Q3 2022 Natures Sunshine Products Inc Earnings Call
Yeah.
Please standby.
Good afternoon, everyone and thank you for participating in today's conference call to discuss Nature's Sunshine Financial result for the third quarter ended September 30th 2022.
Joining us today, our nature's Sunshine CEO parents, Moorhead executive Vice President of global supply chain Martine Gonzales.
Interim CFO , John Benoit and General Counsel Nate Brower.
Following their remarks, well 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 company's safe Harbor statement within the meaning of the private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward looking statements may. Please go ahead.
Yes, Thank you Sarah.
Good afternoon, and thanks for joining our conference call to discuss our third quarter 2022 financial results.
I'd like to remind everyone that this call is available for replay via telephone dial in through November 17th.
N V. A live webcast that will be posted in the investor relations portion of our website.
And I, our nature's Sunshine Dot com.
The information on this call contains forward looking statements.
Those are statements are often characterized by terminology such as believe hope may anticipate.
Expect 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 herein.
Include but are not limited to those factors disclosed in the Companys 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 would like to turn the call over to the CEO of Nature's Sunshine Terrence Moorehead tariff.
Thank you Nate and good afternoon, everyone I want to thank you for joining today's call to review our third quarter results.
The resilience of our portfolio was on display in the third quarter, where despite unprecedented external headwinds, we delivered third quarter sales of $105 million on a reported basis or $112 million when removing the impact of foreign exchange.
To put these results in perspective, our third quarter sales were only down 2% versus prior year on a constant dollar basis and year to date year to date sales were actually up 3% in local currency.
Both measures reflect the underlying strength of our business, especially given the current environment, where it has become more difficult to drive customer engagement.
What's more.
Due to inflationary pressures and volatile foreign exchange rates everything has become more expensive.
As a result third quarter gross margins contracted as inflation and foreign exchange negatively impacted cost of goods by approximately $3 million or roughly 300 basis points versus Q3 of the prior year.
Sales declines driven by foreign exchange also negative negatively impacted profitability by an additional $3 million, which contributed to adjusted EBITDA of $6 8 million for the third quarter versus $12 9 million in Q3 of the prior year.
As I shared last quarter, we are committed to meeting these challenges head on and now have a detailed plan to deliver $10 million to $12 million of gross of gross savings to help improve profitability.
I've invited our news.
Supply chain lead Martina Martin Gonzalez to join US today. So he can briefly walk you through our plans, but first I want to share a few more comments about the quarter to help provide some perspective.
Despite the challenges from the external headwinds, we continue to gain traction from three key strategic investments.
First our investment in field activation continues to gain traction in markets like Taiwan, Japan, and South Korea.
Where sales increased 97%, 22% and 8% respectively on a local currency basis.
While I believe while we believe the underlying fundamentals of our business in China remained strong.
<unk> struggled in the third quarter down, 31% driven by deteriorating macroeconomic conditions and the hangover effects from China's zero Covid policy.
Once the external headwinds abate, we hope to see a return to growth.
Overall Asia Pacific led the company's third quarter results, delivering 12% sales growth in local currency and 21% sales growth year to date.
Second our investment in digital activation continues to gain traction in North America as digital sales increased 22% in the third quarter.
We've continued to invest in digital and as a result, we've been able to attract new customers double the effectiveness of our CRM campaigns and our subscribing drive auto ship program now represents about 27% of sales.
Solid gains from digital were more than offset by average order declines from existing customers, who continue to order nature Sunshine products, but are purchasing about one less unit per order on average.
This is consistent with the broader market trend, where we see consumers offsetting inflationary pressures by purchasing smaller quantities delaying purchases are trading down to cheaper brands overall, North America sales were down 16% in the third quarter.
Finally, our investment in customer growth has helped us gain some early traction in both central and Eastern Europe , and Latin America, and central and Eastern Europe initiatives in Poland, Turkey, and several Baltic States helped partially offset the gap created by the war in Ukraine.
We are still preparing for the relaunch of the business.
In Western Europe , where economic challenges have customers buying and spending less negatively impacting orders and average order size.
Overall, europes third quarter sales were better than expected as we grew 13% on a sequential basis.
Versus the second quarter and were only down 6% versus prior year in constant dollars.
This is a tremendous result, and speaks to the skill determination and resilience of our regional leadership teams.
In Latin America customer growth initiatives helped attract more new customers in the last two months of the of the third quarter than in the first and second quarters combined.
The positive momentum was offset by a decrease in orders from existing customers impacted by the depressed economy. So Latam is third quarter sales were down 14% in local currency.
We're still on the front end of our transformation and are pleased with the progress our new leadership team has made recruiting new talent and creating a roadmap for the future.
Importantly, we're not sitting idly waiting for the effects of the global headwinds to pass we're fighting back by continuing to invest in our growth strategies and by launching a comprehensive initiative to optimize gross margins and reduce SG&A.
As I mentioned earlier.
We've identified a series of initiatives to drive out cost and improve productivity over the next 18 months.
With that in mind I'd like to invite our new head of supply chain, but in Gonzales to update you on our plans related to gross margin.
Dean.
Good afternoon, everyone.
It's good to be here with all of you.
As you May know I joined Nature's Sunshine, a little over five months ago as the executive Vice President for global supply chain.
And since joining the company I've been working in partnership with our finance sales marketing R&D and supply chain team to identify opportunities to optimize our gross margins and offset increased costs driven by inflation.
Working together over the past few months. The team has identified three key initiatives that will deliver significant savings.
And will allow us to make meaningful progress against our gross margin targets.
The initiatives will be launched over the next 12 to 18 months and we will deliver approximately $10 million of gross savings.
I would like to briefly give you a sense of the.
The initiatives we're working on.
Our first initiative involves a deep dive review of our ingredients packaging and formulations.
Raw materials represent a significant portion of our cost of goods. So they are an important area to explore.
We believe there are significant savings from optimizing the materials using our products.
And we are aggressively looking for opportunities to drive out costs, while maintaining quality and performance.
Using one of our top products as an example, we found that by optimizing the ingredients, we could improve the flavor produce sugar improve the fiber content.
And increase the gross margin profile by half a million dollars per year.
That's just one example, but there are many products in our portfolio that will help us to deliver the efficiencies we're looking to achieve.
Our second initiative focuses on improving efficiencies and driving waste out of our manufacturing processes.
Our small batch manufacturing capabilities gives us real advantage when it comes to product quality and performance.
They can also add complexity to the process when run times are negatively impacted by unnecessary changeovers.
For the past few months, we have been analyzing how we can more effectively optimize our production schedules.
Prioritizing production runs improving preventative maintenance and reducing change over time.
This initiative will allow us to increase uptime improved yields and deliver significant savings.
Our third initiative focuses on logistics and transportation, where we're working to improve truck utilization increased pallet density in the warehouse and reduce the amount of air freight.
We believe these offers significant potential to drive savings.
Again, we expect these initiatives to improve our gross profit by approximately $10 million or 200 to 250 basis points of gross margin.
Now I will turn the call back over to Terrence Terence Thank you Martijn.
We expect these savings to start impacting results in late 2023 to 2024. The project teams are already up and running and making progress.
This initiative is an important part of our comprehensive approach to improve gross margin and we are committed to delivering the initiatives that Martin outlines.
I want to reiterate our steadfast commitment to successfully navigating this unique period of market volatility and uncertainty I don't want to leave you with three key takeaways first the persistent challenges posed by inflation foreign exchange and Covid related disruptions were the primary factors negatively impacting our pro.
<unk> second despite the challenging environment Nature's Sunshine continues to be healthy and the underlying fundamentals of the business are sound. We have a strong balance sheet customer orders are still largely holding and when we adjust for currency performance is still near historic.
Tickle highs.
Third we continue to see positive results from our targeted investments that we've made so we're going to lean into the investments. We believe will drive growth going forward and finally, we are fighting back against the challenges of the current macroeconomic landscape by introducing a comprehensive initiative that.
It will deliver gross savings of $10 million to $12 million from the gross margin initiatives Martine reviewed and SG&A reductions from across the business.
In challenging times like these it's more important than ever to stay focused and drive our strategy forward and that's exactly what we're going to do.
Backed by our strong balance sheet and our team of experts around the globe, we remain confident in our ability to provide long term value to our stakeholders.
Before passing the call over to John .
I'd like to recognize our outgoing CFO Joe Baty on.
On behalf of the board and all of our employees here at nature Sunshine I want to thank Joe for his valuable contributions.
<unk> played a key role in developing a strong finance team and driving improvements that have put nature Sunshine and are positioned to win them.
I am deeply appreciative of Joes service and leadership and wish him all the best.
With that I'd like to turn the call over to John , Illinois, Our interim CFO , who will walk you through our financials in more detail John .
Thank you Terrence and good afternoon, everyone net sales in the third quarter were $104 5 million compared to $114 7 million a year ago. This 9% decline was largely driven by declines in North America, and Europe as Terrence mentioned, excluding the impact from foreign exchange rates.
Consolidated constant currency net sales decreased only 2% in the third quarter.
Gross margin in the third quarter was 71, 6% compared to 74, 4% a year ago. The decline was primarily driven by inflationary pressures on our cost of goods sold related to increases in materials.
<unk> and transportation costs as well as the adverse movements in foreign exchange rates.
Third quarter volume incentives as a percentage of net sales were 31, 6% compared to 31, 2% in the prior year quarter.
The slight increase was due to changes in market mix.
Selling general and administrative expenses during the third quarter were reduced to $36 8 million compared to $39 5 million a year ago.
The reduction was from lower services in China.
Lower overall compensation cost.
Partially offset by increases from a return to in person events promotion related activities and investments in our digital initiatives.
As a percentage of net sales SG&A expenses were 35, 2% for the third quarter of 2022 compared to 34, 4% a year ago.
Reflective of gross margin pressures operating income was $5 million or four 8% of net sales compared to $10 million or eight 7% of net sales in the prior year.
GAAP net income attributable to common shareholders for the third quarter was <unk> $1 million or breakeven per diluted share as compared to $4 9 million or <unk> 24 per diluted share a year ago.
In addition to reduced operating margins. The decline also reflects increases of $1 1 million in valuation allowances against deferred tax assets for which we do not expect to receive a benefit excluding these allowances our tax rate would have been 52, 7% for the third quarter.
Adjusted EBITDA as defined in our press release was $6 8 million compared to $12 9 million in the third quarter of 2021.
Compared to 2021 with the current growth in Japan, Korea, and Taiwan offset by declines in China due to the current COVID-19 restrictions.
The challenges presented by inflation and foreign currency volatility are expected to persist and as a result, we expect to continue to have continued pressures on our gross margins.
While our team have shared several initiatives we are actively pursuing to improve gross margins I would remind you that the impact of these actions will not be reflected in our results until late 2023 and into 2024 as these changes cycled through our inventory.
Due to our strong belief in the long term potential in successive nature Sunshine our investment in growth directed initiatives will continue.
As a result, while we worked to optimize our SG&A spend to support our investments we expect SG&A as a percentage of net sales to continue to increase.
We currently expect our adjusted EBITDA margin, including the add back for certain war related working capital charges may declined 3% to five full percentage points from the 11% we reported last year.
Despite market headwinds most of which remain out of our control. We're very excited about and remain committed to the long term growth opportunities for the business and we are committed to pursuing opportunities to maximize value for our shareholders and with that I'll turn it back over to the operator Sir.
Yeah.
Thank you.
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Yes.
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Okay.
And we will take our first question from Steven Martin with Slater.
Yes.
Hi, guys.
Thanks, Steve.
I've asked you for the last two quarters.
Why you Werent looking to save some costs and reduce some expenses now you announce youre going to do it but it's not going to be effective Toby end of 'twenty three.
I'm not quite sure I understood.
And second of all.
I don't understand with sales declining your inventory went down a little but why are you sitting on so much inventory and why not generate some cash and buy back more shares buying back 90000 shares as a joke.
Yes.
So with respect to your first question on SG&A savings in the gross margin savings.
I actually do have again this is a comprehensive plan. It's a it's a I think it's a pretty striking plan. We've been working on this for as Martin pointed out for several months. There's a lot of complexity involved we will have some savings rolling off the assembly line, Steve in advance of.
Kind of a timing that we told you. It's just that the bulk of it needs to go through cost of goods. So there is an inventory turn kind of issue there that we need to.
There is some complexity involved in your marketing talked for example, about having to reformulate the product that's formulation thats labels. That's approvals then you get it into inventory and it goes through so these are meaningful savings I think they are quite impactful.
And there are sustainable as well, so and we feel really good about them. We do have a range of SG&A savings is as well that will be coming through but again the lion's share of the opportunity is from driving our gross margin and we're just getting started here right. So this is an ongoing project.
I feel very good about it I think it's a strong strong effort and I want you to remember we've already taken out some $26 million of savings over the past couple of years, So where we're adding on top of that with our SG&A and then the gross margin savings on top of that.
You are quite substantial.
As it relates to second question, John do you want to take a stab at that Steve Yes, we do have quite a bit of inventory on hand, and we're aware of that.
Going into the beginning of last year I mean, we were in a different place where we had.
Higher expectations of growth before the war and everything out there and we.
We're buying inventory ahead of inflation.
To make.
Make sure we had enough to support our growth in Manhattan, Brooklyn, It come at the levels. We expected we already had commitments there and so we're working through those commitments, we've canceled orders were buying raw materials where needed targeted.
And we're continuing to work down the inventory.
I hope I answered your question.
Well then the corollary to that is with your stock at $8.
Why do you do when we buy back 90000 shares.
We do have volume constraints. So we did buy with volume where also we have prioritized.
The investments that we've talked about there are some investments that are required in order to.
To drive out some of the costs from from gross margin.
So we think those are actually very good very strong priorities for us right now given where given where we are.
A lot more it's a lot harder and more expensive for us to reacquire, new or acquire new customers than it is to try and keep our existing customers. So that's really where our kind of our focus is right now and then on driving out some of these costs and we do have pretty big pretty sizable needs.
In terms of some of the things to upgrade equipment and upgrade our facilities and that's just kind of coming online right now in terms of the investments.
Well speaking is one of your shareholders.
Heard those words before I, just assume you spend some money buying back some stock instead of sitting with $60 million on your balance sheet.
Yes, Jeff we appreciate the.
Sentiment.
Alright.
I'll talk to you offline on next week.
Thanks, Steve.
Okay.
And at this time that does conclude our question and answer session I would like to turn the conference back over to Mr. Moorehead for closing remarks.
Okay. Thank you well, we'd like to thank everyone for listening to today's call and we look forward to speaking with you. When we report our fourth quarter and full year 2022 results in March of 2023, Thanks again for joining us take care.
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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