Nature's Sunshine Products Inc. Q1 2023 Earnings Call
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Good afternoon, everyone and thank you for participating todays conference call to discuss the nature Sunshine and financial results for the first quarter ended March 31 2023.
Joining us today are nature Sunshine CEO Terrence moorehead.
F O Shane Jones.
My General Counsel a power.
Following their remarks, well open up the call for analyst questions.
Before we go further I'd like to turn the call over to Mr. Brower at.
As he reads the company's safe Harbor statement within the meaning of the private Securities Litigation Reform Act of 1995.
Provides important cautions regarding forward looking statements.
Nate Please go ahead.
Thank you.
Good afternoon, and thanks for joining our conference call to discuss our first quarter 2023 financial results I'd like to remind everyone that this call is available for replay via telephonic Dylans through may 23rd via a live webcast that will be posted in the investor relations portion of our website.
At IR Nature's Sunshine Dot com.
The information on this call contains forward looking statements. These statements are often characterized by terminology such as believe hope may anticipate expect will and other similar expressions.
Looking statements are not guarantees of future performance.
And the actual results may be materially different from the results implied by forward looking statements.
That could cause results to differ materially from those implied herein 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 would like to turn the call over to the CEO of Nature's Sunshine Terrence Moorehead, Terence. Thank you Nate and good afternoon, everyone I want to thank you for taking time to join today's call to discuss our first quarter results today I'll provide some context for our first quarter performance and offer some insights on how we believe the business is progressing.
Shane will then walk you through the specifics of our financials in more detail we.
We started the year on a strong note with reported first quarter net sales of $109 million or $113 million when excluding the impact of foreign exchange, which is a two 4% increase versus prior year.
Adjusted net adjusted EBITDA was up 12% coming in at $9 1 million.
Overall, we're pleased with the momentum we're seeing.
We're seeing as markets like Japan, and Taiwan continued to deliver strong double digit growth while most of our other markets delivered solid sequential improvements to the topline with meaningful progress some signs of stabilization in central and eastern Europe and digital initiatives starting to take hold in North America.
We continue to operate in an extremely challenging external environment, but the underlying fundamentals and strength of our business remain firmly intact and the steps we've taken to create a more consumer focused business continued to help us build momentum in the quarter.
In Asia Pacific, We continued to deliver strong results with first quarter sales up 9% on a constant currency basis, driven by 58% growth in Taiwan, and 21% growth in Japan on a local currency basis.
Our investment in field activation helped US helped drive orders stimulate new customer acquisition, and offset lower sales in Korea and China.
Remember, both Korea, and China are still dealing with the residual effects of COVID-19 restrictions and market closures that prevented them from conducting normal business activities.
They have only recently been able to focus on restoring customer growth. After the restrictions were lifted in late 2022.
We're seeing encouraging signs as sales momentum continued to build each month in China as the country reopens.
We are hopeful this trend continues and are focused on restoring growth in 2023.
I believe it's worth noting that despite the challenges in Korea in China Asia Pacific was still able to deliver a strong quarter due to the strength and diversity of our portfolio and moving forward. We believe our continued focus on targeted new product introductions next generation <unk>.
<unk> and sustained investment in field activation will allow us to continue to drive profitable growth in the region.
In Europe sales were flat.
0.3% versus prior year on a local currency basis.
We continue to see signs of stabilization in central and Eastern Europe . Both in terms of how people are reconfiguring their lives and our ability to adapt to the changing situation on the ground.
Our team has done an outstanding job driving orders and attracting new customers. Despite the challenging environment.
As we move through 2023, we believe continued stability in central and Eastern Europe combined with strong execution of our field fundamentals will create opportunities for us to deliver modest growth in the region.
In North America fourth quarter sales were relatively flat down 3% versus prior year, primarily driven by a decline in average order size.
<unk> continued to offset inflationary pressures by purchasing smaller quantities delaying purchases or trading down to cheaper brands.
Our digital initiatives helped offset the negative sales impact from average order declines delivering positive momentum from a 19% increase in new customer acquisition that led to strong growth in digital orders.
What's more our subscribing thrive auto ship program represented about 26% of sales and continued to support repeat purchases.
As we move forward. We believe there is an opportunity to stabilize the north American business in the latter half of 2023 by expanding our digital footprint and increasing the number of nutrition health practitioners recommending our products, thus extending our leadership position as the number one nutritional health practitioner brand.
We also continued to make progress on our margin enhancing and cost savings initiatives and have moved into the execution phase of the plan.
As a reminder.
The structural changes, we're making to our product line and supply chain will provide significant improvements to gross margin, but many of the initiatives involve redesigning processes and revamping sourcing relationships and this takes time.
In the meantime, we're implementing strategic price increases in Asia Pacific Europe , Latam and North America to help offset the impact of inflationary headwinds and improve profitability.
Before I close I'd like to briefly share some thoughts about our ESG program, where we recently released our second annual ESG report, which can be downloaded on the ESG section of our IR website.
This year's report shows that the implementation of our ESG strategies, along with the commitment of our employees who are striving for excellence is allowing the sustainability and transparency mindset to permeate every aspect of our business for.
For example in 2022 natures Sunshine achieved measurable progress on our top five sustainability goals, including <unk>.
Moving to 100% solar power at our U S manufacturing facility, reducing greenhouse gas emissions by about 35%.
Expanding recycling efforts at three of our U S based distribution centers, reducing waste to landfill by almost 30%.
Third moving to more sustainable packaging by increasing the use of post consumer recycled plastics to nearly 40%.
Fourth conducting our second annual greenhouse gas inventory to better understand emissions impact and finally fifth optimizing and reducing shipments both internationally and domestically to further decrease emissions.
As we continue to apply sustainable sustainable practices and processes and our sourcing manufacturing and supply chain I am confident we will have more progress to share.
In closing the strategies that transformed our business have created a strong foundation for growth and continue to support our progress during the fourth or first quarter.
Our brand power initiatives are delivering more powerful new products more relevant messaging and fueling more meaningful customer growth.
Our field energy initiatives are attracting a new younger generation of digitally enabled distributors retailers and nutrition health practitioners.
And our digital first initiatives are building, new customer acquisition and retention capabilities that will serve us for years to come in.
In short we continue to focus on improving consumer appeal, leveraging core capabilities building competitive advantage and improving productivity to drive revenue and profitability.
We're pleased with the progress, we're making and the opportunities that lie ahead.
Our growth strategies continue to gain traction and I want to reiterate our passion dedication and unwavering commitment to successfully navigating this unique period of market uncertainty.
We remain focused on restoring growth and delivering low to mid single digit revenue growth for the year.
With that I'd like to turn the call over to our Chief Financial Officer, Shane Jones, Shane. Thank you Jess it's great to be here, let's jump right into results net net sales in the first quarter were $108 6 million compared to $110 5 million in the year ago quarter.
This one 7% decline was largely driven by reduced sales in China and North America.
As Terrence mentioned, excluding the $4 $6 million unfavorable impact from foreign exchange rates consolidated net sales increased two 4% in the first quarter versus last year.
Gross margin in the first quarter was 78% compared to 68, 8% a year ago. The increase was driven by prior year inventory evaluation reserves taken as a result of the conflict between Russia, and Ukraine offset by cost increases related to inflation and unfavorable FX.
We estimate the combination of FX and inflation decreased gross margin by nearly 100 basis points year over year in the quarter.
Volume incentives as a percentage of net sales was 35% compared to 39% in the year ago quarter.
The decrease is primarily due to changes in market mix.
Selling general and administrative expenses during the first quarter were $43 $6 million, including.
Including onetime charges of $4 $8 million related to a criminal criminal social engineering scheme directed at one of our wholly owned subsidiaries and $1 million in professional fees related to the external investigation of that scheme.
Offset by a zero point $7 million reduction related to a China VAT refund <unk>.
Excluding these onetime charges SG&A expenses during Q1 were $38 5 million <unk>.
Compared to $46 million in the year ago quarter.
This decrease was driven by lower service fees as a result of the decline in China's net sales.
The timing of the dense and expenses of approximately $1 $3 million that were delayed to the second quarter.
As a percentage of net sales SG&A, excluding the onetime charges was 35, 5% for the first quarter of 2023 compared to 36, 8% in a year ago quarter.
Reflective of the impact of the one time charges operating income was zero point $2 million or 0.2% of net sales.
Third to $1 $3 million or one 2% of net sales in prior year.
GAAP net income attributable to common shareholders for the first quarter with zero point $9 million or <unk> <unk> per diluted share as compared to a loss of $3 million or <unk> 15 per diluted share in the year ago quarter.
Higher GAAP net income is mostly driven by a valuation adjustment of certain deferred tax assets that occurred in our first quarter last year.
Adjusted EBITDA as defined in our earnings release was $9 1 million compared to $8 2 million in the first quarter of 2022, the increase was driven by $1 $3 million of timing related to SG&A expenses.
Our balance sheet remains clean with cash and cash equivalents, increasing to $66 million and only $1 million of debt.
Inventory declined slightly in Q1 compared to where we ended Q4.
As part of our capital allocation plan, we continued to utilize our share repurchase authorization.
By 90000 shares in the first quarter for zero point $8 million or an average of $9 16 per share.
As of March 31, 2023, $23 $2 million remains of our $30 million share repurchase program.
Looking beyond share repurchases are healthy capital allocation structure positions us well to continue our digital transformation and other strategic investments.
Now turning to our outlook.
During Q1, we experienced sequential improvements across most of our markets and continue to expect to report sales growth for the full year in the low to mid single digit range.
As it relates to our second quarter. Please note that we expect to ramp up expenses associated with our digital growth and other strategic initiatives.
In addition, as previously mentioned the timing of some events in Asia and North America have moved from Q1 into Q2.
Therefore, we expect our SG&A in Q2 to be elevated versus Q1 and prior year.
While these investments will result in a sequential decline in our adjusted EBITDA in Q2, we believe they are necessary to fuel our high value growth initiatives.
And accelerate sales into the second half of this year and beyond.
With respect to gross margins in the near term, we expect our supply chain initiatives and targeted price increases to be offset by continued inflation and foreign exchange headwinds. Therefore, Q2 gross margins are likely to be close to what we saw in Q1 with modest improvement in the second half of the year and meaningful improved.
<unk> in 2024.
Overall, we're very excited about the long term growth opportunities for the business and we remain committed to driving improved efficiency and profitability and are working to pursue opportunities to maximize shareholder value now.
Now I will turn the time back to the operator.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session.
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One moment. Please for your first question.
Your first question comes from Linda Bolton Weiser from Davidson. Please go ahead.
Yes, Hello, how are you.
Linda How're you doing.
Good good.
So congratulations on a quarter that exceeded our expectations.
Yes, I guess.
I had a question on.
Does your.
SG&A, thanks for all that detail regarding that so.
Hi.
<unk> spending.
Kind of coming to an end can you just be a little more specific about that like can you clarify like.
Like what what quarter or you think that will kind of taper off.
Can you give a little bit more specifics around that.
Yes, I think.
Our investment is not coming to an end we are actually ramping it up and so we pushed some things.
Out of the first quarter and into Q1, so it will be accelerating our investment in Av.
Our digital initiatives and then some other kind of field activation and <unk> initiatives and she can give you some more color commentary around that let me turn it over to Shane.
Yes. So I think we mentioned there were some timing of some about $1 $3 million.
<unk> and other expenses that were pushed from Q1 to Q2. So that's $1 3 million and then in addition to that there is there will be some additional expenses primarily for our digital initiatives, but also for some other field activation.
And that.
That amount will be.
In the range of 1 million to $1 million.
For the quarter, yes.
So we're really again, just trying to invest in making certain that we have strong momentum going into the back half of the year and then into 2020 for really driving some new customer growth initiatives that should help us on an ongoing basis, so that helped clear things up.
Yes, Thank you sorry, if I misunderstood so.
Does that mean.
You said it was up.
Sequentially and year over year.
Percentage of revenue do you think.
Yes.
Okay.
Okay got it.
Joe.
All of these things that youre doing the structural changes to your product line and supply chain and all that work.
What does this mean for your innovation process, because I know in the past you've had a pretty good flow of new products.
That you are bringing to market.
Or do you still keep up with innovation, while youre, making these other changes.
Yeah, our innovation.
We've changed Youll remember a couple of quarters ago, I started talking about our master branding strategy and putting more firepower behind some kind of.
Fewer number of kind of large and robust brands. So that's some of what youre going to see in the back half of the year and investment in kind of some really foundational products for us coming online and then our investment in those brands to really support them and so we don't want to have a kind of a launch and abandon strategy or just start dropping.
Other products into what is already a large product line, we really want to focus on having some some very meaningful and impactful products going into the line in 2023, and then again in 2024. So the pipeline should should continue to be to be solid, but again focusing on what I.
Would consider to be maybe.
Larger more impactful products that will continue to invest on us as a foundational principle going forward.
Okay.
No I was just curious about North America and your commentary was very similar to what it has been in terms of.
Lower average order values and things like that is there any.
Changes that you can comment, though I mean, I think it's real.
Really the same or do you think things are getting a little better a little worse is there any more color you can give on that market.
Yes, I think I think things are definitely getting better we see our our legacy business is.
I think it continues to age, but we are bringing in new younger customers.
To a much larger extent largely through our digital initiatives and through our affiliate initiatives that are that are really just starting to build momentum. So I think youre just youre seeing a lot more.
Activation on that digital side of the business.
And on the affiliate side of the business and we are quite.
I think.
Quite optimistic about the road that lies ahead there.
Okay.
And then just in terms of Asia.
Again, you've had a couple of markets that are really growing quite well.
Is the issue in Korea, I mean is it similar to this the COVID-19 situation and Lockdowns and things just kind of becoming more normalized.
Or are there other things that you think needs to be done to kind of get the Korean market back to growth phase.
I think right now the issue there is they were closed down for two years essentially.
Yeah.
<unk>.
<unk> installed base of customers and their ability to attract new customers over that period.
Diluted some of their effectiveness. So what you saw in the back end of 2022 was us selling probably more product to the same people as opposed to really driving.
Significant levels of new customer growth and so going forward I think the challenge for them is going to be getting back to that new customer acquisition and customer growth that they were so good at for so for so long.
They really are just coming out of <unk>.
Seclusion and it's starting to get their legs underneath them. So the team has.
Pretty significant field activation investments that they're putting in place.
They have historically had very good field fundamentals again during the during the closures.
Those fundamentals, we're stunted but.
But they've built some new digital capabilities. They are using a new digital tool kit we're.
We're going to be launching some some new.
On the website for them that can actually represent our new global digital platform there'll be testing it out first actually in Korea.
So.
I think the runway for the market is still good.
It's just going to take them some time to get their legs back underneath them.
Yes.
Okay.
Hum.
I think I heard you said you did do some share repurchases in the quarter does that signal that you are expecting positive free cash flow.
In the year.
Yes, absolutely yes.
Okay.
That's good and then.
Can you just clarify your guidance for low to mid single digit revenue growth excluding currency effects right.
That's correct.
Okay.
Okay. That's all for me. Thank you very much and good luck with everything.
Thank you that's great. Thank you Linda.
Yeah.
Ladies and gentlemen, as a reminder, should you have any questions. Please press the star key followed by the number one.
I will pause a moment.
Yes.
There are no further questions at this time. Please proceed.
Okay well.
Thank you and we'd like to thank to thank everybody for listening to today's call and we look forward to speaking with you. When we report our second quarter 2023 results in August of this year. Thanks again for joining us and again, we look forward, it's given pretty soon take care.
Ladies and gentlemen, this concludes your conference call for today.
We thank you for participating and ask that you. Please disconnect your lines.