

Okay. Well, thank you and we'd like to thank everybody for listening to today's call and we look forward to speaking with you when we report our Q2 20 23 results in August of this year. Thanks again for joining us. And again, we look forward to hearing from you soon. Take care.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect.

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Earnings Conference Call
Nature's Sunshine Products Q1 2023
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