Q3 2021 Natures Sunshine Products Inc Earnings Call
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Good afternoon, everyone and thank you for participating in today's conference call to discuss Nature's Sunshine financial results for the third quarter ended September 30th 2021, joining us today are nature's Sunshine C. E O parents Morehead C F O.
Joseph Beatty, and executive Vice President and General Counsel Nathan Brower following their remarks will open the call for your questions before we go further I.
I'd like to turn the call over to Mister Brower as he reads the company's safe Harbor statement within the meaning of the private Securities Litigation Reform Act of 1995. The provides important cautions regarding forward looking statements. Nathan. Please go ahead.
Good afternoon, and thanks for joining or conference call to discuss our third quarter 2021 financial result, I'd like to remind everyone that this call is available for replay via telephone dial live through November 18th.
N B a live webcast it will be posted it in the Investor relations portion of our website at Nature's Sunshine Dot com.
The information on this call may contain forward looking statements. These.
These statements are often characterized by terminology terminology such as believe hope may anticipate expect will and other similar expression.
What were looking statements are not guarantees of future performance and the actual results may be materially different from the results implied.
By such statements.
Doctors that could cause results to differ materially from those implied here in 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 in other reports filed with the Securities and Exchange Commission.
The information on this call speaks only as of today's date and.
And the company disclaims any duty to update the information provided here in.
Now I would like to turn the call over to the C. E O of nature Sunshine parents Morehead Terence.
Good afternoon, everyone. Thanks for being with us today to discuss our third quarter results.
Historic record breaking quarters I can't thank them enough.
Still in the early innings of our business transformation, but I'm excited that we have such a great team here at Nature's Sunshine.
Our workplace and employees were the recipient of multiple awards this quarter, including happiest employees by comparably and two of our leaders Kelly Rich and Tracy Comstock received American business Awards.
For being accomplished women in business we're extremely.
Really proud of our people.
And these achievements.
Now I'd like to share a few highlights from each of our owed to us in North America sales were flat in the quarter. Following a challenging year over year comparison as distributors stocked up on product last year anticipation of the launch of the new business model.
I'm happy to say that now that we're a year into the into the Newport business model. We're very pleased with the upgrades that we've made to the business.
We will be rolling out a new affiliate program for the synergy business in first quarter of 2022.
Moving to Asia sales for the quarter grew 24% in local currency driven by a 36% growth in Japan, and 19% growth in China on a local currency basis.
Our largest market in Asia, South Korea.
Had a sales decline of 6% on a local currency basis due to pandemic related challenges.
Our Korean business is built on a strong foundation of sales fundamentals and offers excellent potential but the government imposed COVID-19 restrictions have created some short term challenges.
We expect the business to gain momentum in Q4 and deliver a strong finish to the year.
South Korea is auto ship program has continued to expand increasing 32% for the third quarter versus prior year and will also be launching targeted initiatives to drive order growth.
Moving to China, we continue to deliver solid double digit growth with the with the market reporting 19% sales growth in local currency.
Our focus is on building omni channel capabilities, and creating an improved digital toolkit to focus appears to be paying off as we continue to see positive customer growth for several from several important digital platforms.
It's a COVID-19.
And Russia were up 29% in local currency driven by strong customer growth and improved digital activation from increased investments in social media Influencers.
In Poland sales increased 21% on a local currency basis and year to date the business is up 36% in local currency as we continue to demonstrate the market's strong potential.
Looking at Western Europe sales were down three 5% in local currency. However, we're still in advance of the launch of our transformation initiatives in Europe.
Moving forward, we believe that our plans to relaunch the business in Western Europe will create significant growth opportunities and we expect to start seeing positive momentum building in queue for as we launched our phase one transformation initiatives. Starting later this year and continuing throughout 2022.
The relaunch will include the introduction of a new breed rebranding initiative.
A stronger digital platform launch of a new consumer driven website.
And the introduction of some of the key elements from our award winning business model that we launched in North America, and Latin America last September of 2020.
Finally.
In Latin America, the third quarter sales increased 1% in local currency, marking our fifth consecutive quarter of growth in the region.
We saw a temporary interruption to some of our customer growth initiatives due to resurgent COVID-19 restrictions.
Year to date, however, our business and Latam is up 18% versus prior year in local currency and the business has responded very well to our transformation initiatives. So we're pleased with our progress that we've made in Latin America, and I'd like to remind everyone that were still on the front end of the transformation and continue to be.
Leave that Latin America offers significant growth potential.
The strong performance across all of our <unk> demonstrates how our growth strategies are improving our ability to attract new customers, while also improving sales and profitability.
Products continues to increase and as mentioned last quarter. We believe there are still meaningful opportunities to increase consumer engagement.
Our affiliate program is another important initiative that we will see increased attention in coming months.
The program consists of a growing number of enthusiastic that are using our products and then sharing in recommending them through their social networks to friends and family and acquaintances.
Now that we've had an opportunity to review the program over the past few quarters, we feel confident about more aggressively promoting the program in the market.
Turning to digital first.
DTC is proving to be more a more attractive opportunity than we originally expected as early results have been very positive.
By the end of the year, we will have accumulated just over three quarters of data on consumer sales trends.
And we will be mining that data to identify trends patterns and modalities to help us garner insights to more effectively drive customer growth and accelerate DTC growth in the future.
Leveraging this data we will continue to invest in new customer acquisition and plan to accelerate our investments in 2022.
One of our most one of the most dynamic elements of our digital first strategy is the launch of our new personalization initiative that will be kicking off later this month with the limited test to ensure a proof of concept.
As a reminder, personalization allows our distributors to offer customized solutions to their customers via personalized pill packs based on each customer's individual health needs or goals.
The pill packs will be conveniently packaged into morning afternoon, and evening packs and will automatically be shipped to the customer's home each month.
Over time the program will also allow customers to build their own personalized nutrition plans by answering a simple question here.
This will give us access to an entirely new group of customers, who want to have the best products and program in the market, but also want to choose how they access our brand based on their personal preferences.
Overall, we believe personalization is a unique opportunity to revolutionize the customer experience.
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And we are extremely excited to help more people experience the healing power of nature. When we launched the program later this year.
Moving to manufacturing, Inc. Our manufacturing and quality teams continue continued to deliver our highest level of quality and purity available.
And we're doing and Theyre doing a great job addressing in overcoming the challenges from the global supply chain issues.
We continue to effectively manage the challenges by consistently working to stay ahead of demand to minimize the impact on our business.
As we've shared previously we.
We started taking action, even before others, where we're really talking about the global supply chain prices because we wanted to make sure that we stay ahead of the situation and as such we continue to aggressively invest in inventory to help protect our forecasted sales growth.
Now as you know at natures Sunshine, we take great pride in our industry, leading manufacturing capabilities as part of what makes us unique and special and we believe that if you're serious about nutrition and creating the best supplements in the market.
Then you manufacture your own products and we're one of the few companies to do that.
And as I shared last quarter, we're excited to be upgrading our manufacturing capabilities in 2022 with new state of the art high speed equipments.
The new equipment will further upgrade our capabilities improve productivity and strengthen the reliability of our of our supply chain.
Committed to delivering continued improvements in the future.
Looking forward, we expect our business to continue to deliver strong results as we execute our five global growth strategies and leveraged our strong financial and operating foundation.
Rest assured that as we continue to make progress on the business. We're also looking closely at our capital allocation strategy to ensure that we are effectively putting our capital to work, which Joe will discuss in more detail shortly.
In closing.
For an attorney to transform nature Sunshine and despite being in the early stages Ah results during the quarter and.
And in the past year have shown that we've made tremendous progress in our building momentum for the future with that I'd like to turn the call over to Joe who will make the walk you through a third quarter of 2121 financial results in more detail Joe.
Terence and good afternoon, everyone.
Net sales in the third quarter increased 14% to accompany record $114 7 million compared to $100.3 million in the year ago quarter.
This march the fifth consecutive quarter of record net sales.
Prior year period.
This represented a 1% increase on a local currency basis.
Increase was primarily due to the continued success of our transformation initiatives in Latin America, including the changes in our business model and the increased market demand for our products.
Gross margin improved approximately 150 basis points to 74, 4% compared to 72, 9% in the prior year period.
The increase in gross margin is primarily attributable to changes in market mix, including growth in China and inventory obsolescence reserves recorded in the prior year.
Volume incentives as a percentage of net sales were 31, 2% compared to 34, 2% in the year ago quarter.
The decrease is primarily due to changes in market mix and growth in NSP, China, where volume incentives are included in SG&A.
The decrease also reflects overall cost savings from the September 2020 launch of our new consultant sales and compensation plan in North America, and Latin America.
Year over year decrease was primarily attributable to noncash foreign currency losses in the current year.
And a favorable effective income tax rate 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 and certain noted adjustments increased 38% to $12 9 million in the third quarter as compared to $9 4 million in the year ago quarter.
Shifting to a discussion regarding our liquidity and capital allocation plan.
We had cash and cash equivalents on September 30 of $75 5 million and.
And $2 $7 million of debt.
For the nine months ended September 30, we.
We generated $23 million of cash from operations as compared to $26 8 million in the prior year period.
We remain very healthy from a cash flow perspective.
But as a follow up to the decline in operating cash flows it's important to point out that during the quarter, we had inventory levels that were $9 $7 million higher than the prior year period.
Primarily reflecting an increase in raw materials and finished goods.
We dynamically manage our inventory levels to meet demand and mitigate.
Mitigate supply chain challenges Terrence mentioned these efforts are ongoing.
Additionally, our cash position reflects the impact of our share repurchase program.
Share repurchases are one important piece of our capital allocation plan, which is the ultimate goal of increasing shareholder value year to date, we have repurchased 350000 shares at an aggregate cost of $6 million.
Speaker phone please make sure.
<unk> has turned off to allow your signal to reach our equipment again press star one to ask a question.
And we'll take our first question from Linda Bolton Wiser with D. A Davidson.
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Hey, Linda.
Hi.
So can you talk a little bit about what affected your business in certain markets. We we heard from some direct sellers, but angel was really problematic, but you actually did fairly well, they're especially your big markets of Japan.
And China, what did you see in the rest of the areas like I don't know if you're in Thailand, unless it's like that but where there are significant lockdowns in the rest of Asia and you'll expect those to last or can you just give us a little bit more color.
Yeah, I think you know as you mentioned the date is market by market and so I I don't think I should say first of all that.
You know our our business is so you know cause it's so different from most of the other companies you mentioned I think he knows I tried to emphasize omnichannel approach, our consumer focus really is allowing us to speak and have a strong to reach out to to to consumers and I think in some of those markets, where we haven't been.
Those capabilities out as strong yet you know that that's where we kind of get hit with some of these restrictions.
And and the restrictions are looser tighter in some markets versus others, you know and and Ecuador, and Colombia and some of these Latin American markets.
When they shut things down they really shut it down and he was like transportation gets shut down in public transportation get shut down and.
It can be quite something.
So I think Korea is another area, where again just the nature of the history of the process is there and the way they do business, you'll get a very.
Face to face meeting in intensive.
It has been impacted you know and some of the instances where you know you can only get five people together for example.
Some of the other smaller markets I think like you mentioned, Thailand, or Indonesia, yeah, they've been affected but I don't think that really impacted overall results.
But overall it's.
In the U S in queue for and they will start with largely putting in place some new digital capabilities. So they'll get a new digital platform that will allow them to to move a little bit faster and then the fast follow on the on the back end of that will be some of the rebranding and.
And just some additional enhancements to this new website that we're gonna be putting in place. There are also some new tools for the the distributor base that are actually quite good. They are quite exciting. So that's a that's a global change and but again, it's starting with Europe and North America. This year and then.
Kind of late type thing.
First or second quarter next year in Asia.
Okay great.
And then.
You know I think you said your gross margin with App here be here. So that's really good so you you've gotten favorable things off setting.
I guess it cost pressures what what are you seeing in terms of the cost pressures in terms of materials or transportation or anything what are you kind of thing in that area.
We've seen some issues I I'll, let show elaborate a little bit more wants to talk about that Joe.
Hey, Linda you know we.
Duo packs. So we've got the kind of the systems and the machinery that will allow us to automate that whole that whole process. So in some ways Linda it will simplify things for us.
And you can drive out some costs as well so again, we're going to start start slow on this one so that we don't over overheat the system and again when you look at was receiving correspondence from some of the early.
Distributors that were.
Pulling together programs and they were taking kind of before and after pictures of this big pile of a mess of bottles that some woman to have and then just kind of a single packet that would replace that so it's pretty exciting.
And again, we were able to.
And some of the other customer growth initiatives, we'll be investing slightly investing ahead of growth on those for you know for several quarters. So we will probably have to take a cycle bill two to invest ahead of growth because the residual pay off on doing that is quite substantial will have other.
Initiatives in the Hopper to help kind of fund those and so we're still maintaining and actually having a policy of kind of growing our margins going forward. So.
The business will continue to make progress in terms of operating margin growth and EBITDA margin growth, but we will be kind of fueling fueling growth and investing in growth.
Where it makes sense and again everything that we're seeing right now in all of the all of our analytics are telling us that.
Digital is a great investment opportunity for us.
Personalization, a huge opportunity for us as well as some of these things like just creating awareness around subscribe and thrive in the affiliate program.
Quarters is that the new level or should we expect it to continue to expand.
Well, what I would tell you versus if the expanding thats not necessarily a bad thing because that means that we are continuing to experience growth.
But.
Just from an overall standpoint, Steve.
Yes.
$57 million or so.
Would that bump up.
Over next two to three quarters, yes.
See dramatic increases a lot of that 60% of that increases in raw materials.
Trying to get ahead of that and some of the supply challenges from a from a getting raw materials in the door. So.
That should level off the raw materials side of it but.
You may see a little more upward movement on it but overall you also should see it start to settle out okay. It is an important initiative, though Steve.
It is an important initiative I mean again when you've got.
Japan growing 30 plus percent China.
Hovering round consistently 20%, Taiwan, 400%.
Can you kind of just keep going around the world, Russia, Poland et cetera, et cetera et cetera.
We don't want to get caught flat footed. So I think it's the right strategy for us we bill.
Really comfortable with it and again just trying to stay ahead of it with us.
We're getting and the various expenses related to growing the top line when you isolate out the corporate component.
How do you know how is that growing not growing flat et cetera, because that's really where a lot of your leverages is going to come from going forward.
Yes, Joe you want to talk about that a little bit of what I would tell you is that overall I think.
You're trying to separate variable C from fixed.
And some of our responses.
So that would be of course on a year to year basis, you may see the fixed grow.
Given.
Payroll increases and those types of things, but we feel very good about the fixed overhead structure that we have now I mean, there may be given.
Given the growth that we're experiencing and expect to.
Experience in going forward.
May add some additional folks and so forth but.
We're already starting to leverage.
Our fixed overhead right with the sales growth and again Thats <unk>.
Coming into play with the improvement in the operating margin, we expect that to continue going forward, so there'll be some additions but.
Nothing too dramatic.
And we're still pursuing our strategy I want to present, a sales basis of <unk>.
Euro or negative overhead growth. So you should expect that going forward.
Great.
One last one and I know you like to.
Well, let me know actually I have one next to last one last year in the fourth quarter.
You gave some.
Advanced extra spending.
Which you highlighted and it helped drive the business obviously in 2021.
When you look out to the fourth quarter or is there anything unusual that we should expect and I guess that leads into my for my last question, which is recognizing that you're not you don't want to give guidance and Linda had asked you some questions about the fourth quarter.
Sure.
Should the fourth quarter it looked like the third should.
Sure.
I don't know how to ask it without asking it.
No I'd say in tarpon.
For years.
Yes.
Sure.
You are right, we don't give formal guidance, but directionally, what I would tell you Steve is that we obviously.
<unk> incremental dollars in this quarter, the third quarter say versus the.
The year ago quarter, and you can see that in the SG&A line, so as compared to the current quarter. The quarter. Just ended I don't know that I would anticipate.
Anything incremental as a percent, okay or certainly it would be pretty modest.
So directionally, what I would say is.
From an EBIT EBITDA margin or operating margin standpoint, I would think more in terms of.
The quarter just ended say versus.
Fourth quarter of the prior year does that help yes that helps.
Given that we're now almost halfway through the fourth quarter.
<unk>.
You've seen you've seen.
Additional market closings COVID-19 related et cetera.
How does the fourth quarter look from a market closing standpoint versus the third quarter.
Market closings I mean.
Obviously the.
If you're referencing is in regards to pandemic related challenges and so forth I mean, we haven't seen any.
Dramatic shifts one way or another I mean, you can see.
Maybe there is a market or two in Central America that all of a sudden.
We will see some more restrictions or whatnot Terence touched on some of the challenges we've had in Korea.
There is still that market is a very good market for us but.
Yes, well not halfway with partway through this fourth quarter.
Not seeing anything from a due to the pandemic is causing us major concerns or that would result in a major shift in what we would have.
<unk>.
Realized in Q4 say versus how the third quarter played out.
We're also seeing that I think we're also seeing maybe less.
Less dramatic responses from western countries versus eastern so.
<unk>.
Korea for example, if they get any type of outbreak or sign.
There is a.
Very strong reaction to that and very immediate so it kind of varies by market, but I think Josef.
Exactly right I don't know, if we expect to see anything more or less going forward.
It sounds to me like the market that is still affected the most is Korea.
Is that is that a fair conclusion.
Well, it's fair if you think in terms of just the size of the market scale right I mean.
We wouldn't say that.
Haven't felt some significant pressures in certain markets and like I said, a moment ago in Central America. For example, but just based on scale, yes. The one that's been most impacted or.
For us most challenging in 2021 say versus 2020 as Ben.
Our 2019, if you went back pre pandemic is clearly Korea, yes.
And would you would you would you say that it is the.
And maybe that's what you were saying would you say it is the one.
That has.
Yeah.
From a topline standpoint.
When the the biggest dimunition two what.
It would have been without the pandemic.
If that's the right question.
I would agree with that yes, I think directionally that's fair.
It's not to say that we are seeing erosion in Korea. This year right I mean, we'd love to see more growth, but overall.
We haven't seen much growth, but we also haven't seen a lot of erosion either so.
Ongoing situation, but.
Obviously overall for Asia, we're pretty pleased.
Alright.
<unk>.
I guess, if I might.
<unk> had some major shifts in your shareholder base.
On this last quarter or some that we suspect and some that we're not sure of.
Anything you would care to comment on about Red mountain or.
Any of the others.
No I don't have any commentary on our on our shareholders right now Steve.
Okay I will let you go and looking forward to the next quarter.
Great. Thanks, so much great talking to you.
Thanks for the question.
At this time. This concludes our question and answer session I would now like to turn the call back over to Mr. Moorehead for closing remarks.
Okay.
Thank you and again wed like to thank everyone for listening to today's call.
Look forward to speaking to you again.
When we report our fourth quarter and full year results.
For 2021 in March so again, thank you for joining us and take care and look forward to talk to you soon bye now.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
Yeah.
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Yeah.
Okay.
Okay.
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