Q1 2022 Natures Sunshine Products Inc Earnings Call
Yeah.
Please standby the conference will begin momentarily. Thank you for your patience I should please remain on the line today's call is being recorded.
Today Thursday may five 2022.
[music].
Okay.
Yes.
Good afternoon, everyone and thank you for participating in today's conference call to discuss Nature's Sunshine financial results for the first quarter ended March 31 2020 to join.
Joining us today are nature Sunshine, CEO , Terrence Moorehead, CFO , Joseph Beatty, and executive Vice President and General Counsel Nathan Brower.
Following their remarks, we'll open the call for your questions before we go further I would like to turn the call over to Mr. Brower as he reads the Companys Safe Harbor statement within the meaning of the private Securities Litigation Reform Act of 1095 that provides some portion important cautious regarding forward looking statements. Nathan. Please go ahead.
Yes. Thank you.
Good afternoon, and thanks for everyone joining our conference call today to discuss our first quarter 2022 financial results.
I would like to remind everyone that this call is available for replay.
By Telephonic Dylans through May 19.
And through a live webcast that will be posted in our investor relations portion of our website at IR Dot nature Sunshine Dot com.
The information on this call may contain certain forward looking statements. These statements are often characterized.
By terminology such as believe hope may anticipate.
They expect will and other similar expressions forward looking statements are not guarantees of future performance and the actual results.
May be materially different from the results implied by forward looking statements.
Factors that could cause results to differ materially from those implied.
And this call include but are not limited to those factors disclosed in the company's annual report on Form 10-K under the caption risk factors and other reports filed with the Securities and Exchange Commission.
The information on this call speaks only as of today's date and the company disclaims any duty to update the information provided herein.
Now I'd like to turn the call over to the CEO of Nature's Sunshine Terrence Moorehead.
Alright.
Thank you Nate and good afternoon, everyone. We appreciate you being here with us as we discuss our first quarter 2022 results.
The operating environment, we face to start the year was certainly more challenging than any other quarter in our class the lingering effects of COVID-19, and the Shanghai shutdown the devastating more in Ukraine, and intensifying supply chain crisis, and rapid inflation where are you.
You need a combination of headwinds we had to navigate in the first quarter.
Despite these unprecedented challenges first quarter sales growth was strong up 10, 3% in local currency versus prior year, reflecting the strength of our brand and the steps we've taken to build momentum in the business.
We're very pleased with our top line performance, especially given the heightened uncertainty and challenges to the market.
Our mission to share the healing power of nature with more people across the globe is undeterred.
And it continues to show in our top line results.
The first quarter was our seventh consecutive quarter of year over year net sales growth.
First quarter, adjusted EBITDA was $8 2 million negatively.
Negatively impacted by the confluence of headwinds I discussed earlier.
Cost of goods was impacted by unplanned inventory reserves that were a direct result of the unique external factors impacting the business.
SG&A also increased as we continued to invest in the business funding, our digital first initiatives and field and field energy programs designed to reengage distributor facing activities.
All of our investments support our commitment to deliver long term sustainable growth.
Backing off now would impede our ability to keep the business moving forward.
Given the current headwinds we are currently pleased to be discussing double digit year over year sales growth.
That said as the tail of the first quarter as the tail end of the first quarter and April played out we saw the headwinds have a more significant impact on the business and believe there is risk.
There is increased risk associated with our full year expectations.
We'll talk more about that later, but I wanted to give you a better sense of what's behind the first quarter growth by sharing a few highlights from each of our Ob use and discussing some of the key drivers impacting performance.
Asia Pacific continues to drive top line growth with net sales up 34% in local currency with the 251% increase in Taiwan, a 46% increase in China, and a 33% increase in Japan.
In Taiwan, our highly motivated team of distributors continue to compete for the top position driving order growth through new customer acquisition.
With a sales increase of 251% in local currency to focus on field fundamentals is paying off as distributors are more focused on building and managing customer relationships.
Overall, we're extremely pleased with the progress we've made in this market and we look forward to continued growth in 2022.
In China, we saw first quarter sales increased 46% in local currency. Despite the pressures brought on by the COVID-19 shutdowns in Shanghai.
Our manufacturing and distribution facilities are located facilities are located outside of Shanghai and were largely unaffected by the shutdowns, thus, allowing us to produce and deliver products to customers around the country.
It is still unclear when the government will lift the current wave of Covid Lockdowns. So we will continue to leverage our digital toolkit building omni channel capabilities.
And improve our social media presence using tools like tick tock to drive growth and keep the business moving forward.
Notwithstanding the likely short term impact of the COVID-19 restrictions we.
We believe we still have tremendous growth potential in the Chinese market.
Moving to Japan.
We report our ninth consecutive quarter of year over year growth with sales up 33% in local currency.
We continue to see exceptional growth driven by strong fundamentals and the continued success of our subscribing thrive auto ship program that promotes order growth with every new customer acquisition.
In South Korea. The team continues to deal with the pandemic restrictions and in the first quarter. They also had to deal with several top distributors being diagnosed with all across.
Despite the challenges sales were relatively flat coming in down 0.3% on a local currency basis.
Looking ahead to the second quarter. The government has announced that meeting restrictions will be lifted and the team will be able to conduct face to face meetings for the first time in two years.
This is a significant development and we're also excited to be able to reintroduce some of the tried and true field incentives that have historically motivated our Korean sellers to drive sales.
We believe these initiatives along with several new product launches will help put south Korea on a positive path to growth.
In Europe first quarter net sales were surprisingly resilient coming in almost flat down 0.6% versus prior year on a local currency basis.
The warrant Ukraine is a significant challenge with considerable impact across the region.
It's been devastating and heart wrenching to witness the violence, that's plagued the region over the past two months.
Our first priority continues to be supporting the cranium people during these challenging times.
Through our impact Foundation, we made charitable contributions to ensure that our friends and partners in Ukraine at critical Lifesaving resources, and we will continue to be supportive through our foundation.
Thankfully our key associates are all safe and accounted for and we were in and we are in regular contact with our team.
Most of whom have relocated away from the most dangerous areas of the country.
Our distributors also staying in close contact and some are holding calls and using social media to communicate and support each other.
Many of our distributors have been displaced to Poland, and Turkey and have an X and have expressed an interest in continuing their business in their new host country.
As you know we already have a strong business in Poland that is perfectly capable of supporting a large influx of new distributors and we will continue engaging these distributors to help keep them active in the business.
Last year, we also opened a new sales center and office in Turkey.
Will be an excellent opportunity for distributors that have relocated to this dynamic and growing market.
Turkey has a population of over 70 million people.
And a thriving nutritional supplements industry.
We entered the Turkish market to capture new opportunities in the region, but will now have a chance to support our displaced distributors and their families.
We believe the Turkish market offers good potential for the business and may be able to offset some of the negative sales impact from Russia Ukraine.
Of course, there is still a significant amount of uncertainty in the region and in the near term, we expect to see a significant decrease in the Russia, Ukraine business.
But there's a very real opportunity to recover some portion of that due to the migration of distributors and the expansion of Turkey as I mentioned earlier.
Given the developments in Ukraine, and its impact on the surrounding area. We plan to only provide insights on central and eastern Europe as a whole moving forward.
We believe this will provide more of a more relevant and accurate picture of how the business is progressing.
Despite the challenges and disruptions to the business in Q1 central and Eastern Europe grew four 6% versus prior year in local currency.
Of our western European business.
Western Europe represents 60% of the nutritional supplement supplement market in Europe , but only represents about 14% of our European sales.
As I've mentioned in the past transforming our business in Western Europe is an important priority, but we're still in the beginning stages of the process and expect to have a new web site or subscribing drive Autoship program.
Program and fully represent replicated distributor website up and running by mid to late Q too.
By the end of Q3 will start phasing in our new rebranding initiatives and by Q4, we plan to kick off our initial DTC campaigns with an expanded and upgraded product portfolio targeting new consumers.
These are powerful initiatives that will strengthen our competitiveness improved consumer appeal and help us to penetrate the large and growing nutritional supplements market in western Europe .
Fortunately the market has the potential to be a much larger contributor to our portfolio overtime.
In North America, the positive increase in orders and strong dtc's customer growth was offset by average order declines from existing customers negatively impacted by product shorts and inflationary pressures.
In the first quarter sales decreased 4.7% due primarily to a shortage of raw ingredients that prevented us from billing certain customer orders.
We estimate that our inability to source. These key ingredients negatively impacted our north American net net revenue by $2 million to $3 million or about 5% to 8% of sales.
Throughout 2021, our team was able to proactively mitigate fourth delays raw material shortages and manufacturing constraints to meet to meet demand while.
While preserving our margins.
This was generally still the case in the beginning of 2022.
However, as the quarter progressed, there was a sharp drop off in our ability to source a few key ingredients that make up the complex formulas and 40 to 50 top selling products.
Not having these products, especially in a healthy selling environment reduce net revenues in our North American business.
In addition to the spot supply chain issues inflationary pressures may be impacting consumer behavior with some consumers becoming more price sensitive.
Buying patterns may be temporarily impacted we continue to experience healthy order growth, reflecting the momentum we've created from our digital initiatives are subscribed and thrive Autoship program and they continued focus on our five global growth strategies.
As an example, a closer look at subscribing thrive reveals that 45 per cent of our orders included a subscribing thrive product in the first quarter.
What's more 47% of our direct customers.
Susan 47 per cent of our direct customer sales came from subscribing slides and Q1.
These percentages continued to increase we expect to see even stronger customer growth and stability over time.
Near term challenges that we're seeing in the market are significant however, we believe our strategies are moving us in the right direction and that there are still significant growth potential for our business as.
As such we continue to invest ahead of growth and fine tune, our key initiatives to improve the customer experience and move us closer to our long term objectives.
We've also implemented a price increase that will take effect in the second quarter.
Finally.
Latin America first quarter sales decreased 4% in local currency due to a product available availability issue caused by a local regulatory change for.
The issue has been resolved, but the team was unable to sell a few key products for several months, while the appropriate adjustments were made.
Despite the unexpected challenges the business continued to respond well to the new operating model strengthening field fundamentals and focusing on customer activation.
Oh, New leadership team is in place and focused on scaling the business with an initial focus on penetrating the large and growing nutritional supplement market in Mexico.
With a population of almost 130 million people and to supplement market growing 10% annually. We believe Mexico alone represents a significant opportunity for growth.
We're currently in the process of recruiting a new general manager for our Mexican business, who will be tasked with building a high performance team and implementing a strategy to penetrate the market.
Turning to our five global growth strategies, we continue to make strong progress and feel confident in our ability to deliver long team long term sustainable growth with improved profitability.
Instead of walking you through each of the five strategies as I normally do today I'd like to focus on just two of our strategies digital first and manufacturing Inc. Is I believe these are particularly relevant in the current business environment.
He'll drill down on our other key strategies in future calls when I can dedicate more time to talk about brainpower and the stress and the synergy rebranding and the new Mega blaming initiatives, we're working on.
Field energy and the adjustments were making to our affiliate program an ongoing inroads, we're making with subscribe in drive and the right stuff with some of the initiatives, we're pursuing to strengthen gross margins and improve overall profitability.
I'll start with digital first where we continue to focus on strengthening our web site and improving the customer experience.
We've partnered with our development team on a comprehensive website optimization project designed to strengthen performance and functionality.
We're implementing new shop product and check out pages to create a more appealing consumer experience and improve conversion rates. For example, we're working to improve our contextual search tools to make it easier and faster for people to find the right product.
We're also making it easier for people to share products on us on their social network.
Importantly, we're also looking at ways to make the decision to sign up for subscribing Pride, our auto ship program Ah more of a more obvious risk free choice.
With our DTC business sales exceeded expectations in the first quarter is traffic to the web site continues to be strong.
We've continued to build our digital capabilities and as a result, DTC sales have steadily increased and currently represent about 16% of total sales in the U S.
We expect the ongoing refinement and evolution of our force of nature digital campaign to continue to drive customer growth.
While the exclude while the expansion of our newly developed CRM capabilities improves customer activation for new and lapsed customers.
Oh DTC business through Amazon also represents a significant opportunity and it's still relatively untapped.
To give you a sense of the potential right now due to our social media in CRM activities are chlorophyll product hold the top three position among all cloverfield products on Amazon.
And there are still significant potential for us to replicate that performance with other products in our portfolio.
Overall, we have made excellent progress on our DTC strategy, attracting new customers, while also re activating laps customers.
The team in North America has done an outstanding job building, our proof of concept and laying the groundwork for our DTC expansion into Western Europe later this year.
Remember.
All of our distributors have their own replicated websites social media engagement tools sharing tools and have access to the same consumer facing assets that we use so they have everything they need to build their own digital businesses.
Over the next three years, our goal is to grow VTC to over 30% of our business and as you can see we're already making good progress.
The next exciting chapter or digital horror story is personalization.
Right now we're still in beta with our distributors, but we're on track to launch the <unk> launched the program to consumers and the latter portion of 2022.
Personalization will allow customers to take charge of their own health.
By creating their their own customized health programs.
Each program is based on the consumers individual goals and health needs.
Designed by Herbalists physicians and nutritionists.
Our unique health assessment uses body system analytics to determine the unique component of each customers program.
With over 600 products in our portfolio versus 78 to 80 products for our competitors Nature's Sunshine is uniquely qualified to provide personalised solutions for customers and that's exactly what our incredible retailers and practitioners have been doing for 50 years, we have more experience.
Than anyone else out there in this area.
Moving to manufacturing Inc.
We continue to set the standard for World class manufacturing quality and reliability, but the increased instability in the market along with the ongoing global supply chain challenges that made sourcing and logistics more difficult than ever.
2021, we were able to avoid.
Major supply chain issues by investing in inventory ahead of sales to meet the increased demand for our products.
In the current environment, we've started to see more raw ingredient shortages in instances, where the available materials are unable to meet are demanding specifications.
Again these are relatively new challenges that are generally unpredictable in nature and.
In response, we are intensifying our focus on all aspects of our sourcing process. For example, we've expanded our supplier base identifying more reliable second and third tier backups for key ingredients.
We'll also be looking to build vertical farming relationships to show her up supply and we're and we're going to tighten up our <unk> process to ensure we have appropriate cross functional alignment and integration.
We believe these initiatives will help normalize it improved supply chain performance overtime.
Our plan to upgrade and automate our manufacturing facility along with the expansion of our global supply chain footprint will provide additional performance enhancements.
We are currently conducting an independent facility to review to ensure we're not only maximizing the efficiency and effectiveness of our current manufacturing space, but that we also maximize the potential of the new state of the art solid dose liquid and powder lines, we plan to install.
Importantly.
Goal is to expand and diversify our capabilities, while reducing costs.
To drive these initiatives forward and take our supply chain to the next level, we've made an exciting change to our organization.
Effective may 16, Martin Gonzales will join nature Sunshine as executive Vice President of global supply chain and serve on the company's Executive Committee.
Martin joins us from bowel reforming where he served as vice president of operations and excellence and brings over 30 years of supply chain experience from such notable companies as Unilever Molson Coors S. A V Miller and Sara Lee.
He has a proven track record of leading successful transformation and delivering both savings and growth through supply chain improvements.
We're excited to welcome Martin to nature, Sunshine, and a confidence that his experience attention to detail and dynamic leadership will help will help transform our supply chain capabilities.
All of these changes are important, but our commitment to the environment and to improving our sustainability and transparency lie at the core of who we are which is why I'm. So pleased we're aggressively moving this to the forefront of our business.
To start we recently conducted a full assessment of our environmental footprint in greenhouse gas inventory and the results were published in our inaugural ESG report earlier this year.
The report can be downloaded from a website and outlines a series of goals designed to move nature Sunshine towards an environmental leadership position in our industry.
Our initial goals include a 50% reduction in scope one into greenhouse gas emissions by 2025.
<unk>, 100% renewable energy and are owned manufacturing facilities by 223 2023.
Having a zero waste and land to landfill at all at all of our U S distribution centers by 2025 and.
35 per cent reduction in waste at are owned manufacturing facilities by 2025.
These are just saw our initial objectives, what nature of Sunshine has been a force of nature for the past 50 years, and we're committed to achieving our environmental social and governmental goals and governance calls.
Before I turn the call over to Joe I, just want to reemphasize, our resolve to move the business forward in these challenging times.
We're committed to investing in our strategies and continuing the progress we've made transforming the business the.
The entire team at nature Sunshine is dedicated to deliver our long term objective to drive growth and profitability in our business.
With that I'd like to turn the call over to Joe will walk you through our first quarter financials and mortgage in more detail and provide more insight into 2022 results Joe.
Thank you Terrance and good afternoon, everyone.
Before getting into specific financial details for the first quarter I also want to share some overall thoughts regarding our expectations for 2022.
For starters over the course of 2021, we were increasingly more excited about the prospects for nature Sunshine.
2022, and more importantly for the long term.
Fourth quarter of 2021 represented the sixth consecutive quarter inch sales growth and for full year 2021, all for business units generated top line growth.
As reported sales were $444 million, reflecting an increase of 15% versus 2020.
We entered 2022 with targeted expectations of continued solid growth supported by a recent success organic growth initiatives and overall market expectations for health and wellness focus categories. Among other factors.
We're also very pleased with the has reported growth and adjusted EBITDA amounting to 49 man for 2021 the.
The increase reflected continuing operating and EBITDA margin improvement first prior years, and a very healthy level of liquidity.
We entered 2022 with expectations of continued EBIT any growth.
Primarily driven by top line growth expectations, we believe the operating in EVGA margins would improve modestly primarily as a result of leveraging SG&A and reduced volume incentive expenses, partially offset by continued investment in long term growth initiatives, including.
TTC marketing distributor advance and market and initiatives related personnel costs among other considerations.
Beginning in the first half of 2021, we recognized a certain level of inflationary and supply chain pressures on our business.
Accordingly, coupled with our sales growth expectations, we consciously invested in and committed to high levels of raw materials and finished goods inventories.
We were not successful.
<unk> desire to access to all key raw materials at year end 2021, but we were confident I continued pursuit of such in 2022 and beyond coupled with a pending price increase what address much of the perceived inflationary and supply chain costs and availability pressures we were anti.
This painting.
For much of the first quarter of 2022, our actual financial results approximated expectations. However.
However is carmel, commonly understood and his cherished discussed a number of advancing conditions occurred and or changed for the worse in the back half of the first quarter.
The events and conditions include among others, the major Russia, Ukraine conflict.
Much more heightened inflationary and supply chain pressures, including double digit cost increases for many raw materials.
Expanded product availability issues and increased transportation distribution and production expenses.
Bandage tobit related lockdowns in certain markets, including China <unk>.
Reduction in disposable income for much of the U S and for certain other markets population.
And a strengthening dollar against many currencies.
As the back half of the first quarter in April played out we are recognizing the impact to our previous expectations for 2022.
Given significant future uncertainty relating to the current conditions future actual results may be different we.
We do not and are not providing formal guidance, but I wanted to share overall directional commentary for 2022.
At this time, given the fluidity of many of these issues I'm not going to provide breakout five business unit.
Current expectations for 2022, which can change.
Include the potential that top line sales could reflect a low to mid single digit decline versus the 2021 sales of $444 million.
In addition to the impact from the Russia, Ukraine conflict, we recognize our results in the U S and other markets are being negative negatively impacted by the heightened inflationary and supply chain issues and.
In addition increased COVID-19 concerns in certain markets, including the Shanghai, China shutdown.
Pricing pressures in foreign currency exchange rates represent risks to as reported sales.
We are experiencing meaningful increase in transportation distribution and production related expenses.
Above and beyond the impact of inventory related charges for the first quarter.
Cost of goods sold rate reflected a full point to point and a half of erosion as.
As compared to prior periods.
Well, we believe this situation will will be corrected long term for 2022, we believe our cost of goods celebrate excluding further inventory related charges related to the Russia, Ukraine conflict may continue to reflect an increase versus 2021.
Based on reduction in sales expectations operating margin improvement from our ability to leverage SG&A may not materialize.
In fact, SG&A as a percentage of net sales may reflect an increase year over year.
However, due to our strong belief in the long term potential and successful nature Sunshine, our investment and growth initiatives will continue.
Given these expectations adjusted EBITDA margin, including the add back of certain inventory related charges may decline to the highest single digit versus 11% of 2021.
We're very excited about and remain committed to the long term top and bottom line growth opportunities for the business. We have an active share repurchase plan in place and we are committed to pursuing opportunities to maximize value for our shareholders.
Now more specifically to the first quarter.
Net sales in the first quarter increased 8% to $110.5 million compared to $102.4 million in the year ago quarter.
It's Terrence mentioned this increase was driven by continued growth across or Asia operating business unit.
Excluding foreign exchange rates net sales increased 10% in the first quarter of 2022.
On an absolute basis net sales in Asia increased 29% to $46.1 million.
Compared to $35.8 million in the prior year quarter.
This resentment misrepresented a 34% increase on a local currency basis. The increase was primarily attributable to strong customer growth in China, Japan, and Taiwan supported by our digital toolset.
Net sales in Europe declined, 2% on an absolute basis to $21.8 million compared to $22.2 million in the year ago quarter.
On a local currency basis net sales were flat.
During the quarter, Poland was our fastest growing European market is there a team focused on field fundamentals and customer growth throughout central and eastern Europe .
His parents mentioned, we were watching the Russia, Ukraine situation very closely.
<expletive> together with Ukraine, and Belarus represented approximately 13% of our consolidated revenues for the quarter.
Sales in this region dropped sharply in March and this trend is expected to continue.
Our partners continue to sell through they're available inventory however, in an obviously challenging environment.
While the situation is very fluid. We currently expect overall Europe sales.
2022 to decline approximately 30% to 40% as compared to 2021.
As of March 31st Eastern Europe , including pollen at net asset net assets of approximately 5 million, which primarily consisted of inventories.
North American sales declined 5% to $36 million compared to $37.8 million in the prior year period.
The decrease is primarily attributed to our inability source key product engaging.
He product ingredients as a result of items supply chain issues over the course of the quarter and an overall reduction in the customer average order size. We believe the reduction is primarily attributable to significant inflationary pressures.
We continue to pursue our alternatives to minimize the ongoing impacts of inflationary and supply chain pressures on the North America business.
Net sales in Latin America, and other decreased 1% to $6 6 million compared to $6 $7 million in the prior year period. This represented a 0.2% decrease on our local currency basis, which is primarily due to fluctuations in foreign currency for the quarter.
Gross margin decreased to 68.8% <unk>.
Compared to 73.7% in the year ago quarter.
Nearly half of the decline stemmed from an estimated three one manned charge primarily related to inventory impairment associated.
With our operations in Russia and Ukraine.
The remainder of the margin decline was driven by changes in inventory valuation reserves in other markets production transportation and distribution cost increases and incremental price related promotions.
Results for our second quarter will assist in determining the full year costs sales right.
The subsequent quarters.
Excluding incremental inventory related charges may reflect an approximate full pint full point increase versus the prior year.
Volume incentives as a percentage of net sales were 30.9% compared to 33.4% in the year ago quarter.
This decrease.
It should attributable to changes in market mix and our growth in China.
Decrease also reflects cost savings from the September 2020 launch, our new consultant sales and compensation plan in North America, and Latin America.
Selling general administrative expenses were $46 million compared to $33.6 million in the year ago quarter.
The increase was primarily attributable to higher service fees associated with strong revenue growth in China investments, we may discordant longterm growth, including costs associated with sales events and direct to consumer marketing expenses.
As a percentage of net sales SG&A expenses were 36.8% in the first quarter of 2022 compared to 32.8% in the year ago quarter.
As noted we intend to continue investment initiatives to drive long term growth.
Reflected over the gross margin pressures and higher SG&A spend operating income was one three man or 1.2% of net sales compared to $7.6 million or 7.5% of net sales in the year ago quarter.
GAAP net income loss attributable to common shareholders for the first quarter was a loss of $3 million or 15 cents per diluted share as compared to income of $4 million or 20 cents per diluted share in the year ago quarter.
The loss is primarily due to a significant valuation adjustment of certain deferred tax asset before.
Collected in the provision for income taxes.
Adjusted EBITDA as defined in our press release as net income loss from continuing operations before income taxes depreciation amortization, another income or loss adjusted to exclude the sheer based compensation and certain noted adjustments was 8.2 men compared to 11.6.
<unk>.
In the first quarter of 2021.
Moving onto our liquidity and capital allocation plan.
Our balance sheet remains claims cash cash equivalents March 31 of $66.5 million.
And I would like to point 1 million of that.
As part of our capital allocation plan, we continue to utilize our share repurchase authorization buying 451000 shares in the first quarter for $8 million or an average of 17 67 per share.
A R 30 million share repurchase program announced in March 2022.
$296 million is available as of March 31st.
Looking beyond share repurchases are capital allocation structure positions as well to continue our marketing and business transformation efforts being implemented.
During the quarter inventory, none of the increase in valuation reserves increased approximately $4 million due to continued proactive purchasing of raw materials in order to stay out of supply chain headwinds and to meet customer demand.
This may not seem to align with our earlier comments about being out of stock in several ingredients. Please note we buy hundreds of other ingredients across our portfolio of products.
Spike near term challenges, we continue to make investments on our business transformation strategy and expect these investments to position us to drive further operational improvements for the business.
Now I will turn time back over to the operator Q&A upper.
Operator.
Thank you.
If you would like to register a question. Please press the one followed by the four and your telephone you will hear a three tone prompt open. Other general question. If your question has been answered and you would like to withdraw your registration. Please press the one followed by the three.
Once again, that's one four Christopher question.
For the first question.
Okay.
We have a question from Linda Bolton Wiser with VA Davidson. Please go ahead lines Oprah.
Yes, Hi, How're you doing.
Hey, Linda How're you doing.
Good good hi, so a lot of moving parts going on in your business right now, but thank you for the directionality on some of the numbers and stuff. That's very helpful. I guess first of all can you explain a little bit about the ingredients.
Situation.
And is it possible like can you give us some idea of like what percentage of your skews are affected or is it something like that and also can you explain like our our product substitution as possible or is it certain excuse are just like totally unavailable and there's no substitution like why is it that there's like wood.
Make such a big impact on sales Wow.
Yeah, I think I'll start with your product substitutes in some instances there are substitutes.
So someone might pick up something you know.
But it really does depend on you know every product doesn't have a direct substitute okay. So let me let me just put it that way.
The products that were particularly impacted in the U S and the first quarter were top selling products. So I'm not sure if I could tell you what percentage of.
The products are are impacted here, but specifically.
It was actually a relatively small number of ingredients and as I mentioned that effective 40 to 50 products and so if you're missing sometimes if we're missing two ingredients.
That may impact quite a few products and those those products may have multiple ingredients in them. So if they are missing one ingredient out of 10, we can't produce it so.
I mentioned that this is not something that is that is regularly happens to us, but but I think the the.
Situation is is intensified in the marketplace, just with respect to some ingredients not being available I.
I think we've.
And how we address the specific issues that I highlighted in my commentary right now, but that does not mean that there won't be other ingredients that don't become available going forward.
Is that helpful.
Yeah, Yeah, I think so yeah.
Yeah.
So let me just switch gears, a little bit then cause it sounds gross mm.
Talk about all the different regions and all the different moving parts I mean, even with terribly strong. It was really good in the corner and then you mentioned the reopening of South Korea with the restriction lifting so that seems like that's going to be a huge positive.
That should be good bands yet.
Yeah. So I'm just trying to figure out like when I was moving pizza.
Do you think as opposed to step back at the region can grow in the year in the full year and is there any way to gauge like talent to tell us like second quarter like like one of the transfer thing now what I mean.
Asking in China like in April I mean is it like down like 50 per cent.
Just what are the trends right now in China.
No I don't mean, China is probably the the most challenging market that we that we see right now because of the the shutdown.
And I'll, let Joe kind of add some some color commentary to that but going back to your original question. Yes, we do believe that each of the strong growth market in 2022.
We have very high expectations for.
For the performance to continue and I would say that China is that one <unk>.
Large uncertainty because the Chinese government hasn't given any direction or guidance in terms of when.
When the shutdowns my you know might.
Six or be east for that matter you already have some additional commentary around that yeah, what I would add Linda.
And please way and if.
We're not fully addressing your question, but just just specific to China and the trends. Okay. We saw even though the Asia business, including China in the first quarter clearly reflected a healthy increase we started to experience some pressures on our China business in the month of March.
Cause of the the code shut down so I'm moving into Q2 trend wise at least for that market he'd probably think more in terms of world China quarter over quarter, maybe in and of itself best case may be closer deflect, but it's all subject to.
The uncertainty surrounding just the extent of this COVID-19 shut down and whether it you know and that includes whether it expands or they they find relief or whatever the other thing I'd point out just in relation to Asia. I mean, yeah, we're pretty excited that there's going to be some relief provided on.
The pandemic front in South Korea, I would think more in terms of you know the upside from that will take a little bit too.
Kick in so it's more of a.
Potential upside on the back half of the year say versus the first half, but we're certainly happy about that situation and it's Tara expansion overall, yeah Asia in another cell subject to especially this what we call the Shanghai China shutdown.
We do believe represents growth in 2022 over 2021.
Okay. Thank you that's very helpful.
Let me.
Ask about what you just said about China Best-case slack.
Mean flat.
Versus the first quarter a year over year, just elaborate what you meant by that.
Yeah, No. That's a good question I was having more specific to a second quarter over second quarter year over year yeah.
The trends you asked events and trends and stuff both measure the trend based on what we saw in March.
Clearly saw some softening as you would expect because ernst pull <expletive> about in Shanghai.
Okay, but but to be honest with you.
Quite frankly, much better than I would think.
So it sounds like they're continuing to somehow sell products and operate.
Even allows yesterday at all or is that the case, yes.
Well again the.
Manufacturing facilities or outside of Shanghai, and we do business all throughout the country. So.
Still opportunities there.
Okay. Thank you that's that's very helpful and then.
I'm, sorry to jump around but there's a bigger picture question about North America, and I mean, you really spoke very positively about D. P. C. And you said now it's like 15% of revenue in the U S. So that's coming along but I Wonder are you absolutely sure that there's no channel conflict developing b.
Hi.
Waiting to weakness.
Now.
I guess in certain areas here I know, it's the shortage of the products situation, but are you absolutely sure that there's no channel conflict developing and developed the D. T C in North America.
I think what we're seeing Linda is.
Two things.
The first is that our DTC efforts as I as I mentioned or reactivating lapsed customers and so at new customer, they're activating new customers and lapsed customers. Those lapsed customers are largely customers of distributors and they get they get paid for that.
So.
Benefits them.
And then as far as the.
The core business, we're not seeing an exit is of of distributors kind of leaving the business.
They continue to orders of order growth continues to be strong. So that's why I emphasize that fact.
The the the core numbers in the core core distributors continue to move forward with our business they've got all those same tools.
Other additional opportunities to drive their businesses as well.
Okay. Thanks.
Thanks, and just one last one for me just when you mentioned about the investing in the various areas of manufacturing I I see the importance of that but that sounds like a capital intensive kind of thing is they're capex gonna gonna pick up here in the next few years I guess for this year I'm expecting that tend to 11 million.
Can you just get some color on that.
Tell you about it.
Well.
It turns for reference star, New EDT of a supply chain and we're obviously excited to see Martin come aboard here in the next couple of weeks, so will be better prepared to speak.
Future plans once you've had a chance to assess situation and spend some time getting directly involved your as far as for 2022.
It's you know our current plans or somewhere in that six 810 man I mean, there are certain things that were strike, we're striving to acquire and purchase but along with the materials. There are certain equipment. It's on back order as well so some of them may spill into 2020.
Free.
To be honest, but you're not.
You're you're you're reasonably close with your plus or minus 10 million dollar figure is.
As far as that goes okay.
Is there a second part of your question that I missed.
We cover no I think.
Got it you got you covered it thank you.
The rest off line. Thank you very much.
Hey, Thanks, Glenda excellent thanks to my questions.
As a reminder to register for a question. Please press one four on your telephone.
[noise] Oh, we do have a question from Steven Martin was Slater. Please go ahead your lines open.
Yeah, Hi, guys.
<unk> I I, well I guess, all good parties have too.
Come to an end at some point.
[laughter], let me ask a couple of questions following up on Windows.
If China is flat in the second quarter.
And.
Taiwan and.
Taiwan and Japan.
Continue to be positive in South Korea, finally returns compositing.
That would imply that Asia.
Good have another good quarter, albeit not as good as it we should have it would've had.
Yeah, I mean <unk>.
One way of looking at it I mean again, we're trying to be a little cautious on the second quarter.
Steve because of all the previous.
Previous pressure noted and so forth.
Yeah, a lot of moving pages are specific to China again, we're sort of taking that one week at a time with this situation, we don't want to be overly optimistic because we're still not sure that.
That should shut down won't expand into other markets.
So and then as they tried to address Linda is inquired us your comment about South Korea, I would think more in terms of the upside for us in 2022 versus 2021 for South Korea, and getting past some of the pan endemic limitations and restrictions as more of a second.
This kind of opportunity stay versus first half.
But.
The business in Taiwan, Japan continues to do well, but as we sit here today.
We're cautious on Asian Asia overall for Q2.
We don't.
Right now we don't expect the same old same level of growth as for Q1 over Q1.
But we do expect growth for the year over the year.
Okay.
Right on North America.
Okay.
You saw you implied or you said that you solved some of the stock out issues.
Are you still out of stock on some products magnitude.
We believe we're slowly but surely getting on top of that situation steeds, but honestly when you.
When you literally as I put an AD my comments buying hundreds of ingredients in a while I can sit here today and say okay. We're in great shape on the vast majority of them and there's just these 25 or 30 that were short on I mean, the way the situations played out in supply chain challenges and so forth and so on it's not to say.
That a new 10 or 15.
We we could have problems with with all.
All of the Ah altogether, new 10, or 15 or 20 over the next two to three months, but obviously, we are actively try and stay on top of that we we like to.
Believe that in large part we've got a healthy amount of stock on hand, but there are there continue to be challenges, but we believe slowly but surely the the impact of those <unk>.
Stocks is declining.
Alright, Okay SG&A for a second.
Recognizing what's going on in the world.
And.
What what's going on with you basically I don't want you I would never suggest that you cut.
Youre short of growth expenses, but what can you guys do to mitigate you've always been such great expense managers in the past what are you. What can you guys do to try to soften the blow.
Versus Q1 for the rest of the year.
Yeah, you know.
Just open up you know, they're they're always being that we're looking at and then we work on we try and be a very tight.
Tight with our expense controls.
But you know kind of.
Structural changes you know.
Don't don't happen quaint as as quickly as you like from one quarter to the next US all all all all going to leave it at that but Joe additional commentary.
I think parents captured and see the menu riot, it's difficult for you to see an inch. Thank you don't have the full breadth of all our financials, but we've obviously given.
Updated thoughts on 2022 sales they've already taken a pretty in depth look at our SG&A build spanned the detail the level of discretion. It comes into play on a lot of that and we've already made certain moves related to.
Expected travel and so forth and so on to to rein that in some way.
But what we're not doing at this point is making.
Or looking at major changes to our overheads structure personnel structure, because we clearly believe in the long term potential for the business and at the end of the day, we don't want to make a bad near term decision.
That clearly courses in the long term so continuing to evaluate it going forward like we can assure you that we're taking a hard look at the SG&A span, especially in some of that discretionary discretionary aspect of it but we believe in the long term health of the business. So.
As we sit here today, yeah, we could see a bit of an increase in essence SG&A as a percent of sales but.
Because of our belief in the long term potential for the business and one of the things I don't want I don't want to do anything in 2022, that's gonna.
Put us out of the game in 23 of 24, if you know what I mean.
That's why I said right upfront I wouldn't expect you to do that okay.
Okay, Yeah, let me train subjects to a mathematics mathematical on the share buyback I'm I was really pleased to see that you bought back 150000 shares.
But I guess my question is if I look at your balance sheet. The shares outstanding only declined to 50 did.
Did you did you issue 200000 shares for stock based compensation.
Well, we didn't necessarily issue 250000 shares in the quarter, but we very well may have had 250000 shares invested during the quarter either because they had met their their time restriction right had passed and maybe two or three years ago. Those there was a grant.
Made that had a two three year vesting period and it got too.
Divesting hurdle in the first quarter. So those become those shares become issued now standing and the other we have a number of as far as.
Shoes or price space stock units and if you had certain price levels those will vest as well become shares outstanding. So I think it's more of the latter what I just said, but it just.
[noise] out issue corner remained shares during the quarter would have been the stock grants you start grass from prior periods invested during the quarter alright.
Alright, well given that you've still got 29 of the 30 million outstanding I would hope, you're giving where the stock isn't given where it may trade in the near term I would hope that you guys continue to be aggressive and we see an actual real decline in the share cat.
Well. Thank you I've noted in my comments are all rush stock repurchase plan is.
Alive and active.
Alright. Thank.
Thank you very much I'll leave it to someone else.
Thanks, Dave.
And this concludes our Q&A session I would now like to turn the call back to Mister Morehead for closing remarks.
Okay. Thank you well I would like to thank everyone for listening to today's call and we look forward to speaking with you. When we report our second quarter of 2022 result in August again, thanks for joining us take care. Thank you.
That concludes today's conference you may disconnect. Your lines. Thank you for your participation.
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