Q1 2020 Earnings Call
Hello, and welcome to the nature Sunshine caught it first quarter 2020, <unk> called <unk>.
Okay, that's all come along with other cough and cold record.
I would now like to turn call over to your whole <unk> well It general counsel true I try to.
Well I will now have the floor.
[music] good afternoon.
Thanks to all of you for joining our conference call to discuss our first quarter 2020 financial result.
This call is available for replay it a live webcast will be posted on our web site at Nate Www Dot Nature's Sunshine Dot com in our Investor section.
The information on this call may contain certain forward looking statement.
These statements are often characterized by terminologies such as the leave Oh may anticipate.
That 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 statement.
Factors that could cause results to differ materially from those implied here in include but are not limited to those factors disclose 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'll now turn the call over to Terrence Morehead CEO Nature's Sunshine products.
Thank you made good afternoon, everyone and thank you for joining today's call I hope, you're all well and staying safe and healthy as we adjusted the unique conditions under which were currently living.
It's been an extraordinary start to 2020 as the effects of the Cobiz 19 pandemic.
Tenure, we impact communities around the world at present business leaders with historic challenges and unprecedented change.
So I want to take this opportunity to thank you for your continued support of our company and our efforts to transform the business for the future.
I would also I could take up to take a moment to recognize our healthcare workers are first responders state and local officials and the countless number of people work to keep our communities safe and functioning.
So for their dedication and support.
Their collective efforts for wide spreads and hope when we need at most.
I would also like to recognize and thank my team in nature Sunshine.
I missed the stress that uncertainty the team continues to stay focused.
And as remains in good spirits, despite the crisis.
Do we adapting to our new reality cognizant of the fact that people are counting on them to provide the products they need walked and trust.
As we work from home and practice social distancing.
We've worked tirelessly to ensure our transformation initiatives continue to move forward without disruption.
Our people dealing with the rapidly evolving situation and working together to overcome each of the near term obstacles as they arise.
Importantly, every one of the company is dedicated to keeping our people safe what combining forces to keep our company strong.
The Cobiz 19 pandemic has clearly been disruptive to our People's lives, but I'm incredibly proud of our team for their resilience determination.
Stability and compassion for the people in our community.
I'm, especially grateful for our shipping and manufacturing teams that have been coming to work every single day throughout the crisis to keep our facilities fully operational and on top of the increasing demand for our products.
Their courage dedication and look for our company is an inspiration to us all.
With that in mind when the prices began our first in primary goal was and continues to be the health and safety of our employees distributors partners and customers.
We immediately implemented a series of protective measures to safeguard our people, including deep cleaning at all of our facilities.
Really temperature scans at the beginning of each shift training on a proper handwashing and good hygiene.
Just a leading work groups and either restricting or closing certain common areas, providing hand sanitizing stations throughout our buildings and requiring the use of masks for all associates and protective close for associates dealing with products.
We also make sure to educate our team and strictly follow all CDC guidelines related to social dispensing and personal hygiene to ensure our teams could effectively and safely continue working.
Convinced that we could see if we keep our production fulfillment operations open.
Developed and executed plans to ensure our inventory and supply line for secure.
Our global supply chain with prepares to deliver for our value consumers around the globe.
We simultaneously work to transition our office staff to work remotely.
I've done so without any major interruptions to customer service or the day to day and business activities.
So far we're performing well our people have adapted to the situation staying focused and executing our strategy and implementing the key initiatives designed to transform nature Sunshine.
As I step back and thinking about everything the team has done and.
And what we've been able to accomplish I'm very pleased with our progress.
Consumers are counting on us now more than ever and our team is delivering.
Now, let me turn into the first quarter highlights to briefly review, our operating trends and to share some of the progress we're seeing on our transformation initiatives [noise].
During the first quarter, we saw excellent performance in our business as net sales increased 7% in local currencies on a consolidated basis.
The strong performance was led by sales in both North America and Europe.
As improved field fundamentals combined with increased consumer demand to drive higher than normal sales across all channels and product categories.
We also saw a reversal of the long term negative sales trends in Latin America with modest sales increases across the region.
Sales in Asia Pacific were down as anticipated due to the timing and impact of Copel get back team in a large markets.
The early closure of business centers and the cancellation of all that all of our meetings in response to government shutdowns negatively impacted Asia Pacific to a greater extent and with more lasting impact.
A common driver across all of our global markets was the huge surge in demand for immune products as consumers looking for added protection impede our warehouse of products like silver shield elderberry immune defense and many other immune related products.
In total global sales of immune products increased 110% for the quarter versus prior year.
We also delivered strong improvements the operating profit as we continue to focus on gross margins fixed overhead and SJ.
As a result operating income increased 151% and we finished the quarter with $64 million of cash and no debt.
In North America, we saw the positive momentum that started in Q4 2019 continue in the first quarter into the first quarter of this year.
Unprecedented spike in demand for immune products provided significant sales growth.
Net interest quickly spread to adjacent categories as consumers also bought a wide variety of supplements to improve their health.
Potently sales grew despite the fact that many of our distributors were impacted by retail store closures and the disruption today, we business activities, including the cancellation of face to face meetings and all sales events.
Well the environment continues to evolve our north American business trends are promising and we still have significant enhancements to the business.
Capital to roll out over the coming months.
In Europe, we generated 34% local currency sales driven by continued strong performance in Russia as our initiatives continue to resonate with local consumers.
In Asia net sales decreased 5%, which was.
Well much more moderate decline then than we anticipated.
The team worked diligently to find new ways to motivate their distributors and serve customers, while while working remotely.
As we discussed during our fourth quarter call a couple of months ago, we anticipated a significant decline due to cope with 19 and its impact on key markets like China, Japan, and South Korea.
While there were certainly challenges we've seen strong consumer demand, partially offset the negative impact of our daily business activities.
Distributors of quickly adaptive to the changes while consumer interest in health and supplementation.
I have increased significantly.
Despite the improvements to feel fundamentals progress on our growth strategies and the solid sales. We saw in the first quarter. There was still and we will continue to be a tremendous amount of uncertainty as the cobot 19 pandemic continues to reshape the economic landscape present, new challenges and impact our financial perform.
Yes.
As a result.
I'm going to deviate from our standard policy and take a little bit more time to talk about more recent events.
In April the effects of code Cobot, 19 intensified as office closures canceled meetings and rescheduled events disrupted sales activation.
The initial surge in demand from customers consumers looking to support their immune help boost overall wellness and we're just things I'd showed signs of tapering off.
More recent events, including the changes to the nature and timing of field incentives shifting consumer promotions and the fact that we've experienced less new customers.
We've acquired list of customers all combined to negatively impact.
Current results.
As an example, the the cancellation of incentive trips and field key events.
James the normal course of business for the second quarter and potentially beyond.
Horse, we're actively assessing the social and economic impact of Kobe 19 on our business and while we expect long term sales growth there will continue to be uncertainty as to how our financial results for the second quarter and potential would be and potentially beyond our impacted.
With that in mind as we look forward, we remain focused on executing our global strategy and are seeing a strong early response to our efforts in each of our five key strategies.
I want to review those quickly.
Our first strategy brand power is really just starting to come to light.
This month, we're launching phase one of our rebranding initiative, which includes the introduction of our new company positioning our new logo enhance fliptop bottles that are 100% recyclable, new labels and color schemes and an updated web site.
We're also expect expanding our line of proprietary CBD products marketed under the Kemp brand.
Kim spelled Q, MP, which stands for quality him is the most effective CBD on the market offering better performance better quality and better transparency in every bottle.
In the second quarter, we're introducing two new products to the line first Kemp relief CBD cream and second Ken zero on new line of products with zero THC.
Our new camp zero products offer performance on par with competitors regular CBD products, but again, Ken zero has zero THC.
We're very excited about about camp, which offers our distributors and entirely new business opportunity.
And we look forward to expanding our footprint in this dynamic rapidly growing market.
We're also expanding our popular silver shield brand with two new products in May.
The first is a unique purifying hand, cleanser cold Silver Shield Bio guard, which features our new proprietary power blend of 80% edible alcohol.
Proprietary essential field protective oils, and our silvershoe proprietary collateral silver.
The second product is a hand embody cream also sold under the bodyguard family with well within the silver Shield brand.
The new cream is enhanced with coconut oil highly erotic acid and silver shields proprietary colloidal silver.
All of the initiatives I've just discussed are part of our phase one rebranding it will have multiple phases throughout the end of 2020.
Our second strategy steels energy focus is on enhancements to how our distributors do business with our customers.
You may remember back in 2019, we reimagine the distributor experience for our second largest market South Korea.
Introducing completing and workflows technology at a new state of the our facility with consumer facing retail space.
But for the past.
Year now we've been working on a groundbreaking new business model that will launch in the second half of 2020 as an important component of our field energy transformation for our North American overview.
The proprietary new model is designed to enhance distribute the distributor experienced by offering a new suite of business tools updated services and new customer focus rewards.
Without getting into the details right now.
The new model integrate new consumer facing programs that promote subscriptions community membership referrals and free shipping.
With new dynamic distributor programs, they introduce new sales kids customer driven rewards quick pay a single a single Contemporized comp plan and a bridge program to support our distributor success, while we make these changes.
I will share more on this strategy in the future, but this is an important part of our plan on the road to relevance in North America.
Our third strategy digital first has become increasingly important as code, let's call. Good night team continues to impact consumer behavior.
We've just launched phase one of our new web site, which features a new look in improved functionality with more enhanced features and content to come.
The new sites also gives our distributors their own replicated web sites and personal you or else that allows them to run their own digital business on our corporate web site.
The new site lets distributors do email and social media campaigns and direct their customers to their personal nature's Sunshine web site.
New and existing customers can be tracked and served for improved customer management.
Our fourth strategy manufacturing Inc. has also become more relevant than ever and I want to take a minute too just to commend all of our competitors that offer GMP and NSS certified products to their customers.
It's important that companies in our industry provide safe and reliable products during times like these.
Of course.
It's times like these when consumers are also looking for more.
For products, they can trust and the go above and beyond and Thats why natures Sunshine is not only GMP NSF certified we're also PGS certified which is pharmaceutical grade Hello certified coaster certified Usfifty eight organic certified and ISO.
I was in one certified to meet the demanding needs in specifications of our health practice practitioners freshness herbalists and caregivers.
It's a standard that few if any in the industry can match and we're committed to leading the way.
Our industry, leading manufacturing quality and safety protocols are exactly what consumers are looking for and moving forward our manufacturing facility, which has been renamed NSP labs will begin to start we'll begin to play a larger role in our consumer marketing efforts and we will come.
Thank you to expand our capabilities to address consumer needs as they evolve.
Finally.
We continue to make excellent progress on our rate stuff strategy with positive results from our cost savings and gross margin initiatives.
As we progress through 2020. These enhancements are expected to become increasingly apparent in our financial results.
To close I'm very pleased with how our global organization has responded to the recent challenges and we are committed to moving forward on our strategies and reaching our goals.
We are clearly faced.
With a challenged economic environment and significant uncertainty.
But our team is focused and we're adapting as quickly as possible to the current environment.
Now, let me turn the call over to Joe is going to walk you through our financial results in greater detail Joe.
Thanks, Terence and good afternoon, everyone.
Net sales in the first quarter of 2020 or 95.9 million compared to 91.3 man in the same quarter last year.
On a local currency basis, net sales increased 6.6% year over year unfavorable foreign currency exchange rate fluctuations impacted net sales by approximately 1.4 million compared to the prior year.
Net sales in Asia declined 7.9% year over year to 31 million during the first quarter, but decreased 4.6% in local currencies.
As Terry mentioned and discussed on our fourth quarter call. We anticipate in first quarter decline in Asia, primarily as a result of totaled 19 pandemic.
On a local currency basis net sales in China declined 8.5%.
Declined to 2.9% in Japan and declined to 6.5% in South Korea.
Future results may continue to be negatively impacted by the pandemic and fluctuating foreign currency rates.
Net sales in Europe increased 32.2% year over year to 20.6 million or 33.5% growth in local currencies.
The increase in net sales reflects growth in central and eastern Europe.
In closing strong performance in Russia.
Well first quarter results were not significantly impacted by the pandemic or oil pricing volatility future quarters could be.
North America net sales increased 6.1% on a reported basis and 6.2% and local currency to 30.8 million.
The growth in North America reversed quarterly declines over the last couple of years.
One thing strong sales trends in March primarily related to immunity support product demand, resulting from the cobot 19, pandemic and improving underlying trends, resulting from strategic from strategic initiatives enacted over the last year.
Let's turn as referenced we experience some softening of demand in April.
Net sales for Latin America, and other increased 0.5% year over year to 5.6 man or a 2.4% increase on a local currency basis.
Due to substantial shutdown of certain last Sam markets future results could be impacted.
Gross margin was 74.3% flat when compared to the prior year.
I am incentives as a percentage of net sales were 34.4% compared to 34% in the same period last year.
The increase was driven by changes in market mix, including a lower mix of China revenue.
Selling general and administrative expenses were 31.1 million.
And from 33.9 million in the prior year.
The decrease in asked today is primarily due to savings from restructuring activities over the last year.
As a percentage of net sales SGN a expenses were 32.4%.
Compared to 37.1% in the same period in 2019.
Excluding the impact of 1.6 million of restructuring expenses in the prior year.
And 0.5 man.
T related income this year SGN expenses declined to 32.9% of net sales from 35.4% in the prior year period.
We reported operating income of 7.2 million or 7.5% of net sales compared to operating income of three man or 3.3% of net sales in the prior year period.
Excluding the previously mentioned unusual items relating to restructuring and be a t. related income.
Others.
We generated 6.7 million of operating income for 6.9% of net sales for the current quarter compared to full compared to 4.6 million or 5% of sales in the prior year period.
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 as certain noted adjustments.
Was $9.7 million in the first quarter 2020.
Compared to 7.3 million in the first quarter of 2019.
Net income attributable to common shareholders for the quarter was 2.9 million or 15 cents per diluted share as compared to 1.8 million or nine cents per diluted share in the year ago period.
Adjusted net income attributable to common shareholders was 2.5 million or 12 cents per common share compared to 2.7 man or 14 cents per common share in the prior year period.
Reconciliation of adjusted net income to GAAP net income is provided in today's press release.
Turning to liquidity.
We had cash and cash equivalents on March 31st of 64.1 million.
With no long term debt.
During the first quarter, we generated 13.5 million of cash from operations.
Compared to using cash of 3.9 man in the comparable prior year period.
The change in cash from operating activities on a year over year basis, primarily reflected growth in net sales and profit dollars changes in working capital specifically a reduction in accounts receivable and inventories assisted by an increase in accrued volume incentives primarily due to the times.
King of cash receipts and payments.
And the timing of cash payments for income taxes.
We're pleased with our overall strengthened liquidity.
We also recognize the Tobin 19 pandemic and related impact on future financial results is uncertain.
But could be significant over the course of 2020 and beyond.
Accordingly at this time, our goal is to maintain and hopefully continue to improve our overall cash and liquidity position.
I would now let's turn the call back to the operator to facilitate questions and answers.
Thank you, we'll now begin the question answer session.
To join the question Q you May Press Star then one on your telephone keypad.
Hello tone acknowledging your request.
Can you from the speakerphone, please pick up the handset before passing any Keith.
To withdraw your question. Please press Star then too.
Once again Star then one to join the question too and we'll pause a moment for any color as to join the queue.
My first question is from Steve Martin with Slater Capital Management Mr. Martin Your line is open.
Thank you very much Steve Hey, great.
Good good great quarter in the face of all.
I don't know I mean, we all know what we're talking about so yes.
[laughter] can you you you put words around April may in the future can you be a little more specific as to how.
The changing status state of China Asia, the U.S. and Europe is impacting revenues and how we can impacting your sales functions.
It's a tough one to answer because again as I tried to allude things are moving around.
We've had to cancel events kind of.
Cancel some some incentive programs and introduce new ones and so as a result.
Things that were planned and that we had a good sense for for what we thought they deliver now it's something different with the different timeframe. So.
There's just so much uncertainty right now Steve.
It's hard to answer your question directly.
What we do know is Oh, we're seeing we're seeing it impact from it and again, the closures and not being able to have meetings.
Yes, it's having impact of course, the team is fighting back with new products and and new promotional concepts simultaneously. We're also as you can see redoubling our efforts to support our distributors, where we really are trying to get back to focusing on on being.
Kind of our healers, focusing on that but healing tower herbs and sharing those with with everyone around the world up so we get really playing to our strengths and our heritage, but again doing that in a very new.
New manner, so tough to answer your question, Let me, let me give me assets are getting out there.
Well, let me ask you a slightly differently.
Asia.
Asian went into the suit earlier than we here in the you asked in Europe and came and has come out of the.
The worst of.
Impact.
How did your business in the Asia trend as Asia started to reopened.
It's interesting the to the trends are.
Let Joe follow up on this.
Trends are.
I'd say good with our current people and so we're not losing people, we're not losing customers. The issue that we're seeing right now is a slowdown in new customer acquisition again in the face of not being able to have meetings not being able to what canceling field events now let Joe follow up on this with some maybe a little additional color.
Hi, Steve how are you.
Good.
As as Terrace noted earlier, you had said, it's very difficult to quantify I mean trend wise overall, but I'd tell you is it if you look at the three key markets. We have over there China, we can look at China, and say well they appear to be back fully engaged in the sense. It our office is fully open our people back.
We hope that things will get better it's still very difficult to try to predict how it's going to play out when we look into Korea and Japan. The other two key markets within our Asia business unit, we can look and say well there they were impacted in Q1.
But if anything would save us maybe impacted more of that the latter part of the quarter versus the early part of the quarter. So trend wise that says well, maybe that's going to carry over into Q2, and maybe even beyond that a little bit so it's they're not as.
Back to full.
Mode is say, China, and some fronts because of the the pandemic. So theres a little more uncertainty now we know that our leaders.
Clearly doing everything they can to continue to maintain a support and grow their businesses, having said that theres still facing some struggles in.
In being able to open new markets to again to get those new.
New customers onboard and so forth and so on so it is it's just very fluid, it's very difficult try to quantify but as we noted in his terrace noted and as I noted in my comments.
Clearly at least looking at Q2, you know the overall business could be impacted negatively by the cobot 19 situation.
Okay.
You guys have done a great job on the cost controls and reducing expenditures.
And you and I've talked about that a number of times.
Yes, where are you in that process from the standpoint.
Put it in baseball terms are you in.
The third six through the ninth inning.
We're probably still we're not in the seven fitting stretched yet so we know we're in the right in the fourth fifth inning, Yeah. We're certainly.
We've we've completed half the game, yes, Steve Inova Tom.
In my mind I think in Terence's mind, you know, we're never going to be done right, we're always going to be looking for additional.
Margin pickup opportunities to become a little more main and main and pick up some additional cost efficiencies, but just as far as the overall strategy and trying to drive cross costs out of the business and go through some restructuring and so forth, we're clearly midway through that game, but.
The current situation may make certain things a little more difficult but.
We're still a full steam ahead on.
The margin improvement long term for this business.
Okay and.
On the manufacturing side as opposed to the expense side, where do you stand on improving your manufacturing cost structure.
Well again, you'll see that on a quarter over quarter basis, our gross profit margin was relatively flat.
And you know you can we can sit and look at that look at the the overall mix and so forth.
But the level of promotions and so forth what we're doing this can impact that margin, but having said that.
We're not where we expect to be long term on our gross profit margin or for any of the margins operating margin or EBITDA margin looking at more long term, but just looking in manufacturing and overall Cogs rate, we still believe there's room for improvement in there and we believe there will be improvement.
You know depending add this year plays out again, where there is only uncertainty will have to see but playing a forward into 2021 and 2022, we do expect to see some further manufacturing efficiencies and some pickup on our gross profit margin.
There are couple of things, we're working on Steve everything from really scrubbing down our formulations to kind of looking at the supplier lists and consolidating their and and negotiating better all the way through to local manufacturing, which can have significant.
Benefits also you look at a couple of couple of areas of the business, where we're shipping kind of water across the across this year.
Okay.
Wherever we're sending it there are opportunities for us so we're pursuing all of those some.
Closer in of than others, but we're pursuing them all.
Hi can I ask one last question.
Capex investments spending.
Over the balance of the year sort of what have you expected and have you adjusted to reflect.
What's going on.
Well you saw in the first quarter, we spent a little over a million Bucks and we do have several.
Initiatives that terence's referenced in.
Today and in prior comments that you.
This is a plan as we sit here today is to continue with some of those initiatives I mean, frankly, we may.
Look to scale back some over the course of the year.
We'll see how it plays out, especially as we complete a little bit more of Q2.
And look at some of those initiatives initiatives as to whether maybe you know just in a trying to preserve cash and so forth whether it makes sense to push out some less critical capital expenditures into say 2021, but just from an overall standpoint.
Putting aside the key initiatives, we don't anticipate any a substantial increase in our capex saved from what you've seen the last couple of years.
I think what we're trying to do Steve is to make sure that we are strategic in our in our focus here at as as Joe mentioned that we want to be very conservative with our cash and and make sure that we are you know protecting our cash position.
While at the same time funding those strategic initiatives.
That that are really going to help us during times like these so we do need to focus on things like digital to make sure that we have yes, the requisite capabilities just to stay relevant to be competitive in the marketplace.
Okay. Thank you very much.
Thank you. Thank the thanks, Dave appreciate the question.
This concludes the question answer session I'd now like turn the conference back over to Mr., Terry more head for any closing remarks.
Okay, well, thanks, again, everybody probably support for participating in today's call and for everything you do for our company. We look forward to updating you on our next call and please okay, everybody space safe and healthy during these uncertain times and have a great day, thanks very much.
Thank you.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
[music].
Yeah.
Yes.
[music].
Yes.
Yeah.
Okay.
Okay.
Yes.
[music].
Yeah.
Okay.
Yes.
[music].
[noise] [noise].
[music].