Q4 2019 Earnings Call
[music].
Greetings and welcome to the natures Sunshine products fourth quarter and full year 2019 earnings conference call.
All participants are in listen only mode and this conference is being recorded.
I like to turn the conference over to your own Mr. Named <unk> General Counsel natures Sunshine products. Thank you. Mr. Brown, you now have the floor.
[music] good afternoon.
Thanks to all of you for joining our conference call to discuss our fourth quarter 2019 financial results.
This call is available for replay in a live webcast the week.
Post on our website at natures Sunshine Dot com.
The information on this call may contain forward looking statements.
Oh statements are often characterized by terminologies such and believe.
May anticipate.
Back to will and other similar expressions.
Forward looking statements are not guarantees of future performance.
And the actual results may be materially different from the result simply implied by forward looking statements.
Factors that could cause results to differ materially from that what's implied [noise].
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 it speaks only as of today's date.
And the company disclaims any duty to update the information provided here in.
I will now turn the call over to tenants Morehead.
Our president and Chief Executive Officer.
Thank you very good at a good afternoon, everyone and thank you for joining us for today's call.
I'm pleased to be where here with you today to discuss our fourth quarter results. The excellent progress we've made transforming our business and to share some of the upcoming initiatives that we're pursuing in 2020 [noise].
Our Chief Financial Officer, Joe Beatty isn't with us today.
So today will be joining by our vice president of financing corporate controller, John, Illinois, who will take you out you through our financial results in greater detail.
But before I walk you through an overview of the business I'd like to take a few moments and make some comments about the corona virus and the recent passing a one of our founders Kristine queues.
Well, let me start with Christine because she truly was a pioneer and an innovator in a in this industry.
Founder up the first company to encapsulate herbs and botanical [noise].
Christine that's the way peacefully inner sleep on Sunday morning February 20 Threerd.
And [laughter] for most of us that newer she was up much more than just the founder of our company and a pioneer of the modern supplements industry. She was truly a friend a partner and so much more to so many people. She was someone that made unforgettable impact on everyone around her and her.
Greatest satisfaction came from helping other people achieve greater health and prosperity and she really just love. The fact that nature Sunshine gave her an opportunity in a platform to help people all around the world.
So I am personally grateful for the opportunity to have known and worked with Christine and we're all dedicated to keeping her legacy alive and everything that we do each and every day.
Her kindness compassion and genuine caring for others are an inspiration that will live on through our continued efforts and we are a better company and a stronger company because of Christine Hughes and she will be missed.
But we will move forward with the strain think conviction that she would have wanted us to and that would make our proud [noise].
Now, let me just switch gears and talk a little bit about the the corona violent virus and provide some perspective on the impact is having on our business first and foremost our focus is on the health and safety of our people.
And that includes our employees distributors and customers.
To that end, we've taken a series of precautionary measures that include actions as small as adding hand sanitizers.
Got it throughout our buildings and providing training on proper handwashing techniques to all associates, all the way up to canceling all international travel and reducing or eliminating large gatherings.
Where were working around the world.
The good news is that to date, none of our employees or distributors have been affected by the virus.
And we're working diligently to ensure that this continues to be the case.
Of course.
This issue is having a significant impact on our business in China as well as across Asia.
Our Shanghai office, just reopened two employees a couple of weeks ago and many of the operations remain limited all group meetings and activities have been suspended nationwide.
We have cancelled our March National Convention.
However, our sales leaders are adapting to the situation, they're working on line to maintain engagement and drive business transactions.
Kind of wherever they can.
We're also responding with targeted promotions focused on existing and new immune products.
[laughter] South Korea has also been impacted where are our training center is closed in our business centers, our operating on reduced hours.
And while there is clearly an impact of the grown a virus in Asia.
Yes, I mean, it's been hit the hardest. This situation is it really is fluid and it's still too early to fully understand how this will impact the business. So we're going to continue to monitor the situation to ensure that we're in a position to provide appropriate measured response to whatever happens in the marketplace.
Now, let's turn our attention back to 2018.
Which was a transitional year for nature Sunshine in 2019, we launched our new global strategies designed to strengthen our business by improving our consumer appeal and dramatically and dramatically improving profitability.
So far we've made excellent progress against our plan and early results can be seen into significant improvements the profitability.
2019 operating profit almost tripled versus 2018, while EBITDA was up 78% versus prior year.
These improvements ranch right on through the fourth quarter, where we had equally strong profit gains with operating profit up four times.
Versus prior year after seeing losses in the prior year, well EBITDA grew 89%.
In 2019, we began to strengthen the foundation of our business and restructured $10 million of costs out of the organization.
As we move forward our cost reduction initiatives will continue but will also be introducing several strategic initiatives.
We've worked hard to develop during 2019 that are specifically designed to help drive revenue growth.
Let me walk you through some of the recent efforts.
And discuss our progress against each one of our five global growth strategies.
Our first strategy as you May remember his call brand power and that's all about creating a more aspirational brand that excites inspires and transforms the way people think and feel about our company.
During the fourth quarter, we finalized phase two of our global rebranding initiative, which focused on translating the consumer research from phase one into a creative branding proposition.
Phase two also focused on building style guides for all aspects of the brand, including packaging web sites and all consumer facing assets, our new branding is scheduled to launch sometime at the end of.
April 2020, and will feature the introduction of new logos Newport's packaging.
Messaging.
And to bold new brand imagery.
We're excited for the rollout of our global campaign, which is nothing short of a relaunch of our company.
In the fourth quarter, we also implemented a soft launch of a new brand called Kevin.
Spelled Q E M P, which stands for quality health.
The Kim product line offers a unique proprietary range of CD products that combine whole spectrum, CBD oil whole herbs and whole essential oils in a way the only nature Sunshine can do.
As we discussed last quarter, we're excited to enter the CBD market and have created a unique and groundbreaking line of products that takes CBD to the next level our emphasis on trace ability and improved sourcing will now I will allow natures sunshine to deliver active compounds that offer better performance better.
Quality and better transparency than any other company in the market, while improving the overall consumer experience.
Again, we're currently in a soft launch as we build out the systems to support what we will be an entirely new business opportunity for our business for our distributors. We look forward to updating you on the official launch as we move forward.
Our second strategy Cold field energy is about re imagining natures Sunshine the natures Sunshine experience.
Our initial starting point focus is on strengthening feel fundamentals and making it easier to do business with us, but we also want to improve consumer access by being more omnipresent.
During the fourth quarter, we focused on strengthening field fundamentals by launching a new tool that tracks sales Capesize and gives field management, a better understanding and control of the business. We also launched a new experience in South Korea, which features a new state of the our facility a new technology driven ordering price.
Process and a new mobile left for distributors.
The new experience is designed to improve effectiveness in recruiting training and developing distributors and to give our distributors are more powerful set of tools to drive growth.
We also we also have several groundbreaking projects underway in North America, and Europe designed to modernize and improve how customers and distributors do business with natures Sunshine.
I'll update you on these initiatives at a later date once we have more details to share.
Our third strategy Cold digital first is about developing a next generation digital platform in the fourth quarter, we finalized our phase one designs for a new web platform.
The new designs offer improved functionality, new shopping cart features and improved user experience more powerful search capabilities asset sharing capabilities and will reflect our new branding.
One significant enhancement to the new website is that it will allow distributors to have their own fully replicated web sites, which will allow them to drive customers to their business within easy more attractive consumer focused experience.
The new website is scheduled to launch as a beta at the end of April.
An additional tools and enhancements will be added throughout the year and we will continue to make targeted investments in our digital capabilities as we move forward.
Our fourth strategy manufacturing Inc. focuses on expanding our award winning supply chain capabilities.
During the fourth quarter, we worked hard to extend our quality advantage over the competition by attaining our U.S.D.A. organic certification and by attending the ISO 9001 quality certification.
These two new certifications in addition to our existing GMP NSS TG, a hello, and coaster certifications further distinguishes nature Sunshine as a leader in this market as we move forward, we will continue to build out our industry, leading manufacturing capabilities to extend our.
Additive advantage.
Our fifth and final strategy called the right stuff.
It's a foundation for developing high performance teams.
The result of these efforts were again evident in our strong margin and net income growth during the fourth quarter.
During 2019, our restructuring activities eliminated about $10 million of annualized cost and we have additional savings initiatives planned for 2020.
The launch of our new operating business units, which are now organized by region.
Our already producing results.
We have become more nimble responsive and closer to the consumer which allows us to more effectively drive performance. For example, during the fourth quarter. Our will be used were able to move more quickly to target changes that reduced unprofitable sales and promotions.
While the actions negatively impacted sales they fully supported our focus on profitability.
We've also started to see some early signs that our efforts in North America, maybe having a positive effect as staff count increases versus prior year for the first time, we're above prior year.
The intensified focus on addressing specific regional issues and targeted consumer needs, we'll continue to be our focus as we move forward.
Again, we're still in the early days, but we're very excited about the initiatives. We're rolling out and are committed to transforming the business to drive sales and profit growth, our new web site branding enhance field tools Kemp ceded CBD launch and the significant pipeline of innovations that we've built our just the starting point.
For our global transformation.
Now, let me turn to the fourth quarter operating highlights.
During the quarter net sales were down 5% in local currency on a consolidated basis. This was largely due to unprofitable sales in Asia, and North America, which was partially offset by strong performance in Europe.
Specifically in Asia net sales decreased 11% as a result of the changes made to our promotions in China, where the fourth quarter decline was anticipated.
While China sales were unfavorable to the strong fourth quarter a year ago.
We were pleased to hold our quarterly sales level consistent with the third quarter.
The decline in South Korea was driven by lower events and incentive performance, partially offset by continued growth in Japan.
In North America sales were down 6% versus prior year, reflecting our planned exit of many unprofitable sales and promotions as I noted, we're seeing encouraging signs in North America as the team continues to work on strengthening field fundamentals, redirecting and reallocating resources and streamlining process processes.
To drive out costs.
We expect to make continued progress and see further benefit once we launch our new web site and implement new digital marketing tools.
In Latin Americas sales declined 9%, a local currency basis as the market continues to struggle under the current operating structure.
Our restructuring plans are underway and our goal is to start building a cluster organization in the second half of 2020.
The new streamlined organization will focus on managing Latam as a single business with the regional sales and marketing team tasked with driving performance on a single plan.
We're also working to strengthen local sourcing in an effort to accelerate new product launches and improved gross margin gross margins.
While the Latam transformation as a multiyear project, we should expect to see meaningful changes as we close out the year.
Finally in Europe, we generated 18% local currency sales growth driven by strong performance performance in central and Eastern Europe.
Ill Momenta in Russia continues to reflect the strength of our local initiatives over the last couple of years, our teams in Russia, and Poland have focused heavily on our field funded our field entity strategies working to improve our field fundamentals and drive activation.
Now, let me turn the call over to John Illinois to walk you through our financial results in greater detail. John. Thank you turn some good afternoon, everyone net sales in the fourth quarter of 2019 or 91.7 million compared to 97.4 million.
Same quarter last year on a local currency basis, net sales decreased 5% year over year or 5.8% as reported unfavorable foreign currency exchange rate fluctuations impacted net sales by $3.8 million compared to the prior year.
Asia net sales declined 13% year over year to 36.1 million during the fourth quarter.
Decreased 11.4% local currencies on a local currency basis. The decline was driven by 26.2% decrease in China, and a 5.9% decline in South Korea offset by growth in Japan.
Net sales in Europe increased 17% year over year to 17.2 million or 18% growth in local currencies increase in net sales reflect the continued growth in central Eastern Europe, including strong performance in Russia.
North American net sales in the fourth quarter declined 6.3% on a reported and local currency basis year over year to 32.9 million.
In addition to low recruiting rate is there an offsetting attrition NSP Americas, we took aggressive measures to eliminate and productive sales and promotions laying the groundwork for healthier revenue growth in the future.
Net sales for Latin America, and other decreased 9.7% year over year to 5.6 million or decreased 9.4% on a local currency basis.
The decline on a local currency basis reflects product and support limitations.
Gross margin increased 20 basis points at 74% compared to a year ago. The gross margin increase was driven primarily by favorable changes in market mix cost efficiencies and resorts are obsolete inventory recorded in the prior year.
Volume incentives as a percentage of net sales were 34.1% compared to 32.8% same period last year. The increase is driven by changes in market mix, including a lower mix of China revenue.
Selling general and administrative expenses were 32.7 million down 8.4 million year over year. The decrease in ethylene is primarily due to savings from prior restructuring activities and as a percentage a net sales M&A expenses or 35.7% compared to 42.2% in the same period a year ago.
Excluding the impact.
10 million restructuring expenses in the fourth quarter, 2019, and 1 million at CEO transition extensive zero point $8 million structuring expenses.
Yes.
You are putting on gain on property sales in Fourq as generics expenses declined 35.6% net sales from 40.1% in prior year.
We reported operating income of 3.9 million or 4.3% of net sales compared to operate and operating.
Lots of 1.2 hundred 1.3% of net sales in the prior year, excluding previously mentioned unusual items related to restructuring and other prior gain.
Generated 3.9 million of operating income for consumer percentage sales comparison operating loss of their point 8 million or 0.8% itself.
Sales in the prior year.
Adjusted EBITDA as defined in our press release as net income from continuing operations before income taxes, depreciation amortization and other income or loss adjusted to exclude share based compensation in certain noted adjustments was 7.6 million in the fourth quarter 2019, compared to 4 million in the fourth quarter of 2018.
Net income attributable to common shareholders for the quarter was 1 million or as their 0.5 cents per diluted share compared to loss of 2.9 million or 15 cents per diluted share a year ago.
Adjusted net income attributable to common shareholders was.
I'm wondering are.
Five cents per common share compared to just awesome 1.2 hundred surfaces.
0.6 per common share in the prior year, a reconciliation of adjusted net income to GAAP net income is provided in today's press release.
Turning to liquidity, we remain in a solid financial position with cash and cash equivalents.
December 31st 53.6 million, but no long term debt.
Full year 2019, we generated 9.7 million of cash from operations compared to 21.89, the comparable prior year period. The change in cash from operating activities on a year over year basis, primarily reflects changes in working capital.
Specific Leah reduction in accrued liabilities and an increase in inventory that was partially planned.
Reflecting.
So plan sales growth in the fourth quarter.
I would now like to turn the call back over to the operator to facilitate queuing it.
Thank you.
At this time will be conducting a question and answer session.
I would like to ask a question. Please press star one on your telephone keypad.
Formation tone will indicate your line is in the question Keith.
You May proceed aren't too if you would like to review question from the Q.
Participants using speaker equipment, they may be necessary to pick up your handset before pressing the star.
One moment, please while we poll for questions.
Our first question.
It's from Steven Martin.
From Monness Crespi Hardt.
Please proceed with your question.
All right. Thanks, a lot guys.
Hi, Scott.
We are encouraged by the.
Gross this quarter.
Although.
Got a lot of initiatives for.
The coming year.
How does that fit into the cost structure and are we going to see SGN, a or some other costs pop up.
Second the corollary to that is.
Is this going to be the answer to driving or getting North America sales to reverse.
Up.
Okay. So first with respect to SGN, a we are committed to maintaining the discipline of.
You're going to driving our SNA costs down our overhead down we're kind of.
Preaching in talking to this this concept of zero overhead growth the negative overhead growth.
We recognize that our operating margins are kind of not where we want them to be still so we want them to be kind of compelled I'll say competitive within our our peer set with within the industry.
We also.
I have.
And aspiration and plans to improve our gross margins as well so again recognizing that.
Our our gross margins.
There's room for opportunity for us to theirs to improve our gross margins. So.
What I would say is the.
The push too.
Implement new strategies is not at the expense of profitability, we really don't have that luxury it's it's our focus is on.
Finding opportunities to more efficiently drive sales and we kind of saw that may in the in the fourth quarter of this year, where we recognize that some of the things that the business units were doing just werent werent profitable and so we backed off on them and.
We're able to effectively.
Either hold our business or drive profitability in the in the direction. We wanted to go to.
The second question was our the strategies that were planning the the silver bullet for North America, and what I would say is I think theres certainly the REIT strategies, Steve We know we have to fix the brand we know what we've done extensive research.
We made significant investments in talking to consumers and talking to our distributors. So we know that theres a theres a branding proposition issue in a positioning issue that needs to be addressed and we really do have a groundbreaking.
Okay, new new branding proposition that we're going to be launching.
Little bit later in the in the second quarter.
And it came in an entire campaign that will come along with that so we're really excited about that.
We also know that we have to be more digital in order to be relevant and competitive in the marketplace and so we're building out those capabilities, we're going to start by walking and then we'll have built build momentum on the back into that so we know that's the right thing for us to do we know that we need to kind of rethink and work the the sales.
Experience.
Especially here in the us where.
Consumers want to be they want to be paid faster they want to be easier they want to be much more streamlined and simple. They don't want to have to deal with your kind of a lot of the traditional things that.
The company has done in the past so we've got really in depth plans and exciting plans in each one of those three big bold areas.
Im not going to say that any one of them is a silver bullet Ike and I Wouldnt say also that as soon as we launch them on kind of the day of the launch that that will be a transformative moment.
However, I do believe that it will and I'm confident that it's going to put us on the right path and that will we're going to continue to build these things out we're going to continue to work with the field.
Theres a lot of exciting stuff in there and you will start to see it but again. This this is everything that the market is telling us everything that consumers are telling us.
We are pursuing it in a bold innovative groundbreaking manner and so.
We just have to kind of get accurate that answer your question.
Yeah, I think it does and.
You guys you've done a.
I haven't been there that long you've done a great job of sort of getting the business.
Cleaning up the profitability even at these low rates, you're generating 30 plus million of EBITDA.
[music].
You've got.
Share your stock is trading right now at about.
Three a little over three times that 32 million of EBITDA.
You used to pay a dividend you don't anymore.
Got you something million a cash that is not.
Productive.
Uh huh.
And I want to know what you plan to do with it you or two ago. The answer was well the business is rocky so we can make commitments.
Business isn't rocky anymore, you've got it under relative control and I'm, not saying earnings are where we want it to be.
We sold that you sold a lot of stock to the Chinese and they haven't really delivered what.
We thought they were going to deliver.
And so now that cash is sitting there doing nothing.
And I would propose to that.
You could pay dividends you could buy back shares.
What you should do something with it because its.
So when your return on equity in your return on investment.
Yes.
I won't comment for the on behalf of the entire board of directors, but.
We realize the same kind of data points that you pointed out.
We certainly realize as well we do want to make sure that we are in a position to invest in the business and invest in a lot of those things that I was at that I was talking about but at the same point in time, we're very sensitive to.
The shareholders as well and so.
We're having discussions with the board on this very topic.
All right. What other is there something you guys can do to address the tax rate.
<unk> costs were all the EBITDA because of the taxes, you're not taking a whole lot to the bottom line.
And what did you guys can do to fix.
Yes. Good question, John you want to.
I'll take a swing at that.
At our tax provision because we operate in some markets is very difficult and very complex.
And then we do have market. So we don't have profitable operations, where we maybe aren't taking to the benefits that we would like to take on those and so that Rick.
That pushes out rate up a little bit.
Also some of the impact of the change in the tax legislation, we were not able to leverage some of that as much either I think as we continue to see improvements in the operating results of the business continue pension income up.
Nothing will have less impact on our rate so as we grow profits our range should start to improve.
Right, but you know when you've got market you don't make money yet.
Okay and at what point do you sort of.
Decide that maybe we shouldn't be in that market.
And our you are you really getting.
Benefits out of those Mark.
Yes, we've actually got very aggressive.
Restructuring.
To address those issues. So part of that I talked about Latin America, that's an aggressive overhaul of that entire region.
And then we've got a couple other select markets as well so.
We've got really direct.
Initiatives and our direct focus on profitability in every single one of our markets and to your point, if we can't make it in any one of these markets will get out of what does have to exit them up in the past. However, I'm just not convinced that we had.
Pursued enough creative options to find that path towards profitability and kind of based on what I've experienced in the past and what I, what I see in the business right now we should be able to be very profitable in every market that we do business and it's just the kind of the.
Just working through that path to get there and and we don't have a a tremendous amount of patients with that either so it will happen quickly.
All right one last if I may I.
I know you don't love to give guidance.
But when you look out.
Two 2020 with all the initiatives.
And the trailing when 2019 EBITDA of somewhere around $32 million, yes $31 million.
Directional when should we expect that EBITDA.
No recognizing that there's some things are related to the virus corner virus et cetera, but directionally should we expect the EBITDA to improve again this year.
Let's say I can't comment right now directly on the forecast for for Corona, Ed and there's so many unknowns out there, but let me just say that our strategy.
Is designed to continue to drive the topline.
As you can see based on the things I talked about and we have very specific initiatives in place to help us drive out costs from the business from a.
From a SDMA standpoint, and from a gross margin standpoint. So thats helpful. For you that that's what we're kind of direct directionally as a as a management team trying to accomplish.
Okay. Thank you very much.
Okay.
And once again.
Have a question you can press star one I'd telephone keypad this way you'll be in question.
Our next question is from Daryl Catalina definitely no I'm, sorry, a private investor. Please proceed with your question.
Yes, a couple of points, so I want to pyramid off of something the previous caller talked about I've been in investor and natures Sunshine for many years and it's been kind of a disappointing experience financially.
And I'm just curious I just think you should.
We spend a little bit more attention on either a onetime dividends for shareholders, because we certainly deserve it.
For share buybacks, that's my first point.
And on it.
Second thing I want to share with you is.
I understand Don in reference to measures to keep employee base.
And everybody associated with NKTR state about withdrawn the buyers what's that you take it.
In a positive way in a healthy way.
I have nature's Sunshine products empty on the shelves.
Speak and fell into the curve on the virus scare I know I walk in the stores and there are certain products I can buy it and I spoke to a very savvy investors 1 billion today and I said, what do you think the players in the stock market right now I don't want to go short I want to go along any said give me vitamin companies and I said.
Hi, I'm in the vitamin company hasn't been just good so it's interesting how big financial people looking at vitamin companies right now for the long term and I want to feel comfortable that my company Nature's Sunshine.
Not to say take advantage job, but Matt you guys have your wide open right now and as buyers that are really push vitamins.
Yes, Thats, a great comment and we've got some have very good products like our silver shield product that is in some other immune support type products, obviously, we can't and would not make any claims around.
Curative solutions for the Corona virus or any other virus, but in terms of supporting your immune system that really is.
An area that.
Well I mean, we're selling through our and people are stocking up on our.
Silver shield product right now and if you've never used it used to grab some because it really is a great product.
And it just when you start feeling of symptoms of cold come around I mean I personally.
I've used it and it just makes you kind of feel better.
But there is that there is a huge opportunity there for us to build out the immune products were going to be pushing that much more aggressively in Asia. It is our belief that.
After this this kind of hoping.
During and after this that theres going to be much heightened sensitivity towards people of taking care of their your immune system.
And that's going to be not only in Asia, but here in the states as well. So that's one area in particular, where we're building. It out there are some other adjacent opportunities like gut health people in general who have healthy guts that does tend to support the immune system better as well we happened to be particularly good in that area.
And we're going to be making those connections.
Okay, and irrelevant manner, but yeah I agree with you on both of your comments.
Kind of the first one we're certainly.
Got to be addressing.
Something with the kind of just again with how we make sure that the shareholders get their returns.
And secondly on taking you know I don't want to say take advantage of but certainly making sure that we are poised to have a positive impact on folks that want to protect themselves in an environment where.
Where disease, an infection are increasingly a risk to our societies.
That answer your question barrel.
Hi, Thanks.
Okay.
But having a problem hearing you.
I do apologize this we have we start limit.
And we'll turn the call back over to arm demand.
Okay, well. Thank you everybody for joining us today I want to say how much. We appreciate your ongoing support and participation with the with the company. We really are again excited about.
The future that lies ahead of us and are doing.
Everything we can to transform the business get us to a new place and we're excited about the future that lies ahead. So again I want to thank you and have a great day take care.
Thank you this concludes conference.
Right.