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Edited Transcript of NATR earnings conference call or presentation 7-Aug-18 9:30pm GMT

Q2 2018 Natures Sunshine Products Inc Earnings Call

Provo Aug 17, 2018 (Thomson StreetEvents) -- Edited Transcript of Natures Sunshine Products Inc earnings conference call or presentation Tuesday, August 7, 2018 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregory L. Probert

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

* 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

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Conference Call Participants

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* Steven L. Martin

Slater Capital Management, L.L.C. - Manager

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Presentation

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Operator [1]

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Greetings, and welcome to the Nature's Sunshine Products Second Quarter 2018 Earnings Conference Call. (Operator Instructions) And this conference is being recorded.

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, and thanks to all of you for joining our conference call to discuss our second quarter 2018 financial results. This call is available for replay in a live webcast that we posted on our website at www.naturessunshine.com in the Investors section.

The information on this call may contain certain forward-looking statements. These statements are often characterized by terminology 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 include, but are not limited to, those factors disclosed in the company's annual report on Form 10-K 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.

I now turn the call over to Greg Probert, Chairman and CEO of Nature's Sunshine Products.

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Gregory L. Probert, Nature's Sunshine Products, Inc. - Chairman & CEO [3]

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Thanks, Nate. Good afternoon, everyone, and thank you for your participation in today's call. Also joining me today is our Chief Financial Officer, Joe Baty.

We are pleased to report our highest revenue quarter in almost 4 years and the highest top line growth rate we have generated in over a decade. Second quarter net sales were up 12% year-over-year, and adjusted EBITDA was up almost 65% over prior year. These strong results were driven by Synergy Asia Pacific, NSP Russia, Central and Eastern Europe and China. Additionally, the year-over-year declines in NSP Americas moderated as sales have stabilized over the last several quarters, and we are now lapping last year's business disruption. We continue to feel good about how our business is performing overall. We have reported positive growth in 8 of the last 9 quarters and are seeing accelerated rates of growth in several key markets.

Let me begin with a review of NSP Americas. Net sales were down about 3% in local currency, including a 1% decline in NSP North America. During the quarter, we instituted a price increase in the U.S. and Canada and continue to see our customer service metrics improve. We are excited to launch Purify 2.0 at our U.S. convention next month. This clinically tested, patent-pending, heavy-metal detoxification program was designed to be taken before our IN. FORM program to detoxify the body and ready the gut microbiome for the IN. FORM metabolic transformation program. These 2 programs together are a key strategic focus and driver of the North America business. Purify 2.0 will also be launched in China and Synergy Asia Pacific next year.

In NSP Russia, Central and Eastern Europe, we generated 30% local currency growth over prior year, an acceleration from recent quarters, driven by strong gains in Russia and Poland during the quarter. The momentum continues to be driven by the Kit product program utilized across the region as well as continued strong distributor engagement as evidenced by our 9% year-over-year growth in active distributors and customers and our 15% year-over-year growth in active managers.

Synergy WorldWide sales increased 16% over prior year in local currency, driven by 31% year-over-year local currency growth in Synergy Asia Pacific. Our momentum continues to build in South Korea, our largest international market, where sales increased 50% over prior year in local currency. We are seeing strong levels of distributor engagement in Korea, with business among all of our leaders growing. We also believe that the recent improved relationship between North and South Korea are favorably impacting both distributor and consumer sentiment. Additionally, we have recently attracted 2 accomplished new leaders from large direct selling organizations, who have already contributed to the accelerated growth. In Japan, growth continued, with net sales increasing 4% over prior year in local currency. Net sales were down in Synergy Europe and North America. Both markets clearly have difficult comparisons against the Purify product launch last year.

Turning to China. Net sales increased 44% over prior year in local currency as well as showing sequential growth over the first quarter of 2018. We remain cautiously optimistic about our growth potential in this very important market given the early stage of our market development, and we have seen improved levels of activity amongst our independent service providers and customers during the second quarter. In April, we attracted a new leader who had built a significant direct selling organization in China. We have been very pleased with his success and the level of business thus far and believe his joining NSP China is a strong validation of the opportunity we are building.

Over the past several months, we have devoted additional management resources and engagement in the market as we look to expand leadership development, distributor engagement levels and consumer activity over coming quarters. As I discussed last quarter, our business is still developing and dependent on a limited number of local leaders. We need to continue broadening the leadership ranks to build a foundation for consistent, long-term growth. Joe and I just returned from China 10 days ago and remain optimistic about our growth trends in China.

As you will recall, we initiated evaluation of our cost structure last year and took initial steps in the fourth quarter to reduce corporate SG&A, which has partly impacted our margins and earnings. Specifically, we saw an almost 65% increase in our adjusted EBITDA in Q2 over prior year. We continue to evaluate our cost structure and identify additional strategic initiatives, including optimizing our physical footprint internationally that will further improve profitability and shareholder value. We look forward to updating you on these initiatives as they are implemented on the next few quarters.

Before I turn the call over to Joe, let me provide a quick update on our progress with the CEO transition plan we announced a few months ago. Recall that we announced my retirement as CEO and have planned for me to continue as Chairman of the Board following a successful transition to a new CEO. The search committee of the board has been hard at work to identifying my successor and is pleased with the level of interest we have received and the quality of candidates identified. We are progressing according to plan.

With that, let me turn the call over to Joe to discuss the financial results in detail.

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

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Thank you, Greg, and good afternoon, everyone. Net sales in the second quarter of 2018 were $91.3 million compared to $81.3 million in the same quarter last year. On a local currency basis, net sales increased 9.6% year-over-year or 12.2% as reported. As Greg noted, the increase was driven primarily by growth in Synergy Asia Pacific, NSP Russia, Central and Eastern Europe and NSP China, offset by a $1 million year-over-year decline in NSP Americas net sales, which reflects an improved rate of decline when compared to the last few quarters.

NSP North America sales declined 0.8% year-over-year to $32.9 million during the second quarter or a 1.2% decline in local currencies. Sales in NSP Latin America declined 12.3% year-over-year to $5.5 million for an 11.4% decline in local currencies. Synergy WorldWide net sales in the second quarter grew 20.9% year-over-year to $36.7 million or a 15.9% increase on a local currency basis. Net sales in Synergy Asia Pacific increased 30.8% year-over-year on a local currency basis, while sales in Europe declined 22.7% year-over-year and sales in North Americas declined 11.7%, both on a local currency basis over the second quarter of last year.

In NSP Russia, Central and Eastern Europe, net sales rose 31.4% year-over-year to $9.4 million or 30.2% on a local currency basis. China net sales increased 53.5% year-over-year to $6.8 million or a 43.6% increase on a local currency basis. As Greg mentioned, we also saw strong growth on a sequential basis. Recall that the company received its direct selling license late in the second quarter of last year. As such, we are facing more difficult year-over-year growth comparisons in China for the back half of 2018.

Gross margin decreased 50 basis points to 73.4% compared to the year-ago period. The gross margin decrease reflected changes in our market mix, provisions for inventory obsolescence and impact of certain employee-related benefit costs. Volume incentives as a percentage of net sales decreased to 34.5% in the second quarter compared to 34.8% 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 China where service fees are accounted for in SG&A rather than volume incentives.

Selling, general and administrative expenses were $33.3 million, up $1.5 million compared to $31.8 million in the same period a year ago. The increase in SG&A is primarily related to a $1.5 million charge associated with the previously announced CEO transition, $1.9 million relating to the timing of accrued employee benefits and $0.8 million of higher independent service fees in China given the quarter-over-quarter growth, partially offset by a $2.3 million gain on the sale of an office building in Mexico. As a percentage of net sales, selling, general and administrative expenses were 36.5% in the second quarter compared to 39.1% in the prior year. We reported operating income of $2.2 million or 2.4% of net sales compared to operating income of essentially 0 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, stock-based compensation and other income or loss, was $5.2 million in the second quarter of 2018 as compared to $3.1 million in the second quarter of 2017. Net income attributable to common shareholders for the quarter was $0.1 million or effectively $0.00 per diluted share as compared to a net loss of $0.2 million or $0.01 per common share in the year-ago period. Note that the tax rate during the second quarter was 116.4%, well above the statutory rate of 21%. The disparity is driven by foreign losses, primarily in China, which, at present, do not provide a future tax benefit, as well as other net unfavorable foreign tax-related items.

Turning to liquidity. We are pleased with the benefits of our balance sheet management efforts, including the reduction of inventory levels and the paydown of long-term debt. We ended the second quarter in an improved net cash position. Cash and cash equivalents on June 30 were $46.9 million, and long-term debt was $7.2 million. For the first 6 months of 2018, we generated $9.4 million of cash from operations compared to cash used in operations of $0.7 million in the comparable prior year period. Primary uses of cash during the first 6 months of 2018 include a $6 million net paydown of long-term debt and capital expenditures of $2.7 million.

I would now like to turn the call back to the operator to facilitate Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Steven Martin with Slater.

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Steven L. Martin, Slater Capital Management, L.L.C. - Manager [2]

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Can you talk about trends in gross margin? It was a good quarter. And how do you see gross margin playing out for the rest of the year? And secondarily, you talked about SG&A. You had some transition costs. If I -- if you exclude those, can you give us some idea of what SG&A would have looked like and will look like going forward?

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Joseph W. Baty, Nature's Sunshine Products, Inc. - Executive VP, CFO & Treasurer [3]

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Yes, thank you for the questions. And to the extent, as you know, we don't provide formal guidance, but what I would say is this. First off, in regards to the gross margin trend, while there was a bit of a downtick, I wouldn't look at that as indicative of any negative trend long term. And in the long-term scheme of things, we actually believe through certain efficiencies and so forth that gross margin will improve. So I wouldn't look at anything near term or in this given quarter as indicative of some unfavorable trend. In regards to your question regarding SG&A, yes, the SG&A figure for the quarter includes 2, arguably 3 unusual items. Let me speak to the first 2. First of which is the $33.3 million in the quarter does reflect the benefit of a $2.3 million gain on the sale of a building in Mexico, but it also includes $1.5 million in costs associated with the previously announced CEO transition. Just at that point, you would see the number gets a little bit worse than what it was, but on a percentage basis, is still clearly favorable from the prior year percentage. I would go on to say that on a quarter-over-quarter basis, there are certain employee-related benefit costs that we accrued in the second quarter of 2018, which did not materialize anywhere near to the same level in the second quarter of 2017. So 2018 over 2017 clearly reflects a meaningful increase in employee-related costs, which is, in short, as we sit here today, is we expect the overall results -- what I will say, without giving formal guidance, we do expect the overall financial results for 2018 to reflect a meaningful improvement versus 2017. And as such, there will be certain employee-related benefit costs that will materialize to a larger degree in '18 versus '17.

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Steven L. Martin, Slater Capital Management, L.L.C. - Manager [4]

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Okay. And on the balance sheet improvement, how do you feel about the cash? And is your goal to pay down balance of the debt and then consider what alternatives there are?

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Joseph W. Baty, Nature's Sunshine Products, Inc. - Executive VP, CFO & Treasurer [5]

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Well, I would say that as the CFO of this organization, I'm not a big fan of long-term debt. So that's always an objective to minimize that and to minimize any costs associated with that debt. So that's clearly an objective, continue to be an objective as this year plays forward and into 2019. As you may -- just so we're clear in regards to the cash balance, obviously, there's only one credit facility the company has, and that's here in the U.S. And so the various foreign markets still require cash on hand, so a very sizable portion of whatever cash we're sitting on does meet the operating needs of the various markets that we operate in. But we're still pleased with the improvement on our net cash position. There's clearly an objective for that to continue to improve. And as the future plays forward, we'll appreciate being in a situation where we can evaluate what are the uses of that cash make the most sense for our shareholders.

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Operator [6]

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Ladies and gentlemen, we have reached the end of the question-and-answer session. I'd like to turn the call back to Greg Probert for closing remarks.

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Gregory L. Probert, Nature's Sunshine Products, Inc. - Chairman & CEO [7]

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Thank you again for your support and for participating in today's call. Have a great day. Thank you.

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Operator [8]

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Thank you. This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.