Q2 2021 Natures Sunshine Products Inc Earnings Call

Good day, ladies and gentlemen, and you're currently on hold for natures Sunshine and financial results for the second quarter ended.

June 30 of 2021, we're currently assembling today's audience, sometimes be underway very shortly thank.

Thank you for your patience and please continue to hold.

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Good afternoon, everyone.

Facing and today's conference call to discuss the nature of Sunshine and financial results for the second quarter ended June 30th 2021.

Join the yesterday or nature of Sunshine and C E O parents Moorhead.

And the 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 of Sunshine, Terence Moorhead Tara.

Day, and good afternoon, everyone and thank you for being with US on today's call to discuss our second quarter results of excited to be here with you today to announce our fourth consecutive quarter of record breaking results are historic performance comes as we continue to make progress on our journey to transform our business.

Of reported consolidated second quarter net sales came in at $109 million up 25% or 21% compared to the prior year and local currency.

Each of our 4 operating business units reported strong growth for the quarter led by the Latin America, and Europe, which were up 39% and 34% respectively and local currency.

We also delivered record breaking results from the bottom line as adjusted EBITDA increased 38% to $13 and $4 million.

Being in the early stages of our business transformation are strong execution and ongoing fine tuning of our strategies are having an extremely positive impact on our business.

I'm proud to say that each of our 5 global growth strategies brand power field energy Digital first manufacturing, Inc. And the right stuff are all building momentum.

I will discuss our strategies and more detail later, but 1 of pause because I would like to recognize and the bank.

Each of our associates for their continued focus and dedication throughout the pandemic.

Their resilience and determination have allowed us to deliver 4 consecutive quarter record quarters, and I can't think of them enough.

Additionally, our award winning customer service team, which was recently recognized as customer service team of the year by the American business Awards deserves special recognition as they've been of critical point of contact with all of our customers and distributors throughout this journey.

And while I'm on the topic I want to take a moment to recognize our distributors who throughout the pandemic of continued to step up and find new creative ways to deliver record breaking results, while working shoulder to shoulder with us to transform the business day.

Their efforts and willingness to collaborate have resulted in a record number of new customers, helping us make the healing power of nature accessible to more and more people across the globe.

Now I'd like to share of UK highlights from each of our of US starting with North America, we're reporting of 7% increase and local currency net sales for the second quarter, which is a direct result of the launch of the new business model and the positive impact that our global strategies are having on the business.

Sales and NSP U S were up 7%, while Canada grew 14% and local currency.

The strong performance comes as we continue to make incremental improvements to our new business model to help build momentum and drive customer activation.

Also as mentioned earlier or distributors of done a great job partnering with us to attract new customers and the second quarter, we saw 30% customer growth with the significant increase and the number of customers joining are subscribed and thrived auto ship program.

Over 35% of our orders now include of subscribe in front of the product and North America.

We will continue to aggressively expand our subscribing price program as we believe that will be of significant driver of long term growth.

Additionally, our digital marketing initiatives of outperformed expectations and are proven to be an excellent way to attract new customers.

Overall, we're ahead of where we thought we'd be at this time and we're pleased with our progress and look forward to going into the next phase of our new business model.

Moving to Asia, we saw sales for the quarter growth, 26% and local currency, driven by 12% growth and and South Korea.

38% growth, and Japan, and 15% growth and China on our local currency basis.

South Korea's growth was driven by an increase and autoship participation new build incentives and the successful launch of Lamora, our new skincare line.

Additionally, the recent introduction of of new App for distributors and South Korea is helping sellers stay connected with new business building tools.

And and digital training modules.

While south Korea's COVID-19 restrictions remain challenging Ah results and the second quarter suggest the business of stabilizing and that we're adapting to the situation.

Japan continues and strong performance delivering a sixth consecutive quarter of growth.

The 38% sales increase was driven by strong execution of field fundamentals and steady customer growth.

Japan's auto ship program had a tremendous 24% increase and subscriptions with many of the new subscribers being millennials.

We look forward to even further growth and the second half of the year as we rollout of revamped subscription program and the market.

Now looking at China, we continue to deliver solid growth as the business evolves with and improved digital toolkit.

During the quarter, we leveraged popular digital programs like Tictoc to drive customer growth by 14%.

We will continue to work to expand our digital reach and drive engagement and attract new customers.

Finally, and Taiwan, we continue to penetrate the market with the sales increase of 277% on our local currency basis.

The growth is attributable to and aggressive focus on field fundamentals and friendly competition between distributors buying for top tier positioning.

Overall, we look forward to driving continued growth across the region.

And Europe, we delivered 34% sales growth on our local currency basis.

The growth was led by our markets and central and Eastern Europe, where we built a strong foundation and the proven track record of delivering results.

Sales and Russia were up 44% and local currency the.

This was driven by strong customer growth of 30% and digital activation of existing and new customers for improved through improved social media and influence of marketing.

And Poland, we want the again saw tremendous growth with sales, increasing 49% and local currency.

This was driven by strong field fundamentals virtual sales events and the launch of of New College, and beauty supplement that is selling well above forecasts.

Looking at Western Europe sales were relatively flat down 1% compared to the prior year of local currency.

Moving forward, we believe our plan to relaunch the business later this year will create significant growth potential over time the.

The relaunch will incorporate some of the key elements from our new business model that we launched last year and North America, and we will focus on rebranding updating the website and creating a stronger digital platform.

We look forward to sharing more about our progress and Europe and future quarters.

Finally, and Latin America second quarter sales increased 39% and local currency, marking our 4 consecutive quarter of growth and the region.

The business has responded tremendously well towards the transformation initiatives and results continue continue to improve as COVID-19 restrictions taper off.

Each market and the region grew double digits compared to the prior year driven by increased customer activation improved digital access and several new product launches.

We're pleased with the progress of that we've made and Latin America and continue to believe and the medium to long term potential of these margins.

The strong performance across R. O b used demonstrates how are global strategies of improving our ability to attract new customers, while improving sales and profitability.

Everyone at natures Sunshine is dedicated to keeping this momentum going.

Moving on and I would like to share some thoughts about the progress we're making on our 5 global growth strategies. However, before I do that I want to give you a quick update on our supply chain as I know, it's an important topic that's on many people's minds.

While the challenges presented by the global supply chain crisis of significant we appear to be managing the situation effectively.

So far we've been able to get ahead of the major issues and minimize the impact of our business and financials.

To ensure we stay ahead of the situation we of content and we've committed to investing more aggressively and inventory to help protect our forecast the sales growth.

And we're closely working with or overuse, just stay aligned an inventory health.

These are certainly challenging times, but fortunately as of 49 year old company, we have great long term relationships with our suppliers and lots of experience as well.

And have done a great job, so far and I have confidence and will continue to effectively manage our supply chain moving forward.

Now I'd like to move on to discuss our progress on our 5 global growth strategies, and let's start with brand power and our award winning rebranding.

The updates to our packaging and marketing collateral are receiving a strong reception from customers and distributors of late and I am pleased to say that the majority of of the nature of Sunshine rebranding will be complete for all markets by the end of 2021.

And he has to drive growth and is something we are working to more aggressively promote.

Our affiliate program consists of enthusiasm that use our products and then share and recommend them to friends family and acquaintances through their social media networks.

While our health practitioners and retailers continue to be the driving force behind our business. We're pleased by the number of people that have signed up as affiliates and of sharing their newly found passion for our products.

Moving to digital first we continue to make enhancements to our award winning website to improve the user experience and expand functionality.

The new website has improved the shopping experience for our existing customers and is attracting new customers as well and.

Additionally, we're seeing excellent results from our DTC digital marketing initiatives, and we will be accelerating our investments and the back half of 2021.

1 of the most exciting elements of our digital first strategy is the pending launch of our new personalization initiatives, that's designed to transform the customer experience.

Through personalization distributors will be able to offer customized solutions with personalised the pill tax the their customers based on each customer's individual needs or goals.

The <unk> will be conveniently packaged into morning afternoon, or evening packs and will automatically be shipped to the customers home each month.

Over time the program will also allow customers to build their own personalized nutrition plans by answering a simple question are.

This will give us access to an entirely new group of customers, who want to have the best products and program and the market, but also want to choose how they access our brand based on their personal preferences.

Over time, we believe personalization will help us build more meaningful relationships with customers and make natures Sunshine a more integral part of their daily lives.

We are extremely excited about the new personalization program and we look forward to the to the launch later this year.

Turning to manufacturing, Inc. Our manufacturing and quality teams continue to deliver products with the highest levels of quality impurity available on the market.

Moving forward, we plan to upgrade our small batch of manufacturing capabilities with new state of the art high speed equipment.

The upgrades are expected to help improve productivity increasing output while reducing costs.

Our unique small batch capabilities have been perfected over the last 49 years and and 1 of the many reasons why and natures Sunshine products are superior to what's commonly available on the market today.

As a result small SUV also remember <unk>.

Small batch processing allows us to more effectively controlled products and manufacturing integrity, while also allowing us to select and work with rare ingredients of the highest quality, including wild crafted herbs and botanical the deliberate the most potent micronutrient.

Like other mass marketed and both produced products nature of Sunshine, perhaps each products with precision and artists and all the attention to detail delivering the most potent supplements available on the market for results you can feel.

And finally, we continue to make progress on Ah on building a high performance organization through our rights stuff initiatives and.

And the second quarter, we continued to deliver and improve profitability operating profit increased 44% to $9.5 million, while operating margins improved 114 basis points.

Similarly, adjusted EBITDA increased 38% to deliver and historic $13 and $4 million for the quarter and EBITDA margins increased 118 basis points.

What we've made excellent progress realigning the business for profitability and growth we remain committed to delivering continued improvements in the future.

As we execute our 5 global strategies and leveraged our strong financial operating foundation, we expect our business will continue to deliver strong growth of strong results. Additionally.

We have the capital allocation plan in place since designed to complement of our operating strategy by effectively putting our capital to work.

Ron of journey to transform nature of Sunshine and despite being early in the process I hope you'll agree that we've made tremendous progress and are building momentum for the business.

With that I'd like to turn the call over to Joe who will walk you through our second quarter of 2021 financial results and more detail Joe.

Carrots and good afternoon, everyone.

Jumping right into it and net sales and the second quarter increased 25% and to accompany record of of 109 million.

Period of $87.3 million and the year ago quarter.

This is the fourth consecutive quarter of record net sales.

This is Terrence mentioned this increase was primarily driven from execution of our business transformation plans and growth across all of our operating business units, excluding foreign exchange reach net sales increased 21% and the second quarter of 2021.

On and absolute basis, net sales and Asia increased 33% to 43.5 million compared to $32.8 million and the year ago quarter.

This represented a 26% increase on the local currency basis.

The increase was primarily attributable to strong growth and Korea, Japan, and China, and Taiwan due to the execution of field fundamentals customer group and improve digital tools.

Net sales and Europe increased 39% on and absolute basis, the $21.5 million compared to $15 and $5 million a year ago quarter.

This represented of 34% increase on a local currency basis.

The increase reflects reflects of the success of new product launches stronger field fundamentals and customer growth throughout central and eastern Europe.

North American of sales increased 8% of the $37.4 million compared to $34.5 million and the year ago quarter.

This increase is attributed to of business rebranding and rebuilding efforts success with growth initiatives and the overall increase in demand for nutritional supplements within the U S.

Net sales and Latin America, and other increased 44% to $6.6 million compared to $4.6 million and the prior year period.

This represented the 39% increase on our local currency basis.

The increase was primarily due to the continued success of our transformation initiatives and Latin America.

<unk> and a business model and the increased market demand for our products.

Gross margin improved 30 basis points to 73.9% compared to 73.6% and the per year period, primarily due to changes and market mix.

Volume incentives as a percentage of net sales were 32.5% compared to 73, 4% and the year ago quarter.

The decrease is primarily due to changes and market mix, reflecting growth and markets, where volume incentives are a percentage of net sales are lower than the consolidated and average.

The growth and NSP, China, where volume incentives are included and SG&A and the prior year launch of the new business model.

Selling general and administrative expenses were $35.6 million compared to $28.5 million and the year ago quarter.

The increase was primarily attributable to hire selling costs from growth and Marcus with higher variable cost as well as growth in China and.

And as a percentage of net sales.

Seeing the expenses were flat at $32 and 7% through the respective second quarters.

Operating income and the second quarter increased 44% to 9.5 million or 8.7% of net sales.

Compared to operating income of 6.6 million or 7.6% of net sales and the year ago quarter.

Okay and.

We look forward to continuing to be opportunistic with tools available and our capital allocation plan ultimately with the clear goal of increasing shareholder value.

The students mentioned, we believe our supply chain management efforts overall have been successful we expect continued growth for the second half of 2021 and beyond.

However, supply chain and pandemic related challenges continue and may impact future results.

Furthermore, the second half of 2020 represents tougher cup for the second half of the current year.

Lastly, you may have noticed the recent filing of our format 3.

Filing R. S..3 is the check the box action for US we see it as completely natural and good corporate governance for us to have and effective filing and place.

We will continue to utilize our balance sheet is the first and foremost way to support growth and have no near term plans to raise capital from the shelf registration.

Now I will turn the time back to the operator for Q&A operator.

Thank you Sir.

Of these and gentlemen to ask a question today the signal bypassing star 1 on your telephone keypad.

Please ensure that the mute function on your telephone and switched off to allow us to take notes and retire equipment.

Again to ask a question. Please take note of bypassing star 1 on your telephone.

And have a pause for just a moment to him out of everyone and opportunity and signaled for questions.

And we will take our first question now.

From <unk> from Titan Capital Management and please go ahead.

Thank you I was hoping to get a little bit more color on what is going on and Korea currently what.

What is the situation of the shutdowns and.

It's starting to open up at all and and what you're seeing.

Around that changing environment currently.

Sure, Thanks, Bye-bye and hear from you.

Yeah the business there.

They're starting to kind of figure out how to how to work around things using digital a little bit more as I had mentioned.

And the shutdown situation.

Really has affected large meetings they are still able to have some some smaller meetings and kind of personal meetings, so what they're doing and largely is.

Of utilizing just digital technology, when they do want to get people together, so whether it's webcast doom.

Et cetera and.

And and then we've just we're still able to deliver products.

So again, we kind of of seeing things stabilising ripped from our standpoint.

Despite the the market challenges, but it's fluid over there.

Is it the answer your question.

It is helpful parents, I would would like the little bit more colors and safe to assume that Korea still running well below last year than a year ago levels before everything like not a year ago, but a couple of your years ago level of before everything shut down and then or or.

Is it close to our sales and getting closer to the normal amount of at the point.

And like I said and the quarter. They had 11 per cent growth for the second quarter of.

I wouldn't call that the the new trend line of for them, but I do think they've got some stability and.

And they're just fighting day to day so.

Okay now that that's helpful.

Some questions over there, but I don't think we're seeing what we were and I don't think we're not expecting what we saw say in the back half of last year, where they were really just flat out of the struggling.

Yeah. Yeah. That's helpful. Also wanted to ask about the skin Caroline day touched on free.

Frankly, I wasn't familiar with that what more can you tell us about the skin care line, where have you introduce that the opportunity just add a little bit more around that to the that would be great.

Sure Lavarra is a.

Probiotic baseline of Detox line as of kind of and anti pellucid pollution element to it it's largely facial skin care, all natural luxury positioning and.

And it's.

It's a new segment 4 I think that piece of the business generating a tremendous amount of excitement launched in South Korea first okay. So that was the first to get it and then it'll go too.

Japan, eventually it'll come to the U S as well, but it's a beautiful line of products that includes.

Full range of of facial skincare products cleanser of toner and moisturizer.

But they're all they're all kind of specialty and very different from anything that we've had before and and also of what's out on the market and we're supporting that with some really strong of a.

Very strong complement of marketing collateral.

And for the for the teams the using their marketplace.

Great. Thank you I appreciate it and.

Yes, yes. Thank you.

Thanks for the call.

And as a reminder of ladies and gentlemen to ask a question piece techno my passing star 1 on your kind of phone keypad.

And now go to our next question from Steven Martin from the <unk>. Please go ahead.

Hi, guys and Dave.

And congratulations on just a phenomenal quarter.

Thank you. Thank you.

I don't know what to ask you you put up great numbers, you'll ever you. You grew sales you of leveraged expenses you bought back stock you pay the special dividend.

And you answered my question about the ashtray, [laughter] and the and the previous.

And did it obvious and the previous caller asked the question about Korea.

So.

I know you guys don't like to or haven't been prepared to guide.

Can you give us some color maybe of range on how you think the back half of is going to look.

Vs last year's back have 4 vs 2019.

And I'll speak to that Joe Hte, how are Ya and.

Thank you. Thank you for your comments, where I always enjoy hearing from you, obviously I address that to some degree and my script.

And no you are right.

As of yet.

Do not give formal guidance and.

I would say again is is go back and re read my comments, we do believe there will be growth and the second half of 2021 as compared to the second half of 2020.

But it's a much tougher comp.

As we talk about the 4 consecutive quarters of record growth.

Obviously 2 of those were and 2020 the back half of 2020, so it's a much tougher comp we expect growth but.

So we sit here today and we don't anticipate the same level of of growth that we experienced and the first half of 2021.

And Ah, leaving.

Let me ask gross he you know when you refer to growth.

There's there's top line growth and then there's operating profit or EBITDA growth, which gross are we talking about now [laughter] well first off I'm talking about the top line growth, yes, Okay net sales.

From a bottle of mine stamp and obviously, we're very pleased with the the the growth that we've seen and EBITDA.

Again, if you want to look at it over and second half over the second half standpoint, I would say, we're certainly targeting growth and EBIT yea as well for the second half of 21 vs. The second half of 2020.

Okay, and what about if I ask 1 more.

What about EBITDA margin of our operating margin because your margin improvement this last quarter was great.

What what do you expect from the back half margin improvement as well.

If your question is in regards to improvement vs. The first half of the second half of 2020 and then.

That is what we are targeting yes.

Okay, Okay, but please keep in mind that as a call out and my comments that we do and is Terrance reference and his comments, we have a number of of growth initiatives. The.

The personalization and initiative for example will be launched and the back half of 2021 and there are other initiatives and we've talked about previously and we continue to support and grow I mean could we spend a little bit more in the back half of 21, and then we did and 2020.

For those types of initiatives and short answers, yes, but when all said and done we clearly expect the.

Pretty solid EBITDA margin and the back half of 2021.

Okay.

Where where do you stand and I ask this periodically.

If you look at your cost structure and.

In Utah.

Where do you stand on that in terms of rationalization or lever and your ability to leverage out out in Utah.

I believe that.

We put in a.

Pretty serious.

<unk> initiative plan.

2.

Of reducer overhead costs, right and to drive of some pretty significant and.

Expenses SG&A and otherwise.

A few years ago.

And obviously, if you look at our EBITDA growth and so forth over the last 2.3 years you can clearly see the benefit of that I would say overall that plan is now.

90 plus percent.

Complete the the key for us moving forward as far as driving incremental EBITDA growth of our operating income growth.

Is going to come down to the access of our new business model. Some of these initiatives of terraces and talking about the last few quarters and topline sales growth.

Topline sales growth clearly drives the and incremental contribution margin, which is north of our overall.

Fully reported operating margins of the combination of growth and the success of.

Some of these initiatives, we talk of that surely Lynn truly lend themselves to and.

And even more enhanced operating and EBITDA margin going forward.

Long term.

Alright, I greatly appreciate it and I'll, let you guys go because there's not much else task.

That's great. Thanks day like advanced good talking to you yeah.

Yeah.

Okay.

Thank you at this time. This can can you talk question and answer session.

And I turned the call back over to Mr. Morehead for closing remarks.

Okay. Thank you and we'd like to thank everybody from listening to today's call. We look forward to speaking with you again, when we report our third quarter of 2021 result of November of it until the end and everybody to take care of stay safe and we'll see you soon bye now thanks for joining us.

Thank you ladies and gentlemen, this does conclude today's teleconference.

You may disconnect your lines at this time, thank you for your participation.

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