Q2 2019 Earnings Call

All participants are in listen only mode and this conference is being recorded.

I would now like to turn the conference over to your host that's for me for our General counsel of Nature's Sunshine products.

Thank you mr. probably be novel.

Good afternoon.

Thanks to all of you for joining our conference call to discuss our second quarter 2019 financial result.

This call is available for replay in a live webcast that we posted that we will post on our website at www <unk>.

Nature's Sunshine Dot com in the investors section.

The information on this call may contain certain forward looking statements. These statements are often characterized by terminologies such as believe hope may anticipate 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 these 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.

I will now turn the call over to Terrence Morehead CEO of Nature's Sunshine products.

Thank you Nate and good afternoon, everyone and thank you for joining us for today's call.

I'm pleased to be here with you today to discuss our second quarter results.

And to share some early thoughts regarding progress on our strategic transformation.

With me is our Chief Financial Officer, Joe Baty, who will walk you through our financials in greater detail, but I'm going to kick things off today with a brief summary of the business.

Overall, we had a very productive second quarter, which started with the announcement of our five global strategies and included a series of restructuring initiatives and the launch of a new.

Negative last year to a positive.

2000 to $2.9 million this year.

Growth in EBITDA was also very strong increasing over 80% for the quarter.

We will continue to identify opportunities to drive out costs as we simultaneously implement growth strategies designed to enhance our competitive position in the market.

Speaking of being more competitive as we discussed last quarter. Our vision is to be more consumer focused with the objective of being more modern more flexible and more profitable in everything we do.

Last quarter I shared details of our multi year strategy designed to unleash the potential of our business Reimagine, our brand and redefine herbal traditions to make the healing power of nature accessible to everyone.

Our plan focuses on five global strategies, and we're making progress on each one of them.

Our first strategy brand power is all about creating a more as original brand that excites inspires and transforms the way people think and feel about our company.

We have already completed an in depth market and consumer research product project and in response to what we've learned.

We're working to update logos packaging designs consumer messaging and brand imagery to more effectively emphasize our performance edge.

We're also working on plans to revitalize our portfolio with innovative new products that will allow us to expand into new high growth categories.

I'll be prepared to share more information on this set an appropriate date, but for now let me simply say this is a key strategy for our business.

Our second strategy field energy is all about re imagining the natures Sunshine experience.

The starting point is a basic mastery of field fundamentals, but will ultimately include an effort to deliver more personalization and be more omnipresent.

Right now the team is working on an initiative to make buying and selling natures sunshine easier and more attractive by updating and modernizing sales programs and by improving our technology.

We're also in the process process of opening a retail test store as a prototype and learning lab for the hundreds of brick and mortar locations that we currently have around the world.

In both cases the goal is to be more.

Effective in driving customer growth.

Our third strategy called digital first is all about developing a next gen digital platform.

We are currently in the process of redesigning our website to improve functionality and user experience.

And then we'll move on to create and expand an expanded and more powerful digital tool kit.

Our goal is to move from managing transactional relationships to creating more personal and sustainable lifestyle rate relationships by improving the consumer experience.

Our fourth strategy manufacturing Inc. focus is on creating award winning supply chain capabilities. The strategy emphasizes improvements to our industry, leading quality and service, while leveraging production capacity to support new business opportunities.

Right now we're in the process of obtaining ISO 9001 quality certification and we expect to receive our organic certification later this year.

We're already GMP, NSS, TJ hollow and kosher certified.

So we are building a strong foundation of excellence upon which to grow our business.

Our fifth and final strategy called the right stuff.

Is all about creating high performance teams.

The goal is to be more efficient and productive and we're already seeing the positive impact of our REIT strategies in the form of improved operating margins, which were which are up over 145% as reported year to date.

We will continue to implement right stuff initiatives with the goal of improving profitability further.

So those are our five growth strategies and based on the strong growth. We are seeing in the nutritional supplements industry and the strategic roadmap. We've put in place. We continue to believe there are significant growth opportunities for our country our company.

To support our strategies and take our company to the next level, we've restructured the organization to create for regional operating business units or will be used as we call them.

Under the new structure, each will be you will be responsible for driving strategy and building market share for both the natures Sunshine and synergy brands. The idea is to provide more targeted strategic direction.

More relevant consumer focus and a more powerful management and management support in each region, where we do business.

Weve appointed Dan Norman Executive Vice President and President for Asia Pacific, which includes China, Korea, Japan and Southeast Asia.

In his new role as the overview leader for APAC, Dan will lead the transformation of our largest business unit and help capture what we believe is one of our largest growth opportunities.

Bryant Gates has been appointed executive Vice President and President for Europe , which includes Europe , and central and Eastern Europe .

Brian will be responsible for strengthening business fundamentals and capturing the tremendous untapped potential in the market in his new role as the Abili overview leader for Europe .

Eddie Silcock join nature Sunshine in April 2019, and will continue in his role as executive Vice President and President of North America.

In his role as the overview leader for North America, which includes the us and Canada and he will be responsible for turning around the us business and re imagining our sales model to strengthen our consumer appeal.

Latin America, which includes our businesses in Mexico, and Central and South America will report directly to me as we began a major transformation initiative to turnaround this business.

Our goal is to create a more profitable business unit.

And build a regional operating model.

With local management and key members of the executive team, helping to spearhead the effort to turnaround our Latin American business.

Once our strategy is up and running and we've seen improved results and over you leader will be will be put in place.

Now, let me turn back to the second quarter operating highlights as I noted, we saw just over 2% growth in local currency net sales on a consolidated basis with growth in key Asian markets in Europe .

While North America, and Latam continue to experience modest declines.

We posted 4% local sales growth in Asia with each of our three largest markets in the region, South Korea, Japan, and China, showing positive sales growth.

Growth was up was more moderate in South Korea, this quarter, increasing 4% on a local currency basis. However, we continue to see strong field fundamentals and a solid trend line. So we expect strong growth for the full year.

China, China experienced a disruption to sales from the governments 100 day review of the industry, which slowed business activity. However, our China business continued to enjoy positive growth.

For the quarter, we generated 2% growth on a local currency basis and are up 24% for the first six months of the year.

We continue to believe we have significant long term growth opportunities in this market.

In Japan.

New product launches and sales programs to increase activity contributed to 7% local currency growth.

Our European over you generated 11% local currency currency growth, reflecting continued strong momentum in central and eastern Europe .

Key highlights include Russia, which contributed 18% growth driven by strong field fundamentals around order growth, while Poland delivered 28% local currency growth driven by increased consumer penetration.

In North America, net sales decreased 2% on a local currency basis.

The rate of decline in North America continues to moderate as we see signs of improved fundamentals and recruiting and retention.

The new North American leadership team is aggressively moving forward with transformation plans and their key growth initiatives are expected to launch later this year. So we expect to see continued strengthening as we move forward.

Sales in Latin America declined, 2% as weak fundamentals and SKU reductions continue to negatively impact performance.

To reverse this trend our strategy is to leverage local capabilities to accelerate new product introductions and fill key product gaps.

While simultaneously restructuring and streamlining the organization to strengthen best practices and an improved competitiveness.

Now, let me turn the call over to Joe is going to walk you through our financial results in greater detail.

Thank you Terence and good afternoon, everyone.

Net sales in the second quarter of 2019 were $90.7 million compared to $91.3 million in the same quarter last year.

On a local currency basis, net sales increased 2.3% year over year or decreased 8.6% as recorded.

Unfavorable foreign currency exchange rate fluctuations impacted net sales by $2.6 million compared to the prior year.

Asia net sales declined 1.6% year over year to $35.2 million during the second quarter, but increased 4.2% in local currencies.

On a local currency basis, the growth was driven by a 4.2% increase in South Korea.

A 7% increase in Japan, any 1.9% increase in China.

Net sales in Europe increased 8.3% year over year to $15.1 million or 11% growth in local currencies.

The net sales increase reflects continued growth.

In central and Eastern Europe .

North American net sales.

In the second quarter declined to 2.7% year over year to $34.6 million.

Or a 2.4% decline on a local currency basis.

As anticipated.

We continued to see lower recruiting rates that are not offsetting attrition in NSP Americas and this trend may continue in the near term.

However.

New leadership.

And initiatives have been put in place to support our North America operations.

Net sales for Latin America, and other decreased 3.2% year over year to $5.9 million or a 1.8% decline on a local currency basis. The decline in net sales was mainly due to decreases in distributor retention and average purchase size.

Gross margin increased 30 basis points to 73.7%.

Compared to the year ago period.

The gross margin increase was driven primarily by favorable changes in market mix and manufacturing efficiency.

Volume incentives as a percentage of net sales were 34.5%.

Consistent with the same period last year.

Selling general and administrative expenses were $31 million.

Down 2.3 million year over year.

The decrease in SGN AE is primarily due to savings from prior restructuring activities.

As a percentage of net sales SGN expenses were 34.2%.

Compared to 36.5% in the same period of 2018.

Excluding the impact of 8.4 million in restructuring related charges second quarter SGN expenses were 33.8%.

Net sales.

We reported operating income of $4.5 million or 5% of net sales compared to operating income of 2.2 million or 2.4% of net sales in the prior year period.

Excluding the previously mentioned restructuring charges, we generated $4.9 million of operating income or 5.4% of net sales in the current quarter.

Adjusted EBITDA as defined in our press release as net income or loss from continuing operations before income taxes, depreciation amortization and other income or loss adjusted to exclude share based compensation and certain noted adjustments was $8 million in the second quarter of 2019.

As compared to $4.4 million in the second quarter of 2018.

Net income attributable to common shareholders for the quarter was $2.7 million.

Or 14 cents per diluted share as compared $2.1 million.

Or zero cents per common share in the year ago period.

Adjusted net income attributable to common shareholders was $2.9 million.

Or 15 cents per common share compared to adjusted net loss of $1.2 million or seven cents per common share in the prior year period.

A reconciliation of adjusted net income to GAAP net income is provided in today's press release.

Turning to liquidity.

We're we remain pleased with the benefits for our balance sheet management efforts cash and cash equivalents on June Thirtyth were 46.3 man with no long term debt.

For the first six months of 2019, we used 1.3 million of cash in operations.

Compared to generating $9.4 million in the comparable prior year period.

The change in cash from operating activities on a year over year basis.

Primarily reflected changes in working capital specifically a year to date reduction in accrued liabilities.

I would now like to turn the call back to the operator to facilitate una.

Of course, thank you.

I'd like to ask a question. Please signal by pressing star one on your telephone keypad.

If you are using a speakerphone. Please make sure your mute function is turned off the line of Cmos return.

Again press star one to pose the question, we'll pause for just from until everyone in the park opening up for questions.

Well take our first question from Julien Hoffman from Evercore. Please go ahead.

Hi, Thank you very much.

Yeah first of all can you comment a guess on the cost savings initiatives.

So costs seem to have gone down quite significantly.

Just how far you are far along are you on the yeah the cost saving program.

And secondly can you provide some more insights into the trends.

With regard to.

Sales were representatives in China and Korea. Please.

On your first question regarding our cost.

Or I should say, our strategic restructuring we had a fairly significant.

Oh look and take it at or.

Corporate overhead and really just.

Largely focused on.

I kind of reducing some staff count in areas and restructuring the team.

On a corporate basis and so.

The combination of of doing that plus some some process changes and general efficiencies are the source of the of the changes. So we believe the the savings are sustainable.

And they're kind of built into our baseline operating model.

In terms of where are we on the process you know I I won't necessarily comment on on on that fully but I will say that our our plan and our approach is based around to kind of to central principles. One is a zero overhead growth in another is negative overhead growth, which we affectionately affectionately call a dog zero or very growth in NOG negative overhead growth and again. The idea there is to on an ongoing basis continue to drive out inefficiencies and drive cost out of the business I I did reference the changes that we're going to be making in Latin America, but this is an ongoing process for us to improve our profitability become more more I guess competitive.

But from the standpoint of our overall SGN a utilization and.

And so again it is a it's a major piece of our strategy and it's a major piece of a what we call the right stuff strategy.

With respect to staff growth and representative growth I think you mentioned in China and and Korea.

The teams continue to work aggressively we've got a great management team on the ground I think in in Korea were seeing actually really quite good business fundamentals and when I talk about field fundamentals, you know I would be talking about recruiting training recruiting retaining people and retaining them.

And so I think we're seeing really good strong fundamentals in Korea, we were seeing continued progress in China, and and again I think that's reflected in the fact that we continue to grow.

In the market despite any disruptions there.

Okay and Oh.

Overhead so how many employees did you have at the end of the second quarter.

We don't disclose that level of detail.

Let's just say that obviously, we took a $1.6 million charge in the second quarter and so clearly included a number of folks, but we don't disclose the exact.

Number.

Okay. Thank you.

Thank you Gerry.

Once again, if you'd like to ask a question. Please signal a pressing star one on your telephone keypad, we'll just wait for a moment.

It's time to this does not appear to be any further questions I'd like to turn the conference back to the presenters.

Okay, well if there are no other questions.

Again I want to thank you all for your support and participating into in today's call and have a great day. Thank you very much. Thank you.

This concludes today's call. Thank you for your participation you may now disconnect.