Q3 2024 Nature's Sunshine Products Inc Earnings Call
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Speaker Change: 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 30, 'twenty 'twenty for joining.
Speaker Change: Joining us today, our nature's Sunshine CEO, Karen warhead P. S O Shane Jones, and General Counsel Nate Brower.
Speaker Change: Following their remarks, we'll open the call for analyst questions.
Speaker Change: 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.
Mr. Brower: Please go ahead.
Mr. Brower: Thank you.
Speaker Change: Good afternoon, and thanks for joining our conference call to discuss our third quarter 2024 financial results.
Speaker Change: I'd like to remind everyone that this call is available for replay via telephonic dialing through November 21st N V. A live webcast that will be posted in the Investor relations portion of our website at IR Dot Nature's Sunshine Dotcom.
Speaker Change: The information on this call contains forward looking statements.
Speaker Change: These statements are often characterized by terminology such as believe hope may anticipate expect will and other similar expressions.
Speaker Change: Forward looking statements are not guarantees of future performance.
Speaker Change: And the actual results may be materially different from the results implied by forward looking statements.
Speaker Change: Factors that could cause results to differ materially from those implied there in <unk>.
Speaker Change: Include but are not limited to.
Speaker Change: Those factors disclosed in the company's annual report on Form 10-K under.
Speaker Change: Under the caption risk factors.
Speaker Change: And other reports filed with the Securities and Exchange Commission.
Speaker Change: The information on this call speaks only as of today's date.
Speaker Change: And the company disclaims any duty to update the information provided here in.
Speaker Change: Now I would like to turn the call over to the CEO of Nature's Sunshine Terrence Moorehead Terence.
Terrence Moorehead: Thank you Nate and good afternoon, everyone.
Terrence Moorehead: I want to thank you for joining today's call to discuss our third quarter results.
Terrence Moorehead: During the third quarter, we continued to make good progress executing our global growth strategies.
And the investments that we've made to expand our digital capabilities improve our consumer proposition strain.
Terrence Moorehead: Strengthen our brand presence and drive out cost.
Terrence Moorehead: All combined to help drive performance in the third quarter.
Terrence Moorehead: While each of the initiatives is at a different stage of execution.
Terrence Moorehead: Excited about the actions we've taken to advance our strategic agenda and remain confident that our omni channel approach will allow us to attract and retain more customers drive profitable growth and build shareholder value.
Terrence Moorehead: Our plans are clearly benefiting the business is there is the third quarter delivered the highest sales volume this year with $114 $6 million of sales up 4% versus prior year on a local currency basis.
Terrence Moorehead: The strong third quarter results were driven by a positive consumer response.
Terrence Moorehead: Our global growth strategies.
Terrence Moorehead: And.
And the actions we've taken to amplify our strategies in the second quarter.
Terrence Moorehead: As you May remember in the second quarter, we upgraded our digital platform in North America.
Terrence Moorehead: Made the strategic move to rebalance our portfolio in key markets in Asia Pacific.
And implemented incremental cost savings initiatives to improve productivity.
Terrence Moorehead: With respect to our first strategic action, we were excited to upgrade North America's digital platform with new technology and improved mobile first capabilities.
Terrence Moorehead: The changes helped improve site load speeds conversion rates and stability.
Terrence Moorehead: While creating a pathway for continued improvements in the future.
Terrence Moorehead: We believe these improvements will continue to support meaningful growth and in the third quarter digital sales grew 17% in North America as we continued to see a positive consumer response to the brand.
Terrence Moorehead: Moving forward, we will continue to invest in our digital capabilities by improving and expanding the tools that are available to our nutritional health practitioners and specialty retailers.
Terrence Moorehead: Over time.
Terrence Moorehead: We believe the changes will help improve the performance of distributor distributors looking for a stronger more modern platform, which is an exciting opportunity.
Overall, North America sales were down about 3%, which is a slight improvement on a consecutive basis versus the second quarter.
Terrence Moorehead: Longer term, we expect to see positive momentum from the North American business as our omni channel approach continues to build momentum.
Terrence Moorehead: And as we invest in more powerful tools for our nutritional health practitioners and specialty retailers.
Terrence Moorehead: Regarding our second strategic action, we placed greater emphasis on introducing more consumer friendly products packs in markets like South Korea, Taiwan and Japan.
Terrence Moorehead: We also invested in field activation to support these programs and generate incremental field activity.
Speaker Change: The strategy paid strong dividends in the third quarter as customer and order growth surged, leading to significant sales increases in Korea, Taiwan and Japan.
Speaker Change: <unk>, 3%, 20% and 34% respectively.
Speaker Change: China is a different story.
Speaker Change: Our research suggests that consumers continue to have April but favorable attitudes towards supplements.
Speaker Change: The sharp downturn in the macroeconomic environment is negatively affected their willingness to spend leading to more cautious purchase behavior.
Speaker Change: As a result.
Speaker Change: Third quarter sales decreased 23% versus prior year in local currency.
Speaker Change: We continue to believe that digital live streaming is a powerful tool with significant upside potential and our long term goal is to expand our digital live streaming platform to allow us to attract and retain more new customers by first strengthening our product line to offer more consumer friendly.
Speaker Change: <unk> solutions.
Speaker Change: Upgrading our branding and packaging to align with consumer preferences and third introducing a localized version of our successful subscribing thrive auto ship program to encourage and reward repeat purchases.
Speaker Change: Overall, we're pleased with the consumers' response to our growth strategies as third quarter sales in Asia Pacific increased 9% versus prior year on a local currency basis.
Speaker Change: Our plans to improve performance by building a more attractive consumer friendly pump his proposition appear to be working and.
Speaker Change: And we believe our results are illustrative of the long term potential these markets represent.
Our third strategic action focused on delivering $5 million of annualized cost savings that allowed us to continue to fund strategic investments, while contributing to improved profitability.
Speaker Change: For the quarter adjusted EBITDA was strong coming in at $10 $7 million, which was a 5% increase versus prior year.
Speaker Change: In closing, we're very pleased with the quarter and with the direction. We were taking and we continue to be excited about the long term potential of our omnichannel business once again.
We believe the recent changes we've made will lead to a better shopping experience, while giving our distributors a more powerful set of tools to build their businesses.
Speaker Change: Ultimately that will allow us to attract and retain more customers drive order growth and build sustainable profitable growth to create shareholder value.
Speaker Change: And with that I'm going to turn the call over to our Chief Financial Officer changeover.
Speaker Change: James.
James: Thank you Terence moving to our third quarter results.
James: Net sales in the third quarter were $114 $6 million.
James: Compared to $111 2 million in.
James: In the year ago quarter, a 3% versus a 3% increase versus the prior year or a 4% increase excluding the impact from foreign exchange rates as.
Speaker Change: As Terrence discussed this was driven by strong performance in Taiwan, and Japan and outperformance in Central Europe, partially offset by continued weakness in China.
Speaker Change: Now diving into more detail on our regional performance I'll start with APAC in Asia Pacific, We reported growth of 6% to $55 $3 million.
Speaker Change: Or up 9% when excluding the impact of foreign exchange.
Speaker Change: This was largely driven by a resurgence of growth in Japan, and Taiwan, which were up on a constant currency basis by 34% and 20% respectively.
Speaker Change: This was led by a powerful customer response to our field activation initiatives and a surge in new customers.
Speaker Change: We're very pleased with the momentum driven by our growth strategies and the resulting acceleration in these important markets. While we expect meaningful growth in these markets in Q4 and into 2025, we do not expect growth at the levels achieved this quarter in.
Speaker Change: In South Korea, we are gaining confidence in this markets turnaround, both new customers and average order value improved year over year, resulting in 3% constant currency growth in the quarter.
Speaker Change: We are encouraged by the progress made in Korea. This year and expect continued measured improvement.
Speaker Change: Offsetting an otherwise strong quarter in APAC was the continued macroeconomic weakness in China.
Speaker Change: Our Q3 revenue declined 23% in constant currency.
While we are working hard to refine our value proposition and reenergize customer to customer demand in this market.
Speaker Change: The sharp downturn in the macroeconomic environment for the Chinese consumer continues to negatively impact consumer spending and the resulting sales declines in China are likely to moderate going forward, but it will take some time to get back on a growth trajectory.
Speaker Change: Our European business continues to operate well in a challenging environment.
Speaker Change: Q3 sales increased 5% or 3% in local currency.
Speaker Change: Central Europe continued to perform exceptionally well growing sales by 23%.
Speaker Change: Or 17% in local currency.
Speaker Change: Largely driven by a positive response to our recently launched power line products as well as continued new market expansion in the Baltic region.
Our teams also continued to do a remarkable job keeping our eastern European markets stable given the protracted war in Ukraine.
Speaker Change: Looking at our North America business, our third quarter net sales were down 3% as discussed on our last earnings call. We upgraded our digital platform in North America to strengthen our digital capabilities and improved mobile first performance. This is an exciting transformation that will enhance the customer experience improve site performance.
Speaker Change: And benefit both distributors and consumers.
Speaker Change: While the transition has resulted in a short term dip in customer acquisition and efficiency of media spend we are very encouraged by improved improvement across our key customer metrics and the resulting robust growth in our digital business.
Speaker Change: In Q3, our North America digital business grew 17% bolstered by improvement in both conversion and retention.
Speaker Change: Gross margin in the third quarter decreased 172 basis points to 71, 3% compared to 73, 1% a year ago.
Speaker Change: The decrease was primarily driven by higher inflation and unfavorable foreign currency exchange, which in Q3 continued to mask the favorable results of our savings initiatives.
Speaker Change: We expect sequential improvement in gross margin for Q for Q4 with the full results of our savings initiatives, becoming more apparent in our consolidated financial results in 2025.
Speaker Change: Volume incentives as a percentage of net sales was 31.0% compared to 37% in the year ago quarter. The increase was primarily driven due to changes in market mix.
Speaker Change: Selling general and administrative expenses during the third quarter were $41 million compared to $41 $3 million in the year ago quarter.
Speaker Change: As a percentage of net sales SG&A expenses were 35, 7% in the third quarter compared to 37, 1% last year.
Speaker Change: We are seeing the benefit of the $5 million of cost out actions taken in Q2 and continue to look for additional opportunities to increase efficiency and reduce waste.
Speaker Change: We also note that Q3 had roughly $1 million of one time expenses that distort our true run rate.
Speaker Change: Operating income decreased to $5 3 million or four 6% of net sales.
Speaker Change: Paired to $5 8 million or five 2% of net sales in the year ago quarter.
Speaker Change: GAAP net income attributable to common shareholders for the third quarter was $4 3 million or 23 <unk> per.
Speaker Change: Per diluted common share compared to $2 8 million or 14 cents per diluted share in the year ago quarter.
Speaker Change: Adjusted EBITDA as defined in our earnings release increased 5% to $10 7 million compared.
Speaker Change: Compared to $10 3 million.
Speaker Change: In the year ago quarter.
Speaker Change: Our balance sheet remains clean with cash and cash equivalents of $78 $7 million and zero debt.
Speaker Change: Inventory was $62 3 million at the end of the third quarter, which is $4 $6 million less than we ended 2023.
Net cash provided by operating activities was $13 1 million compared to $31 6 million in the prior year period.
Speaker Change: The decline in operating cash flows versus prior year was driven by the timing of payments for accrued liabilities and receivables offset by reductions in inventory.
Speaker Change: We repurchased approximately $8 $4 million worth of stock year to date with $9 $2 million remaining on our $30 million share repurchase program.
Speaker Change: Looking beyond share repurchases are healthy capital allocation structure positions us very well to continue our digital transformation and other strategic initiatives.
Now turning to our 2020 for outlook.
Speaker Change: Given our third quarter sales performance and expectations for the remainder of the year, we are raising our prior prior range and now expect full year 2020 for net sales to range between $443 million and $448 million from.
Speaker Change: $436 million to $445 million.
Speaker Change: Communicated last quarter.
Speaker Change: For adjusted EBITDA. We are also increasing the low end of our range to be 40 million to $42 million versus.
Speaker Change: Versus the previous range of 39 million to $42 million.
Speaker Change: In summary, we.
We are pleased with our third quarter results and remain encouraged by the opportunity opportunity in front of US we are seeing meaningful progress on our initiatives and acceleration in several key areas of the business.
Speaker Change: In addition, we have taken steps to improve efficiency.
Speaker Change: Reduce cost and position ourselves to accelerate profitability as the business continues to grow.
Speaker Change: We are confident that these measures will lead to significant shareholder value in 2025 and beyond.
Speaker Change: Now I will turn the time back to the operator.
Speaker Change: Thank you Sir.
Speaker Change: Ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the number one on your Touchtone following you'll hear up Tom that your hand has been raised should you wish to decline from the polling process. Please press the star followed by the number is.
Speaker Change: If you're using a speaker phone please lift the handset before pressing anarchy.
One moment. Please for your first question.
Speaker Change: And our first question will come from the line of Susan Anderson from Canaccord Genuity. Your line is now open. Please go ahead.
Susan Anderson: Hi, good evening nice job on the quarter.
Speaker Change: Susan I'm wondering.
Speaker Change: Hey, How's it going.
Speaker Change: Yes.
Speaker Change: The Guy the updated guide good to see the raise there.
Speaker Change: It implies maybe fourth quarter will be flattish you said something about the royalty is on Asia now continuing maybe if you could just give some more color on kind of by region. How you expect that to pan out.
Speaker Change: To get to the guide for the year. Thanks.
Speaker Change: Shane why don't you take that one.
Speaker Change: Absolutely yes.
Speaker Change: Yes.
Speaker Change: As you noted that implies a Q4 of down 2% to up 2%. So a flattish Q4 on the top line.
Speaker Change: As we look at where that comes from.
Speaker Change: In the APAC region as you know, we had very strong results in Taiwan and Japan.
Speaker Change: Some of that various debt strength a portion of that is.
Speaker Change: Some timing such that it'll be a little bit less.
Speaker Change: Call it a little bit of Q4 into Q3, so although we expect to continue to see strong results in those regions and it won't be at the rate that we've seen it will be a lesser in Q4, and then obviously, we'll have growth strong growth next year as well.
Speaker Change: As we look at China, China will continue to be the trend will get a little bit better than what it's been as far as down it won't be down as much but we'll still be down significantly.
Speaker Change: As we look at Central Europe.
Speaker Change: We expected to see similar results to Q3, there and then in North America, our digital business.
Speaker Change: We will continue to perform well, but in a similar.
Speaker Change: High teens to 20% ish growth there and we do expect to be see some continued.
Speaker Change: <unk>.
Speaker Change: Yes.
Speaker Change: Headwinds in the North America core business that will offset that.
Speaker Change: So that's the.
Speaker Change: The detailed by region.
Speaker Change: Okay, Great. That's really helpful. And then maybe if you could just talk about the new consumer product pack that you introduced in the markets in Asia I guess.
Speaker Change: I guess what are those Intel and then also if you could talk about the performance of the power line both in the U S.
Speaker Change: Internationally, I guess should we expect more product to be introduced down the road and the power lines.
Speaker Change: Yes, sure absolutely so.
Speaker Change: As it relates to the kind of the rebalancing the portfolio in APAC and some of the package we put in place.
Speaker Change: What we've done is trying to make a migration.
Speaker Change: Obviously, the old products are still there, but they were selling a lot of.
Speaker Change: Detox products. It was a heavy focus on detox and as you might imagine you can only detox. So many times a year and there are only so many people that do detox. So really it was a shift in focus.
Speaker Change: Adding.
Speaker Change: Kind of on top of that kind of more vitality driven.
Speaker Change: Packs. So we were selling that would appeal to a broader range of people, but also would encourage people to purchase more frequently and kind of more often so it's a nice shift in and we also kind of rebalance the.
Speaker Change: The price of those packs slightly so initially what we knew we were going to see was more people coming in driving new customer growth driving order growth.
Speaker Change: With some kind of slightly lower.
Speaker Change: Average order in the near term, but that has since been offset by kind of the volume of new customers and new orders that we're getting in and the repeat orders that we're getting from that as we're migrating people.
Speaker Change: Into our subscription programs, so really pleased about that.
Speaker Change: Piece of your question on the power line.
Speaker Change: Great progress in Europe with the power line. It is kind of one of our top products. It represents an increasing percentage of sales in Europe.
Speaker Change: North America sales kind of achieving kind of near double digit growth as we continue to.
Speaker Change: Year to date as we continue to sell those products into the marketplace. We will continue to.
Speaker Change: I think.
Speaker Change: Very kind.
Speaker Change: Kind of.
Cautiously and appropriately expand the line, we don't want to kind of balloon the lineup too much. It really is all about improving people's metabolic performance and so the Greens the beats in the mail product are truly foundational.
Speaker Change: Through products in each one of their respective areas, but now we're going to shift into and Youll see it kind of actually in the back half of 2025 really much more aggressively.
Speaker Change: Marketing all three of those products as a system. So we're excited about what lies ahead for the for the power line, they're great products. They are like I said breakthrough kind of result in breakthrough products in each one of their respective categories, but when you combine them. They really do start to have some pretty incredible.
Speaker Change: Results that they're capable of delivering from the standpoint of <unk>.
Speaker Change: Proving People's metabolic performance, so I hope that answers your question.
Speaker Change: Yeah that was great. Thanks, so much for all the details I'll go ahead and pass them along good luck to SCR.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Once again should you have a question. Please press the star followed by the number one on your Touchtone phone you will hear that your hand has been raised.
Speaker Change: Now for our next question.
Speaker Change: This will come from the line of Linda Bolton Weiser from D. A Davidson. Your line is now open. Please go ahead.
Speaker Change: Yes, hi.
Speaker Change: Hi.
Speaker Change: Hi, I missed the very part of your narrative in the beginning.
Speaker Change: What.
Speaker Change: Somebody referred to headwinds in your North American core business.
Speaker Change: Can you just give a little more color what what are you referring to is that just the kind of strapped consumer situation or is there something else here you were talking about yes. There is a piece of it where consumers are just little strapped and kind of.
Speaker Change: Holding back on some purchases.
Speaker Change: A minor extend another piece of it as well.
Speaker Change: When we made the switch to our.
So our digital platform.
Speaker Change: We did the consumer facing piece first and then Theres a follow on piece for the kind of the backend for distributors and helping them process their customer customer orders. So that's just coming online and we will see the full alignment as we get further into the kind of.
Speaker Change: The systems as we get into the into the fourth quarter. So it's just kind of a natural progression of moving flat moving our platform around and having some friction points that are a result of that but.
Speaker Change: I think by the time, we get through the other fourth quarter all of those friction points will be will be taken care of will be addressed and then it will simply be a matter of just helping people kind of build momentum and get back on track. So that's really what we're talking about what we were speaking to Linda.
Speaker Change: Okay. Thank you.
Speaker Change: And then.
Speaker Change: And just.
Speaker Change: Wondering again I'm, sorry, if I missed this but I know you have the initiatives too.
Speaker Change: Hum.
Speaker Change: Reduce costs and improve efficiencies to help gross margin you had some targets for that can you just talk about how that's going and whether youre on target and will there be any more savings in 2025, and then second part on the cost is I think you had mentioned at one point some shortages are hard to get certain herbs and things like that are there any.
Speaker Change: Is there any other issues with any of your input at this point.
Speaker Change: Yes, absolutely I'll start and then I'll, let Shane elaborate so as it relates to our gross margin savings initiatives. We are on track. The team has done an incredible job of.
Speaker Change: Driving of identifying the savings and then kind of driving them through the system, we're starting to see some of those savings come through.
Speaker Change: And I'll, let Shane speak to some of the challenges that we're facing that would that would kind of mask some of those results, but but as far as the savings that we said we were going to chase after.
Speaker Change: The team has really done everything that they said theyre going to do.
And we do believe Theres more.
Upside opportunity going forward as we get into 2025.
Speaker Change: Second part of your question was.
Speaker Change: It was about any shortages of Arabs or any other kind of input.
Yes, yes, yes. Thank you.
Speaker Change: There is intermittently there might be something.
Speaker Change: Right now I think supplies are are actually very good.
Speaker Change: The supply chain team has been identifying.
There are things that are like I said intermittently challenging and then there are other things that are just.
Speaker Change: They're just hard to get frequently we're dealing with with some rare.
Speaker Change: Kind of hard to find the ingredients and so we're going through a process in many cases, a re formulating plus our products. So that we can just overcome that and improve our service levels, but right now as Linda there's really nothing that is a real barrier from our supply chain process.
Speaker Change: Product availability.
Speaker Change: Standpoint.
Speaker Change: Shane you want to add some commentary around and color around <unk>.
Speaker Change: Savings.
Speaker Change: Sure sure first of all Linda I'll give you a little more detail.
Speaker Change: Last year we.
Speaker Change: We.
Speaker Change: Realized about $3 million.
Speaker Change: In the previous year and 2023 of those savings as they were just starting to roll on this year, we expect to.
Speaker Change: See about it.
Speaker Change: Year to date, we've gotten most of this already another additional $7 million. So by the end of the year, we will have achieved that's $10 million target.
Speaker Change: We do expect going forward into next year as tenants have been noticed noted additional savings to come in as well. So we would exceed that target, but it has been masked.
Speaker Change: So far we have seen.
Speaker Change: A significant amount of headwind in FX rates as well as inflation.
Speaker Change: That has made it so that those improvements has not been.
Speaker Change: It.
Speaker Change: Difficult, it's been difficult to see in our P&L, we do expect it.
Speaker Change: And your inflection point at this point.
Speaker Change: And that we'll see improvement in Q4.
Speaker Change: We expect an inflection in improvement in Q4 gross margin rates.
Speaker Change: And a meaningful increase as we go into next year as well.
Speaker Change: Okay. Thank you very much I appreciate it.
Speaker Change: Absolutely.
Speaker Change: Okay.
Speaker Change: At this time. This concludes our question and answer session I would now like to turn the call back over to you Mr. Moorehead for closing remarks.
Speaker Change: Okay. Thank you and finally, we'd like to thank everybody for listening to today's call and we look forward to speaking with you when we report our fourth quarter and full year.
Speaker Change: In 2025, thanks, again for joining us and take care.
Speaker Change: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.