Nature’s Sunshine Products, Inc. (NASDAQ:NATR) Q3 2023 Earnings Call Transcript
Nature's Sunshine Products, Inc. (NASDAQ:NATR) Q3 2023 Earnings Call Transcript November 7, 2023
Operator: Good 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. Nate, please go ahead.
Nathan Brower: Thank you. Good afternoon, and thanks for joining our conference call to discuss our third quarter 2023 financial results. I'd like to remind everyone that this call is available for replay via telephonic dial-in through November 21 and via a live webcast that will be posted in the Investor Relations portion of our website at ir.naturessunshine.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-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. Now I would like to turn the call over to the CEO of Nature's Sunshine, Terrence Moorehead. Terrence?
Terrence Moorehead: Thank you, Nate, and good afternoon, everyone. I want to thank you for joining today's call to discuss our third quarter 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 third quarter, we continued to gain traction and deliver strong results. Today, I'll provide some context for our third quarter performance and offer some insights on how we believe the business is progressing. 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 third quarter, we continued to drive growth with reported net sales of $111 million or $112 million when excluding the impact of foreign exchange, which is a 7% increase versus the prior year. EBITDA was also strong in the third quarter coming in at $10.3 million, which was a 50% increase versus the prior year. Third 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 million gross cost savings plan. In Asia Pacific, we continue to deliver strong results as third 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, third quarter sales increased 11% versus the prior year, which is an important milestone for our North American business unit. Our strategic investments in digital and field activation are starting to have a greater impact on the business. And in the third 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. 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'll remember that we've committed to delivering $10 million of gross savings by focusing on several areas. First, driving out costs from ingredients, packaging and formulations while maintaining quality and performance. Second, 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 third quarter, we started to see the effectiveness of our cost savings initiatives as gross margins increased 141 basis points to 73.1% 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. In summary, our third quarter results exemplify the strong underlying fundamentals of our business and we're very pleased with our performance. I'd like to leave you with the following thoughts. First, 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. Second, our gross margin savings initiatives are on track to deliver the $10 million of gross savings we discussed.
The team has verified the savings and we've already started to see the early benefits of our plans as gross margin surged in the third quarter. Over the coming months, we expect to see continued progress. And finally, third, we 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 fourth quarter and beyond. With that, I'd like to turn the call over to our Chief Financial Officer, Shane Jones. Shane?
Shane Jones: Thank you, Terrence. As Terrence mentioned, we're seeing positive momentum across our largest segments, resulting in another strong quarter. Net sales in the third quarter were $111.2 million compared to $104.5 million in the year ago quarter, a 6% increase versus prior year or 7% growth excluding the impact in 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 third quarter, Asia Pacific continued to see robust growth with sales increasing 12% on a local currency basis driven by our key initiatives. 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. 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. 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 third 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. 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 third quarter were $41.3 million compared to $36.8 million 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&A was 37.1% for the third quarter of 2023 compared to 35.2% in the year ago quarter. Operating income increased to $5.8 million or 5.2% of net sales compared to $5.0 million or 4.8% of net sales in the prior year. GAAP net income attributable to common shareholders for the third quarter was $2.8 million or $0.15 per diluted share as compared to $0.1 million or $0.00 per diluted share in the year ago quarter. The higher GAAP net income was primarily the result of the strong sales growth and gross margin improvement in the quarter, as well as a lower provision for income tax compared to the third quarter of last year. Adjusted EBITDA as defined in our earnings release increased 50% to $10.3 million compared to $6.8 million in the third quarter of 2022.
The increase was driven by sales growth coupled with gross margin improvement. Our balance sheet remains clean with cash and cash equivalents of $76 million and only $0.2 million of debt. Inventory was $66.3 million at the end of Q3. That's $1.6 million 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 authorization, buying 180,000 shares year-to-date for $2.2 million on average price of $12.35 per share. As of September 30, 2023, $21.8 million remains of our $30 million share repurchase program. 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 million and $451 million, representing year-over-year growth between 5% and 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. For the remainder of 2023, we expect improvement verses 2022 as early benefits from our initiatives and pricing are partially offset by continued inflation and foreign exchange headwinds. We also expect SG&A, excluding the one-time charges related to Japan, to be sequentially higher during the fourth quarter of the year, due to investment in our strategic growth initiatives along with timing of events.
As a result of our strong third quarter, along with the meaningful progress on our gross margin initiatives, we are increasing our guidance for full year adjusted EBITDA to $37 million to $40 million compared to guidance of $34 million to $38 million 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. Now I will turn the time back to the operator.
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