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Edited Transcript of NATR earnings conference call or presentation 7-Mar-19 10:00pm GMT

Q4 2018 Natures Sunshine Products Inc Earnings Call

Provo Mar 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Natures Sunshine Products Inc earnings conference call or presentation Thursday, March 7, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joseph W. Baty

Nature's Sunshine Products, Inc. - Executive VP, CFO & Treasurer

* Nathan G. Brower

Nature's Sunshine Products, Inc. - Executive VP, General Counsel & Secretary

* Terrence O. Moorehead

Nature's Sunshine Products, Inc. - CEO & Director

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Presentation

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Operator [1]

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Greetings, and welcome to Nature's Sunshine Products Fourth Quarter and Full Year 2018 Earnings Conference Call. (Operator Instructions)

I would now like to turn the conference over to your host, Mr. Nate Brower, General Counsel of Nature's Sunshine Products. Thank you, Mr. Brower. You now have the floor.

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Nathan G. Brower, Nature's Sunshine Products, Inc. - Executive VP, General Counsel & Secretary [2]

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Good afternoon. Thanks for joining our conference call to discuss our fourth quarter and full year 2018 financial results. This call will be available for replay from our website at naturessunshine.com.

The information on this call may contain certain forward-looking statements, which are often characterized by terminologies such as believe, hope, may, anticipate, expect, will and other similar expressions. Such statements are not guarantees of future performance, and 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 set forth in the company's reports filed with the Securities and Exchange Commission, under the caption, Risk Factors.

The information on this call speaks only as of today's date, and the company disclaims any duty to update the information provided herein.

I now turn the call over to our Chief Executive Officer, Mr. Terrence Moorehead.

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Terrence O. Moorehead, Nature's Sunshine Products, Inc. - CEO & Director [3]

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Thank you, Nate, and thank you, everyone, for joining today's call. I am very pleased to be here with you today to discuss our fourth quarter results and to share some of our emerging thoughts around the business.

Our Chief Financial Officer, Joe Baty is here with me today, and he'll be providing some more details and insights into our fourth quarter results.

But I'd like to start today by providing some background and an overview of the business. Let me begin by saying that we closed 2018 with strong momentum, delivering double-digit revenue growth, improved margins and a new vision to support continued topline growth with improved profitability. The vision is to be more consumer-focused with the goal of becoming more modern, more flexible and more profitable in both our processes and our interactions with consumers. We're still in the process of finalizing our strategic roadmap and the specific initiatives that will bring our vision to life, but our goal is to start rolling out the strategies in the first half of 2019 so that they can selectively begin to have an impact on the back half of the year.

Based on where we are today and the growth in the market, we really do like what we're seeing. We feel good about our current momentum, and as a result, we feel confident about 2019. Our long-term objective is to reposition the company to allow us to appropriately participate in and benefit from the ongoing industry growth that's expected in the future.

Now I'd like to briefly share a few highlights and trends from the quarter.

Sales for the fourth quarter were up 11.3% in local currency versus prior year, while adjusted EBITDA quadrupled on a year-over-year basis. The strong sales growth was driven by continued positive momentum in Synergy, NSP Russia, Central and Eastern Europe and NSP China.

Specifically, we continue to see strong sales momentum from South Korea, which increased local currency sales by 45% for the quarter. The growth was driven by strong distributor engagement, excellent field leadership, solid fundamentals and a favorable economic environment. South Korea is our largest international market and the largest driver of Synergy Worldwide group. We also continue to see strong performance in NSP China, where our fourth quarter sales were up 61.1% in local currency, after being up 200% last year during the same period. We believe there is tremendous potential for our business in China and are optimistic about our long-term growth opportunities. As such, we continue to invest ahead of growth, believing the additional resources and investments are having a positive impact on market penetration and will support the achievement of NSP China's long-term goals.

Russia and Central and Eastern Europe is another area where we continue to see positive momentum with 21.8% local currency sales growth. Local market management has done an excellent job of creating products to address local consumer needs, and they continue to maximize growth by introducing market-specific product kits that have been specifically designed to address targeted health needs and satisfy local consumers.

With respect to NSP Americas, fourth quarter sales were down 7.5% in local currency as the management team is still in the process of stabilizing the business. The strategies and initiatives, we're now cascading throughout the organization, are designed to stabilize performance. And despite the recent results, we believe there is still considerable opportunity to improve our performance and benefit from the positive market growth.

Now I'd like to turn over the call to Joe, so he can walk you through our results in greater detail. Joe?

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Joseph W. Baty, Nature's Sunshine Products, Inc. - Executive VP, CFO & Treasurer [4]

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Thank you, Terrence, and good afternoon, everyone.

Net sales in the fourth quarter of 2018 were $97.4 million, compared to $88.3 million in the same quarter last year. On a local currency basis, net sales increased 11.3% year-over-year or 10.3% as reported. The increase in net sales was driven primarily by a $6.7 million increase in Synergy Asia Pacific, a $4.2 million increase in NSP China, a $1.9 million increase in NSP Russia, Central and Eastern Europe and a $0.3 million increase in Synergy North America, which was partially offset by a $3.3 million decline in NSP Americas and a $0.8 million decline in Synergy Europe. Net sales were also negatively impacted by $0.9 million of unfavorable foreign currency exchange rate fluctuations.

NSP North America sales declined 6.4% year-over-year to $32.1 million during the fourth quarter or a 6.1% decline in local currencies. Sales in NSP Latin America declined 17.5% year-over-year to $5.3 million or a 15.4% decline in local currencies. We continue to see lower recruiting rates that are not offsetting attrition in NSP Americas, and we expect this trend may continue in the near term until our new strategies and initiatives gain traction.

Synergy WorldWide net sales in the fourth quarter, grew 19.9% year-over-year to $38 million or a 21.5% increase on a local currency basis. Net sales in Synergy Asia Pacific increased 28.8% year-over-year on a local currency basis, driven by a continued strong sales momentum in South Korea, as Terrence mentioned. Sales in Europe declined 10.2% year-over-year, while sales in North America grew 11.9%, both on a local currency basis over the fourth quarter of last year.

NSP China net sales increased 59.6% year-over-year to $11.2 million or a 61.1% increase on a local currency basis. In NSP Russia, Central and Eastern Europe, net sales rose 21.1% year-over-year to $10.8 million or 21.8% on a local currency basis.

Gross margin increased 170 basis points to 73.8% compared to the year-ago period. The gross margin increase primarily reflects changes in our market mix and higher inventory reserves, recognized in the prior year.

Volume incentives as a percentage of net sales decreased to 32.8% in the fourth quarter, compared to 36.2% of net sales in the same period last year. The decrease in volume incentives as a percentage of sales was driven by changes in market mix, including growth in markets where volume incentives as a percentage of net sales are lower than the consolidated average, and the growth in NSP China, where service fees are accounted for in SG&A rather than as volume incentives.

Selling, general and administrative expenses were $41.1 million, up $6.6 million year-over-year. The increase in SG&A is primarily due to an increase in independent service fees in China, CEO transition-related expenses, restructuring charges and other employee-related benefits. As a percentage of net sales, SG&A expenses were 42.2% compared to 39.1% for the same period in 2017. Excluding the impact of CEO transition expenses and other restructuring charges, fourth quarter SG&A expenses as a percentage of net sales were 40.1%, compared to 38.1% in the prior year period.

We reported an operating loss of $1.2 million or 1.3% of net sales compared to an operating loss of $2.8 million or 3.2% of net sales in the prior year period. Excluding the CEO transition-related expenses and restructuring cost, we generated $0.8 million of operating income or 0.8% as a percentage of net sales compared to a loss of $1.9 million or 2.2% as a percentage of net sales in the prior year period.

Adjusted EBITDA, as defined in our press release as net income or loss from continuing operations before income taxes, depreciation, amortization and other income or loss adjusted to exclude share-based compensation expense and certain noted adjustments, was $4 million in the fourth quarter of 2018 as compared to $1 million in the fourth quarter of 2017.

Net loss attributable to common shareholders for the quarter was $2.9 million or $0.15 per diluted share, as compared to a net loss of $17.4 million or $0.92 per common share in the year-ago period. Adjusted net loss attributable to common shareholders was $1.2 million or $0.06 per common share, compared to an adjusted net loss of $2 million or $0.11 per common share in the prior year period.

A reconciliation of adjusted net income/loss to generally accepted accounting principles net income/loss is provided in the attached financial tables.

Note that during the fourth quarter of 2018, we reported tax expense of $0.9 million despite reporting a pretax net loss as a result of U.S. tax impact of foreign operations, including the new Global Intangible Low-taxed Income rate impact, foreign withholding taxes, transfer pricing adjustments, foreign losses not benefited and foreign rate differentials. Furthermore, the unusually very high tax provision in the fourth quarter of 2017 was primarily due to the impact of tax reform, including increases to valuation allowances on foreign tax credits and revaluation of deferred tax assets and liabilities to the new lower U.S. federal tax rate as well as the impact of foreign losses not benefited.

Turning to liquidity. We remain pleased with the benefits of our balance sheet management efforts, including the reduction of inventory levels and the pay down of long-term debt. We ended the year debt-free. Furthermore, cash and cash equivalents on December 31 were $50.6 million. In 2018, we generated $21.8 million of cash from operations, up from $10.5 million in the prior year. I would now like to turn the call back to the operator to facilitate Q&A.

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Operator [5]

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(Operator Instructions) As there are no questions in the queue, I would like to turn the call back over to Mr. Moorehead for closing remarks.

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Terrence O. Moorehead, Nature's Sunshine Products, Inc. - CEO & Director [6]

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Okay. Well, again, thank you, everybody, for all of your support and for participating in today's call. Again, we continue to feel good about our business and the momentum that we have behind us and also about the journey that lies ahead of us.

We are committed to putting together and then sharing with you very quickly a strategy that is reflective and going to be competitive in the marketplace and help us continue to build momentum going forward. So again, I want to thank you for all of your support and look forward to getting together again in the future. Thank you very much. Have a great day.

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Operator [7]

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This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.